<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1996
Registration Nos. 33-23512, 811-5629
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 25
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26
THE GCG TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
1001 Jefferson Street, Suite 400
Wilmington, DE 19801
[302-576-3400]
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
MARILYN TALMAN, ESQ. COPY TO:
Golden American Life Insurance Company Jeffrey S. Puretz, Esq.
1001 Jefferson Street Dechert Price & Rhoads
Wilminigton, DE 19801 1500 K Street, N.W., Suite 500
Washington, D.C. 20005
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
__________
Approximate date of commencement of proposed sale to the public:
A soon as practical after the effective date of the Registration Statement
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
[X] immediately upon filing pursuant to paragraph (b)
[ ] on _________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on _________ pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on _________ pursuant to paragraph (a)(ii) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this Post-Effective Amendment designates a new effective date
for a previously filed Post-Effective Amendment.
__________
DECLARATION PURSUANT TO RULE 24F-2
The Registrant has previously filed a declaration of indefinite registration of
its shares of beneficial interest pursuant under the Securities Act of 1933
pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
Rule 24f-2 Notice for the year ended December 31, 1995 was filed on
February 28, 1996.
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<PAGE>
THE GCG TRUST
CROSS-REFERENCE SHEET
MULTIPLE ALLOCATION SERIES, FULLY MANAGED SERIES, LIMITED MATURITY BOND SERIES,
ALL-GROWTH SERIES, NATURAL RESOURCES SERIES, REAL ESTATE SERIES, CAPITAL
APPRECIATION SERIES, RISING DIVIDENDS SERIES, EMERGING MARKETS SERIES, VALUE
EQUITY SERIES, STRATEGIC EQUITY SERIES, SMALL CAP SERIES, AND LIQUID ASSET
SERIES
PART A -- PROSPECTUS
ITEM HEADING
1. Cover Page Cover Page
2. Synopsis Prospectus Synopsis
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives and
Policies; Investment Restrictions;
Description of Securities and
Investment Techniques
5. Management of the Fund Management of the Trust
5A. Management's Discussion of See Annual Report to
Fund Performance Contract owners
6. Capital Stock and Other Securities Other Information; Federal
Income Tax Status; Portfolio
Transactions; Dividends and
Distributions
7. Purchase of Securities Purchase of Shares;
Being Offered Exchanges
8. Redemption or Repurchase Redemption of Shares
9. Legal Proceedings Not Applicable
PART B -- STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Management of the Trust
13. Investment Objectives and Policies Investment Techniques; Investment
Restrictions
14. Management of the Registrant Management of the Trust
15. Control Persons and Principal Other Information
Holders of Securities
16. Investment Advisory and Other Management of the Trust
17. Brokerage Allocation Brokerage and Research Services
18. Capital Stock and Other Securities Voting Rights
19. Purchase, Redemption and Pricing Purchases and Redemptions
20. Tax Status Taxation
21. Underwriters Not Applicable
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
<PAGE>
THE GCG TRUST
1001 JEFFERSON STREET WILMINGTON, DELAWARE 19801
This Prospectus offers shares of thirteen portfolios (the "Series") of The GCG
Trust (the "Trust"), which is an open-end, management investment company. Each
Series has its own investment objective or objectives and investment policies.
Shares of the Series may be sold to separate accounts of insurance companies to
serve as the investment medium for variable life insurance policies and variable
annuity contracts issued by the insurance companies ("Variable Contracts") and
to certain qualified pension and retirement plans. In the case of Variable
Contracts, the separate accounts invest in shares of one or more of the Series
in accordance with allocation instructions received from owners of the insurance
policies and annuity contracts. Such allocation rights are described further in
the Prospectus for the separate account.
The Series are managed by Directed Services, Inc. ("DSI"), which is an indirect,
wholly owned subsidiary of Bankers Trust Company. For more information regarding
DSI and Bankers Trust Company, see "The Manager." DSI and the Trust have
retained several investment advisory firms ("Portfolio Managers") to provide
investment advisory services to the Series. The thirteen Series and their
respective Portfolio Managers are as follows:
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGER
- - -------------------------------------- -----------------------------------------------------------
<S> <C>
MULTIPLE ALLOCATION SERIES ZWEIG ADVISORS INC.
FULLY MANAGED SERIES T. ROWE PRICE ASSOCIATES, INC.
LIMITED MATURITY BOND SERIES BANKERS TRUST COMPANY
NATURAL RESOURCES SERIES VAN ECK ASSOCIATES CORPORATION
REAL ESTATE SERIES E.I.I. REALTY SECURITIES, INC.
ALL-GROWTH SERIES WARBURG, PINCUS COUNSELLORS, INC.
CAPITAL APPRECIATION SERIES CHANCELLOR TRUST COMPANY
RISING DIVIDENDS SERIES KAYNE, ANDERSON INVESTMENT MANAGEMENT, L.P.
EMERGING MARKETS SERIES BANKERS TRUST COMPANY
VALUE EQUITY SERIES EAGLE ASSET MANAGEMENT, INC.
STRATEGIC EQUITY SERIES ZWEIG ADVISORS INC.
SMALL CAP SERIES FRED ALGER MANAGEMENT, INC.
LIQUID ASSET SERIES BANKERS TRUST COMPANY
</TABLE>
Information about the investment objective or objectives, investment policies,
and restrictions of each Series, along with a detailed description of the types
of securities and other assets in which each Series may invest, are set forth in
this Prospectus. There can be no assurance that the investment objective or
objectives for any Series will be achieved.
Investment in the Liquid Asset Series (or in any other Series) is neither
insured nor guaranteed by the U.S. Government. There can be no assurance that
the Liquid Asset Series will be able to maintain a stable net asset value of
$1.00 per share.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the Series. A Statement of Additional
Information, dated May 1, 1996, containing additional and more detailed
information about the Series has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. The
Statement of Additional Information is available without charge and may be
obtained by writing to the Trust at the address printed above or by calling the
Trust at the Customer Service Center at the telephone number shown in the
accompanying prospectus.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE
SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THE SERIES' SHARES ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY. THEY ARE NOT
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK AND ARE NOT BANK GUARANTEED. THEY ARE
SUBJECT TO MARKET FLUCTUATION, REINVESTMENT RISK AND POSSIBLE LOSS OF PRINCIPAL
INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SYNOPSIS.................................. 1
FINANCIAL HIGHLIGHTS................................. 3
INVESTMENT OBJECTIVES AND POLICIES................... 14
Multiple Allocation Series......................... 14
Fully Managed Series............................... 16
Limited Maturity Bond Series....................... 17
Natural Resources Series........................... 18
Real Estate Series................................. 20
All-Growth Series.................................. 21
Capital Appreciation Series........................ 21
Rising Dividends Series............................ 22
Emerging Markets Series............................ 23
Value Equity Series................................ 24
Strategic Equity Series............................ 25
Small Cap Series................................... 26
Liquid Asset Series................................ 27
MANAGEMENT OF THE TRUST.............................. 28
The Manager........................................ 28
The Portfolio Managers............................. 30
ZWEIG ADVISORS INC. ............................. 30
T. ROWE PRICE ASSOCIATES, INC. .................. 31
BANKERS TRUST COMPANY............................ 31
VAN ECK ASSOCIATES CORPORATION................... 32
WARBURG, PINCUS COUNSELLORS, INC. ............... 33
CHANCELLOR TRUST COMPANY......................... 33
KAYNE, ANDERSON INVESTMENT MANAGEMENT, L.P. ..... 34
EAGLE ASSET MANAGEMENT, INC. .................... 34
E.I.I. REALTY SECURITIES, INC. .................. 34
FRED ALGER MANAGEMENT, INC. ..................... 35
Other Expenses..................................... 35
Distributor........................................ 35
Custodian and Other Service Providers.............. 35
DESCRIPTION OF SECURITIES AND INVESTMENT
TECHNIQUES.......................................... 36
Mortgage-Backed Securities......................... 36
MORTGAGE PASS-THROUGH SECURITIES................. 36
OTHER MORTGAGE-BACKED SECURITIES................. 36
RISKS OF MORTGAGE-BACKED SECURITIES.............. 36
Other Asset-Backed Securities...................... 37
<CAPTION>
PAGE
<S> <C>
High Yield Bonds................................... 37
Repurchase Agreements.............................. 37
Restricted and Illiquid Securities................. 38
Short Sales........................................ 38
Foreign Securities................................. 38
Investment in Gold and Other Precious Metals....... 40
Futures Contracts.................................. 41
RISKS ASSOCIATED WITH FUTURES AND FUTURES
OPTIONS......................................... 41
Options on Securities.............................. 42
RISKS OF OPTIONS TRANSACTIONS.................... 43
Foreign Currency Transactions...................... 43
Options on Foreign Currencies...................... 44
Borrowing.......................................... 44
INVESTMENT RESTRICTIONS.............................. 45
PURCHASE OF SHARES................................... 45
NET ASSET VALUE...................................... 46
REDEMPTION OF SHARES................................. 47
EXCHANGES............................................ 47
PORTFOLIO TRANSACTIONS............................... 47
Brokerage Services................................. 47
Portfolio Turnover................................. 48
DIVIDENDS AND DISTRIBUTIONS.......................... 48
FEDERAL INCOME TAX STATUS............................ 48
OTHER INFORMATION.................................... 49
Capitalization..................................... 49
Voting Rights...................................... 50
Chancellor Administrative Order.................... 50
Performance Information............................ 50
LEGAL COUNSEL........................................ 51
INDEPENDENT AUDITORS................................. 51
FINANCIAL STATEMENTS................................. 51
</TABLE>
I
<PAGE>
PROSPECTUS SYNOPSIS
THE TRUST
The GCG Trust (the "Trust") is an open-end management investment company,
organized as a Massachusetts business trust on August 3, 1988. This Prospectus
offers shares of thirteen portfolios (the "Series") of the Trust, each with its
own investment objective or objectives and investment policies. There can be no
assurance that any particular Series' investment objective or objectives will be
attained. The Board of Trustees may establish additional Series at any time and
may discontinue offering a Series at any time.
The purpose of the Trust is to serve as an investment medium for (i) variable
life insurance policies and variable annuity contracts ("Variable Contracts")
offered by insurance companies, and (ii) certain qualified pension and
retirement plans, as permitted under the federal tax rules relating to the
Series serving as investment mediums for Variable Contracts. See "Purchase of
Shares." In the case of Variable Contracts, the various Series may be used
independently or in combination. Within the limitations described in the
Prospectus for the applicable Variable Contract, an owner of a Variable Contract
("Variable Contract Owner") may allocate premiums and reallocate investment
value under his or her Variable Contract among various divisions of the
applicable separate account, which, in turn, invest in the various Series. The
assets of each Series are segregated and a Variable Contract Owner's interest is
limited to the Series in which the divisions selected by the Variable Contract
Owner have invested.
INVESTMENT OBJECTIVES
The investment objective or objectives of each of the Series are as follows:
The MULTIPLE ALLOCATION SERIES seeks the highest total return, consisting of
capital appreciation and current income, consistent with the preservation of
capital and elimination of unnecessary risk. The Series seeks to achieve this
objective through investment in debt and equity securities and the use of
certain sophisticated investment strategies and techniques.
The FULLY MANAGED SERIES seeks, over the long term, a high total investment
return, consistent with the preservation of capital and prudent investment risk.
The Series seeks to achieve this objective by investing primarily in common
stocks. The Series may also invest in fixed income securities and money market
instruments to preserve its principal value during uncertain or declining market
conditions. The Series' strategy is based on the premise that, from time to
time, certain asset classes are more attractive long term investments than
others.
The LIMITED MATURITY BOND SERIES seeks the highest current income consistent
with low risk to principal and liquidity. The Series seeks to achieve this
objective by investing primarily in a diversified portfolio of limited maturity
debt securities. The Series also seeks to enhance its total return through
capital appreciation when market factors indicate that capital appreciation may
be available without significant risk to principal.
The NATURAL RESOURCES SERIES seeks long-term capital appreciation. The Series
seeks to achieve this objective by investing in equity and debt securities of
companies engaged in the exploration, development, production, and distribution
of natural resources.
The REAL ESTATE SERIES seeks capital appreciation. The Series seeks to achieve
this objective through investment in publicly traded equity securities of
companies in the real estate industry. Current income is a secondary objective.
The ALL-GROWTH SERIES seeks capital appreciation. The Series seeks to achieve
this objective through investment in securities selected for their long-term
growth prospects.
The CAPITAL APPRECIATION SERIES seeks to generate long-term capital growth. The
Series seeks to achieve this objective by investing in common stock and
preferred stock that will be allocated between categories or "components" of
stocks referred to as the growth component and the value component.
The RISING DIVIDENDS SERIES seeks capital appreciation. The Series seeks to
achieve this objective by investing in equity securities of high quality
companies that meet the following four criteria: consistent dividend increases;
substantial dividend increases; reinvested profits; and an under-leveraged
balance sheet.
The EMERGING MARKETS SERIES seeks long-term growth of capital. The Series seeks
to achieve this objective by investing primarily in equity securities of
companies that are considered to be in emerging market countries.
The VALUE EQUITY SERIES seeks capital appreciation and, secondarily, dividend
income by investing primarily in equity securities which meet quantitative
standards believed by the Portfolio Manager to indicate above average financial
soundness and high intrinsic value relative to price.
1
<PAGE>
PROSPECTUS SYNOPSIS (CONTINUED)
The STRATEGIC EQUITY SERIES seeks to achieve capital appreciation primarily
through investment in equity securities based on various equity market timing
techniques. The amount of the Series' assets allocated to equities shall vary
from time to time to seek positive investment performance from advancing equity
markets and to reduce exposures to equities when the Portfolio Manager believes
that their risk/reward characteristics are less attractive.
The SMALL CAP SERIES seeks to acheive long-term capital appreciation by
investing in equity securities of companies that, at the time of purchase, have
total market capitalization of less than $1 billion. Many of the securities in
which the Series invests may be those of new companies in a developmental stage
or more seasoned companies believed by the Portfolio Manager to be entering a
new stage of growth.
The LIQUID ASSET SERIES seeks a high level of current income consistent with the
preservation of capital and liquidity.
THE MANAGER AND PORTFOLIO MANAGERS
The Manager of the Series is Directed Services, Inc. (the "Manager"), which is
an indirect, wholly owned subsidiary of Bankers Trust Company. The Trust and the
Manager have retained several investment advisory firms ("Portfolio Managers")
to manage the assets of the Series. The thirteen Series and their Portfolio
Managers are as follows:
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGER
- - --------------------------- --------------------------
<S> <C>
Multiple Allocation Series Zweig Advisors Inc.
Fully Managed Series T. Rowe Price Associates,
Inc.
Limited Maturity Bond Bankers Trust Company
Series
Natural Resources Series Van Eck Associates
Corporation
Real Estate Series E.I.I. Realty Securities,
Inc.
All-Growth Series Warburg, Pincus
Counsellors, Inc.
Capital Appreciation Series Chancellor Trust Company
Rising Dividends Series Kayne, Anderson Investment
Management, L.P.
Emerging Markets Series Bankers Trust Company
Value Equity Series Eagle Asset Management,
Inc.
Strategic Equity Series Zweig Advisors Inc.
Small Cap Series Fred Alger Management,
Inc.
Liquid Asset Series Bankers Trust Company
</TABLE>
As Manager of the Series, Directed Services, Inc. has overall responsibility,
subject to the supervision of the Board of Trustees, for engaging portfolio
managers and for monitoring and evaluating the management of the assets of each
Series by the Portfolio Managers, for administering all operations of the
Series, and for providing or procuring all services necessary for the ordinary
operation of the Series. Pursuant to a Management Agreement, the Trust currently
pays the Manager for its services a monthly fee at the annual rate of 1.0% of
the value of the average daily net assets of the Multiple Allocation, Fully
Managed, Natural Resources, Real Estate, All-Growth, Capital Appreciation,
Rising Dividends, Value Equity, Strategic Equity, and Small Cap Series, in the
aggregate; 0.60% of the value of the average daily net assets of the Limited
Maturity Bond and Liquid Asset Series, in the aggregate; and 1.50% of the value
of the average daily net assets of the Emerging Markets Series.
Each Portfolio Manager of each Series has full investment discretion and makes
all determinations with respect to the investment of the Series' assets and the
purchase and sale of portfolio securities consistent with the investment
objectives, policies, and restrictions for such Series. The Portfolio Managers
are compensated by the Manager (and not the Trust).
The Trust is distinct in that the expense structure of the Series is simpler and
more predictable than most mutual funds. Many of the ordinary expenses for the
Trust's Series, including custodial, administrative, transfer agency, portfolio
accounting, auditing, and ordinary legal expenses are paid by the Manager;
whereas, most mutual funds pay for these expenses directly from their own
assets.
PURCHASE AND REDEMPTION OF SHARES
Shares of each Series are offered at the net asset value of each Series. Shares
of each Series may be redeemed without cost at the net asset value per share of
the Series next determined after receipt of the redemption request. The
redemption price may be more or less than the purchase price.
SPECIAL CHARACTERISTICS AND
INVESTMENT RISKS
Certain of the Series may engage in investment techniques that involve certain
risks that are described more fully in the section "Description of Securities
and Investment Techniques." For instance, the Multiple Allocation, Fully
Managed, Limited Maturity Bond, Natural Resources, All-Growth, Capital
Appreciation, Emerging Markets, Value Equity, Strategic Equity, and Small Cap
Series may engage in various types of futures transactions. All these Series,
except the All-Growth Series, may also lend their portfolio securities. The
Multiple Allocation, Fully Managed, All-Growth, Natural Resources, Rising
Dividends, Value Equity, Strategic Equity, and Small Cap Series may invest in
non-U.S. dollar-denominated securities of foreign issuers, and the Emerging
Markets Series will normally invest primarily in such securities. The Multiple
Allocation, Fully Managed, Natural Resources, Rising Dividends, Emerging
Markets, Value
2
<PAGE>
PROSPECTUS SYNOPSIS (CONTINUED)
Equity, Strategic Equity, and Small Cap Series may engage in foreign currency
transactions and options on foreign currencies. The Multiple Allocation, Fully
Managed, Limited Maturity Bond, Natural Resources, Real Estate, All-Growth,
Capital Appreciation, Emerging Markets, Value Equity, Strategic Equity, and
Small Cap Series may engage in various put and call options transactions. The
Fully Managed and Emerging Markets Series may invest in high yield bonds and the
Real Estate Series may invest in high yield convertible bonds. The Natural
Resources Series may invest in precious metals and futures contracts on precious
metals and the Multiple Allocation and Strategic Equity Series may invest in
gold futures contracts. In addition, the Multiple Allocation, Natural Resources,
All-Growth, Capital Appreciation, Strategic Equity, and Small Cap Series may
engage in short sales of securities.
FINANCIAL HIGHLIGHTS
The following tables present condensed financial information with respect to
each Series except the Small Cap Series which had not commenced operations prior
to December 31, 1995. Information in the tables for the years ended December 31,
1995, 1994 and 1993 is derived from the Trust's financial statements for the
Series that have been audited by Ernst & Young LLP. Information in the tables
for the years ended December 31, 1992, 1991, 1990, and 1989 is derived from the
Trust's financial statements for the Series that have been audited by another
independent auditor. The condensed financial information below does not include
deductions at the Separate Account level or contract specific deductions that
may be incurred under a Variable Contract for which the Trust serves as an
underlying investment vehicle. These charges would reduce the total return to
any owner of a Variable Contract. The following tables should be read in
conjunction with the Trust's financial statements, which are incorporated by
reference in the Trust's Statement of Additional Information from the Trust's
Annual Report dated as of December 31, 1995. The Trust's Annual Report, which
contains further information about the Series' performance, is available to
shareholders upon request and without charge.
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
MULTIPLE ALLOCATION SERIES
<TABLE>
<CAPTION>
MULTIPLE ALLOCATION SERIES
-------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989*
---------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of
period.......................... $ 11.33 $ 11.89 $ 11.41 $ 11.73 $ 10.26 $ 10.34 $ 10.00
---------- ---------- ---------- ---------- --------- --------- ---------
Net investment income.......... 0.58 0.42 0.24 0.42 0.49 0.57 0.58
Net gain (loss) on securities
-- realized and unrealized.... 1.56 (0.56) 1.03 (0.18) 1.57 (0.08) 0.44
---------- ---------- ---------- ---------- --------- --------- ---------
Total from investment
operations...................... 2.14 (0.14) 1.27 0.24 2.06 0.49 1.02
---------- ---------- ---------- ---------- --------- --------- ---------
Less distributions:
Dividends from investment
income........................ (0.45) (0.42) (0.24) (0.42) (0.49) (0.57) (0.58)
Distributions from capital
gains......................... (0.50) 0.00 (0.55) (0.14) (0.10) 0.00 (0.10)
---------- ---------- ---------- ---------- --------- --------- ---------
Total distributions.............. (0.95) (0.42) (0.79) (0.56) (0.59) (0.57) (0.68)
---------- ---------- ---------- ---------- --------- --------- ---------
Net asset value, end of period... $ 12.52 $ 11.33 $ 11.89 $ 11.41 $ 11.73 $ 10.26 $ 10.34
---------- ---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- ---------- --------- --------- ---------
Total Investment Return............ 18.93% (1.18)% 11.13% 1.88% 20.02% 4.74% 8.92%++
Ratios and Supplemental Data
Total net assets, end of period
(000's omitted)................. $307,691 $299,392 $274,231 $116,040 $58,578 $24,347 $15,513
---------- ---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- ---------- --------- --------- ---------
Ratio of expenses to average net
assets.......................... 1.01% 1.00% 1.01% 1.09% 1.33% 1.24% 2.35%+
Decrease reflected in above
expense ratio due to expense
limitations..................... -- -- 0.03% 0.10% 0.13% 0.68% 0.09%+
Ratio of net investment income to
average net assets.............. 4.42% 3.56% 2.75% 3.65% 4.43% 5.73% 6.52%+
Portfolio turnover rate.......... 186.90% 291.00% 348.34% 92.68% 69.51% 162.45% 115.11%
</TABLE>
- - ------------------------
* The Multiple Allocation Series commenced operations on January 24, 1989.
+ Annualized.
++ Non-annualized.
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FULLY MANAGED SERIES*
<TABLE>
<CAPTION>
FULLY MANAGED SERIES
--------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989**
----------- ---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of
period.......................... $ 11.70 $ 12.99 $ 12.43 $ 11.94 $ 9.51 $ 10.16 $ 10.00
----------- ---------- ---------- --------- --------- --------- ---------
Net investment income.......... 0.45 0.35 0.19 0.28 0.29 0.33 0.28
Net gain (loss) on securities
-- realized and unrealized.... 1.98 (1.29) 0.75 0.49 2.43 (0.65) 0.16
----------- ---------- ---------- --------- --------- --------- ---------
Total from investment
operations...................... 2.43 (0.94) 0.94 0.77 2.72 (0.32) 0.44
----------- ---------- ---------- --------- --------- --------- ---------
Less distributions:
Dividends from investment
income........................ (0.34) (0.35) (0.19) (0.28) (0.29) (0.33) (0.28)
Distributions from capital
gains......................... -- 0.00 (0.19) 0.00 0.00 0.00 0.00
----------- ---------- ---------- --------- --------- --------- ---------
Total distributions.............. (0.34) (0.35) (0.38) (0.28) (0.29) (0.33) (0.28)
----------- ---------- ---------- --------- --------- --------- ---------
Net asset value, end of period... $ 13.79 $ 11.70 $ 12.99 $ 12.43 $ 11.94 $ 9.51 $ 10.16
----------- ---------- ---------- --------- --------- --------- ---------
----------- ---------- ---------- --------- --------- --------- ---------
Total Investment Return............ 20.80% (7.27)% 7.59% 6.23% 28.93% (3.18)% 3.90%++
Ratios and Supplemental Data
Total net assets, end of period
(000's omitted)................. $118,589 $ 99,854 $108,690 $37,696 $10,031 $ 5,426 $ 5,443
----------- ---------- ---------- --------- --------- --------- ---------
----------- ---------- ---------- --------- --------- --------- ---------
Ratio of expenses to average net
assets.......................... 1.01% 1.00% 1.01% 1.04% 1.50% 1.52% 2.69%+
Decrease reflected in above
expense ratio due to expense
limitations..................... -- -- 0.04% 0.20% 0.68% 1.27% 0.19%+
Ratio of net investment income to
average net assets.............. 3.41% 2.62% 2.12% 2.38% 2.71% 3.38% 3.07%+
Portfolio turnover rate.......... 112.74% 66.06% 54.89% 27.37% 68.21% 99.59% 195.69%
</TABLE>
- - ------------------------
* Since January 1, 1995, T. Rowe Price Associates, Inc. has served as Portfolio
Manager for the Fully Managed Series. Prior to that date, a different firm
served as Portfolio Manager.
** The Fully Managed Series commenced operations on January 24, 1989.
+ Annualized.
++ Non-annualized.
5
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
LIMITED MATURITY BOND SERIES*
<TABLE>
<CAPTION>
LIMITED MATURITY BOND SERIES
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989**
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of
period.......................... $ 9.98 $ 10.62 $ 10.43 $ 10.54 $ 10.15 $ 10.16 $ 10.00
--------- --------- --------- --------- --------- --------- ---------
Net investment income.......... 0.60 0.51 0.40 0.60 0.68 0.72 0.74
Net gain (loss) on securities
-- realized and unrealized.... 0.57 (0.64) 0.23 (0.11) 0.42 0.00 0.19
--------- --------- --------- --------- --------- --------- ---------
Total from investment
operations...................... 1.17 (0.13) 0.63 0.49 1.10 0.72 0.93
--------- --------- --------- --------- --------- --------- ---------
Less distributions:
Dividends from investment
income........................ -- (0.51) (0.40) (0.60) (0.68) (0.72) (0.74)
Distributions from capital
gains......................... -- 0.00 (0.04) 0.00 (0.03) (0.01) (0.03)
--------- --------- --------- --------- --------- --------- ---------
Total distributions.............. -- (0.51) (0.44) (0.60) (0.71) (0.73) (0.77)
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period... $ 11.15 $ 9.98 $ 10.62 $ 10.43 $ 10.54 $ 10.15 $ 10.16
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total Investment Return............ 11.72% (1.19)% 6.20% 4.84% 11.27% 7.87% 9.69%++
Ratios and Supplemental Data
Total net assets, end of period
(000's omitted)................. $90,081 $72,213 $72,219 $40,213 $16,144 $ 8,321 $ 2,631
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of expenses to average net
assets.......................... 0.61% 0.60% 0.61% 0.72% 0.87% 0.81% 1.11%+
Decrease reflected in above
expense ratio due to expense
limitations..................... -- -- 0.04% 0.27% 0.89% 2.09% 3.22%+
Ratio of net investment income to
average net assets.............. 5.58% 4.73% 4.64% 5.71% 6.58% 7.47% 8.56%+
Portfolio turnover rate.......... 301.52% 209.00% 114.63% 63.25% 464.93% 373.13% 354.02%
</TABLE>
- - ------------------------
* Since May 1, 1992, Bankers Trust Company has served as Portfolio Manager for
the Limited Maturity Bond Series. Prior to that date, a different firm served
as Portfolio Manager.
** The Limited Maturity Bond Series commenced operations on January 24, 1989.
+ Annualized.
++ Non-annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
NATURAL RESOURCES SERIES
<TABLE>
<CAPTION>
NATURAL RESOURCES SERIES
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of
period.......................... $ 13.88 $ 13.89 $ 9.31 $ 10.46 $ 10.11 $ 11.89 $ 10.00
--------- --------- --------- --------- --------- --------- ---------
Net investment income.......... 0.15 0.13 0.07 0.14 0.13 0.13 (0.35)
Net gain (loss) on securities
-- realized and unrealized.... 1.34 0.23 4.58 (1.15) 0.35 (1.78) 2.26
--------- --------- --------- --------- --------- --------- ---------
Total from investment
operations...................... 1.49 0.36 4.65 (1.01) 0.48 (1.65) 1.91
--------- --------- --------- --------- --------- --------- ---------
Less distributions:
Dividends from investment
income........................ (0.13) (0.13) (0.07) (0.14) (0.13) (0.13) 0.00
Distributions from capital
gains......................... (0.20) (0.24) 0.00 0.00 0.00 0.00 (0.02)
--------- --------- --------- --------- --------- --------- ---------
Total distributions.............. (0.33) (0.37) (0.07) (0.14) (0.13) (0.13) (0.02)
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period... $ 15.04 $ 13.88 $ 13.89 $ 9.31 $ 10.46 $ 10.11 $ 11.89
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total Investment Return............ 10.69% 2.53% 49.93% (9.81)% 4.70% (13.84)% 18.96%++
Ratios and Supplemental Data
Total net assets, end of period
(000's omitted)................. $27,147 $32,879 $21,517 $ 2,916 $ 2,702 $ 2,552 $ 2,383
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of expenses to average net
assets.......................... 1.01% 1.00% 1.05% 1.50% 1.50% 1.53% 5.46%+
Decrease reflected in above
expense ratio due to expense
limitations..................... -- -- 0.08% 0.89% 1.94% 1.93% 1.36%+
Ratio of net investment income to
average net assets.............. 0.89% 1.01% 1.03% 1.38% 1.21% 1.21% (3.65)%+
Portfolio turnover rate.......... 24.47% 25.12% 4.77% 19.28% 38.63% 53.99% 21.95%
</TABLE>
- - ------------------------
* The Natural Resources Series commenced operations on January 24, 1989.
+ Annualized.
++ Non-annualized.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
REAL ESTATE SERIES*
<TABLE>
<CAPTION>
REAL ESTATE SERIES
----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989**
---------- -------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of
period.......................... $ 11.29 $ 11.18 $ 9.81 $ 9.02 $ 7.05 $ 9.53 $ 10.00
---------- -------- --------- --------- --------- --------- ----------
Net investment income.......... 0.75 0.60 0.32 0.52 0.42 0.50 0.05
Net gain (loss) on securities
-- realized and unrealized.... 1.12 0.11**** 1.37**** 0.79 1.97 (2.48) (0.06)
---------- -------- --------- --------- --------- --------- ----------
Total from investment
operations...................... 1.87 0.71 1.69 1.31 2.39 (1.98) (0.01)
---------- -------- --------- --------- --------- --------- ----------
Less distributions:
Dividends from investment
income........................ (0.53) (0.60) (0.32) (0.52) (0.42) (0.50) (0.05)
Distributions from capital
gains......................... -- 0.00 0.00 0.00 0.00 0.00 (0.41)***
---------- -------- --------- --------- --------- --------- ----------
Total distributions.............. (0.53) (0.60) (0.32) (0.52) (0.42) (0.50) (0.46)
---------- -------- --------- --------- --------- --------- ----------
Net asset value, end of period... $ 12.63 $ 11.29 $ 11.18 $ 9.81 $ 9.02 $ 7.05 $ 9.53
---------- -------- --------- --------- --------- --------- ----------
---------- -------- --------- --------- --------- --------- ----------
Total Investment Return............ 16.59% 6.34% 17.27% 13.87% 34.06% (20.78)% (1.22)%++
Ratios and Supplemental Data
Total net assets, end of period
(000's omitted)................. $34,975 $37,336 $29,000 $ 3,739 $ 710 $ 320 $ 670
---------- -------- --------- --------- --------- --------- ----------
---------- -------- --------- --------- --------- --------- ----------
Ratio of expenses to average net
assets.......................... 1.01% 1.00% 1.04% 1.18% 1.53% 1.48% 5.79%+
Decrease reflected in above
expense ratio due to expense
limitations..................... -- -- 0.10% 1.79% 11.17% 10.80% 1.32%+
Ratio of net investment income to
average net assets.............. 5.79% 5.31% 4.69% 5.74% 5.00% 5.95% 0.55%+
Portfolio turnover rate.......... 53.36% 64.18% 38.37% 17.57% 53.79% 47.16% 82.94%
</TABLE>
- - ------------------------
* Since January 1, 1995, E.I.I. Realty Securities, Inc. has served as
Portfolio Manager for the Real Estate Series. Prior to that date, different
firms served as Portfolio Manager.
** The Real Estate Series commenced operations on January 24, 1989.
*** During the period from January 24, 1989 to December 31, 1989, the Real
Estate Series distributed capital per share of $.11.
**** The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to timing of sales and redemptions of
Fund shares.
+ Annualized.
++ Non-annualized.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
ALL-GROWTH SERIES*
<TABLE>
<CAPTION>
ALL-GROWTH SERIES
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989**
---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of
period.......................... $ 11.86 $ 13.42 $ 12.64 $ 13.05 $ 9.65 $ 10.59 $ 10.00
---------- ---------- ---------- ---------- ---------- ---------- ------------
Net investment income.......... 0.18 0.11 0.05 0.08 0.11 0.19 0.09
Net gain (loss) on securities
-- realized and unrealized.... 2.47 (1.56) 0.78 (0.41) 3.40 (0.94) 0.66
---------- ---------- ---------- ---------- ---------- ---------- ------------
Total from investment
operations...................... 2.65 (1.45) 0.83 (0.33) 3.51 (0.75) 0.75
---------- ---------- ---------- ---------- ---------- ---------- ------------
Less distributions:
Dividends from investment
income........................ (0.14) (0.11) (0.05) (0.08) (0.11) (0.19) (0.09)
Distributions from capital
gains......................... (0.59) 0.00 0.00 0.00 0.00 0.00 (0.07)***
---------- ---------- ---------- ---------- ---------- ---------- ------------
Total distributions.............. (0.73) (0.11) (0.05) (0.08) (0.11) (0.19) (0.16)
---------- ---------- ---------- ---------- ---------- ---------- ------------
Net asset value, end of period... $ 13.78 $ 11.86 $ 13.42 $ 12.64 $ 13.05 $ 9.65 $ 10.59
---------- ---------- ---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ---------- ---------- ------------
Total Investment Return............ 22.42% (10.77)% 6.56% (2.59)% 36.48% (7.35)% 7.20%++
Ratios and Supplemental Data
Total net assets, end of period
(000's omitted)................. $ 93,198 $ 71,218 $ 56,491 $ 24,202 $ 11,857 $ 5,005 $ 3,572
---------- ---------- ---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ---------- ---------- ------------
Ratio of expenses to average net
assets.......................... 1.01% 1.00% 1.01% 1.31% 1.48% 1.51% 3.23%+
Decrease reflected in above
expense ratio due to expense
limitations..................... -- -- 0.01% 0.04% 0.40% 1.51% 0.38%+
Ratio of net investment income to
average net
assets.......................... 1.42% 1.08% 0.52% 0.61% 0.94% 1.99% 0.94%+
Portfolio turnover rate.......... 80.99% 195.65% 29.09% 20.13% 31.39% 88.29% 53.92%
</TABLE>
- - ------------------------
* Since July 1, 1994, Warburg, Pincus Counsellors, Inc. has served as
Portfolio Manager for the All-Growth Series. Prior to that date, a different
firm served as Portfolio Manager.
** The All-Growth Series commenced operations on Janury 24, 1989.
*** During the period from January 24, 1989 to December 31, 1989, the All-Growth
Series distributed capital per share of $.07.
+ Annualized.
++ Non-annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
CAPITAL APPRECIATION SERIES
<TABLE>
<CAPTION>
CAPITAL APPRECIATION SERIES
-------------------------------------------------
YEAR ENDED DECEMBER 31
-------------------------------------------------
1995 1994 1993 1992*
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period............ $ 11.34 $ 11.76 $ 11.00 $ 10.00
---------- ---------- ---------- ----------
Net investment income......................... 0.19 0.23 0.13 0.12
Net gain (loss) on securities -- realized and
unrealized................................... 3.22 (0.42) 0.78 1.00
---------- ---------- ---------- ----------
Total from investment operations................ 3.41 (0.19) 0.91 1.12
---------- ---------- ---------- ----------
Less distributions:
Dividends from investment income.............. (0.15) (0.23) (0.13) (0.12)
Distributions from capital gains.............. (1.09) 0.00 (0.02) 0.00
---------- ---------- ---------- ----------
Total distributions............................. (1.24) (0.23) (0.15) (0.12)
---------- ---------- ---------- ----------
Net asset value, end of period.................. $ 13.51 $ 11.34 $ 11.76 $ 11.00
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Total Investment Return........................... 30.16% (1.59)% 8.31% 10.87%++
Ratios and Supplemental Data
Total net assets, end of period (000's
omitted)....................................... $122,227 $88,890 $87,219 $18,645
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Ratio of expenses to average net assets......... 1.01% 1.00% 1.02% 0.91%+
Decrease reflected in above expense ratio due to
expense
limitations.................................... -- -- 0.04% 0.27%+
Ratio of net investment income to average net
assets......................................... 1.53% 1.96% 1.69% 2.06%+
Portfolio turnover rate......................... 97.55% 83.64% 66.82% 5.52%
</TABLE>
RISING DIVIDENDS SERIES
<TABLE>
<CAPTION>
RISING DIVIDENDS SERIES
---------------------------------------
YEAR ENDED DECEMBER 31
---------------------------------------
1995 1994 1993**
---------- ---------- -----------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period............ $ 10.22 $ 10.30 $ 10.00
---------- ---------- -----------
Net investment income......................... 0.13 0.14 0.01
Net gain on securities -- realized and
unrealized................................... 3.04 (0.08) 0.30
---------- ---------- -----------
Total from investment operations................ 3.17 0.06 0.31
---------- ---------- -----------
Less distributions:
Dividends from investment income.............. (0.09) (0.14) (0.01)
Distributions from capital gains.............. -- 0.00 0.00
---------- ---------- -----------
Total distributions............................. (0.09) (0.14) (0.01)
---------- ---------- -----------
Net asset value, end of period.................. $ 13.30 $ 10.22 $ 10.30
---------- ---------- -----------
---------- ---------- -----------
Total Investment Return........................... 31.06% 0.59% 3.10%++
Ratios and Supplemental Data
Total net assets, end of period (000's
omitted)....................................... $ 81,210 $ 50,712 $ 14,430
---------- ---------- -----------
---------- ---------- -----------
Ratio of expenses to average net assets......... 1.01% 1.00% 0.24%++
Ratio of net investment income to average net
assets......................................... 1.24% 1.88% 0.34%++
Portfolio turnover rate......................... 42.50% 25.99% 2.79%
</TABLE>
- - ------------------------
* The Capital Appreciation Series commenced operations on May 4, 1992.
** The Rising Dividends Series commenced operations on October 4, 1993.
+ Annualized.
++ Non-annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
EMERGING MARKETS SERIES
<TABLE>
<CAPTION>
EMERGING MARKETS SERIES
---------------------------------------
YEAR ENDED DECEMBER 31
---------------------------------------
1995 1994 1993*
------------ ---------- -----------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period............ $ 10.08 $ 12.44 $ 10.00
------------ ---------- -----------
Net investment income......................... 0.04 0.00 0.00
Net gain (loss) on securities -- realized and
unrealized................................... (1.06) (1.89) 2.44
------------ ---------- -----------
Total from investment operations................ (1.02) (1.89) 2.44
------------ ---------- -----------
Less distributions:
Dividends from investment income.............. -- 0.00 0.00
Distributions from capital gains.............. (0.00)*** (0.47) 0.00
------------ ---------- -----------
Total distributions............................. (0.00) (0.47) 0.00
------------ ---------- -----------
Net asset value, end of period.................. $ 9.06 $ 10.08 $ 12.44
------------ ---------- -----------
------------ ---------- -----------
Total Investment Return........................... (10.11)% (15.18)% 24.40%++
Ratios and Supplemental Data
Total net assets, end of period (000's
omitted)....................................... $ 47,974 $ 65,224 $ 31,181
------------ ---------- -----------
------------ ---------- -----------
Ratio of expenses to average net assets......... 1.53% 1.73% 0.38%++
Ratio of net investment income to average net
assets......................................... 0.40% 0.03% 0.00%++
Portfolio turnover rate......................... 140.57% 105.88% 0.00%
</TABLE>
VALUE EQUITY SERIES
<TABLE>
<CAPTION>
VALUE EQUITY
SERIES
------------
YEAR ENDED
DECEMBER 31
1995**
------------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of the period........ $ 10.00
------------
Income from investment operations:
Net investment income......................... 0.08
Net realized and unrealized gain on
investments.................................. 3.44
------------
Total from investment operations................ 3.52
------------
Less distributions:
Dividends from investment income.............. (0.06)
Distributions from capital gains.............. (0.28)
------------
Total distributions............................. (0.34)
------------
Net asset value, end of the period.............. $ 13.18
Total return...................................... 35.21%
------------
Ratios/Supplemental Data
Net assets, end of period (in thousands)........ $ 28,830
------------
Ratio of expenses to average net assets......... 1.01%
------------
------------
Ratio of net investment income to average net
assets......................................... 1.53%
------------
------------
Portfolio turnover rate......................... 86.36%
------------
------------
</TABLE>
- - ------------------------
* The Emerging Markets Series commenced operations on October 4, 1993.
** The Value Equity Series commenced operation on January 1, 1995.
*** Amount represents less than $0.01 per share.
++ Non-annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
STRATEGIC EQUITY SERIES
<TABLE>
<CAPTION>
STRATEGIC
EQUITY
SERIES
------------
PERIOD ENDED
DECEMBER 31
1995
------------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period............ $ 10.00
------------
Net investment income......................... 0.06
Net realized and unrealized loss on
investments.................................. (0.03)#
------------
Total from investment operations................ 0.03
------------
Less Distributions:
Dividends from net investment income.......... (0.02)
Distributions from capital gains.............. --
------------
Total Distributions............................. (0.02)
------------
Net asset value, end of period.................. $ 10.01
------------
------------
Total return...................................... 0.33%++
Ratios and Supplemental Data......................
Net assets, end of period (in thousands)........ $ 8,067
------------
------------
Ratio of expenses to average net assets......... 1.00%+
Ratio of net investment income to average net
assets......................................... 4.04%+
Portfolio turnover rate......................... 28.57%
</TABLE>
- - ------------------------
* The Strategic Equity Series commenced operations on October 2, 1995.
+ Annualized.
++ Non-annualized.
# The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to timing of sales and redemptions of Fund
shares.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
LIQUID ASSET SERIES*
<TABLE>
<CAPTION>
LIQUID ASSET SERIES
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989**
------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of
period............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ -------- -------- -------- -------- -------- --------
Net investment income............... 0.054 0.04 0.03 0.03 0.05 0.07 0.08
------------ -------- -------- -------- -------- -------- --------
Total from investment operations...... 0.054 0.04 0.03 0.03 0.05 0.07 0.08
------------ -------- -------- -------- -------- -------- --------
Less distributions:
Dividends from investment income.... (0.054 ) (0.04 ) (0.03 ) (0.03 ) (0.05 ) (0.07 ) (0.08 )
------------ -------- -------- -------- -------- -------- --------
Total distributions................... (0.054 ) (0.04 ) (0.03 ) (0.03 ) (0.05 ) (0.07 ) (0.08 )
------------ -------- -------- -------- -------- -------- --------
Net asset value, end of period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ -------- -------- -------- -------- -------- --------
------------ -------- -------- -------- -------- -------- --------
Total Investment Return................. 5.51 % 3.89 % 2.64 % 3.13 % 5.66 % 7.75 % 7.67 %++
Ratios and Supplemental Data
Total net assets, end of period (000's
omitted)............................. $ 38,589 $46,122 $16,808 $13,206 $ 9,790 $ 8,709 $2,352
------------ -------- -------- -------- -------- -------- --------
------------ -------- -------- -------- -------- -------- --------
Ratio of expenses to average net
assets............................... 0.61 % 0.61 % 0.61 % 0.74 % 0.76 % 0.66 % 0.90 %+
Decrease reflected in above expense
ratio due to expense limitations..... -- -- 0.08 % 0.50 % 1.01 % 1.84 % 3.26 %+
Ratio of net investment income to
average net assets................... 5.39 % 3.89 % 2.60 % 3.04 % 5.48 % 7.56 % 8.99 %+
</TABLE>
- - ------------------------
* Since May 1, 1992, Bankers Trust Company has served as Portfolio Manager
for the Liquid Asset Series. Prior to that date, a different firm served as
Portfolio Manager.
** The Liquid Asset Series commenced operations on January 24, 1989.
+ Annualized.
++ Non-annualized.
13
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each of the Series has a different investment objective or objectives that are
described below. Each Series' portfolio is managed by its own Portfolio Manager.
There can be no assurance that any of the Series will achieve its investment
objective or objectives. Because each Series seeks a different investment
objective or objectives and has different policies, each is subject to varying
degrees of financial, market, and credit risks. Each Series is subject to the
risk of changing economic conditions. As with any security, a risk of loss is
inherent in investment in a Series' shares. Therefore, investors should
carefully consider the investment objective or objectives, investment policies,
and potential risks of any Series before investing.
The different types of securities and investment techniques used by the
individual Series all have attendant risks of varying degrees. For example, with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt securities,
there exists the risk that the issuer of a security may not be able to meet its
obligations on interest or principal payments at the time called for by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with interest rates.
Certain types of investments and investment techniques common to one or more
Series are described in greater detail, including the risks of each, in this
Prospectus under "Description of Securities and Investment Techniques" and in
the Statement of Additional Information.
Each Series is diversified, as defined in the Investment Company Act of 1940. A
diversified Series may not invest more than 5% of the value of its total assets
in any one issuer and it may not purchase more than 10% of the outstanding
voting securities of any one issuer with respect to 75% of its total assets,
exclusive of amounts held in cash, cash items, and U.S. Government securities.
Each Series' policy on diversification is a fundamental policy and may not be
changed without approval of a majority of the outstanding voting shares of that
Series.
The Series are subject to investment restrictions that are described in the
Statement of Additional Information. The investment restrictions so designated
and, unless otherwise noted, the investment objective or objectives of each
Series, are "fundamental policies" of each Series, which means that they may not
be changed without a majority vote of shareholders of the affected Series.
Except for these fundamental policies, all investment policies and practices
described in this Prospectus and in the Statement of Additional Information are
not fundamental, meaning that the Board of Trustees may change them without
shareholder approval.
MULTIPLE ALLOCATION SERIES
The investment objective of the Multiple Allocation Series is to seek the
highest total return, consisting of capital appreciation and current income,
consistent with the preservation of capital and elimination of unnecessary risk.
The Series seeks to achieve this objective through investment in debt and equity
securities and the use of certain sophisticated investment strategies and
techniques. The Portfolio Manager for the Series is Zweig Advisors Inc.
In seeking to maximize total return, the Series will follow an asset allocation
strategy contemplating shifts (which may be frequent) among a wide range of
investments and market sectors. The Series' investments will be designed to
maximize total return during all economic and financial environments, consistent
with the preservation of capital and elimination of unnecessary risk, as
determined by the Portfolio Manager.
The Series will invest up to 60% of its total assets in U.S. Government
securities and investment grade debt securities of domestic and foreign issuers,
and up to 50% of its total assets in equity securities, including common and
preferred stocks, convertible debt securities, and warrants. If the Portfolio
Manager deems stock market conditions to be favorable or debt market conditions
to be uncertain or unfavorable, a substantially higher percentage (but generally
not more than 60%) of the Series' total assets may be invested in such equity
securities. If, however, the Portfolio Manager believes that the stock market
investment environment is uncertain or unfavorable and justifies a defensive
position, then the Series may decrease its investments in equity securities and
increase its investments in debt securities and/or money market instruments.
During periods when the Portfolio Manager believes an overall defensive position
is advisable, greater than 50% (and under certain circumstances perhaps all) of
the Series' total assets may be invested in money market instruments and cash.
Furthermore, if the Portfolio Manager believes that inflationary or monetary
conditions warrant a significant investment in companies involved in gold
operations, the Series may invest up to 10% of its total assets in the equity
securities of companies exploring, mining, developing, producing, or
distributing gold or other precious metals.
14
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
The Portfolio Manager will determine the extent of the Series' investment in
debt and equity securities, primarily on the basis of various debt and equity
market timing techniques developed by Dr. Martin Zweig (Ph.D. in Finance) and
his staff. The debt market timing techniques incorporate various indicators,
including the momentum of bond prices, short-term interest rate trends,
inflation indicators and general economic and liquidity indicators, as well as
other market indicators and statistics which the Portfolio Manager believes tend
to point to significant trends in the overall performance and the risk of the
debt markets. The equity market timing techniques incorporate general market
indicators, including interest rate and monetary analysis, market sentiment
indicators, price and trading volume statistics, and measures of valuation, as
well as other market indicators and statistics which the Portfolio Manager
believes tend to point to significant trends in the overall performance and the
risk of the stock market. There is no assurance that these debt or equity market
timing techniques will eliminate the risks of debt and equity investments,
correctly predict market trends, or enable the Series to achieve its investment
objective.
The Series may use various investment strategies and techniques when the
Portfolio Manager determines that such use is appropriate in an effort to meet
the Series' investment objective including: writing "covered" listed put and
call equity options, including options on stock indexes, and purchasing such
options; short sales of securities; purchasing and selling stock index, interest
rate, gold, and other futures contracts, and purchasing options on such futures
contracts; borrowing from banks to purchase securities; investing in securities
of "special situation" companies, "gold operations" companies, and foreign
issuers; entering into foreign currency transactions and options on foreign
currencies; entering into repurchase agreements or reverse repurchase
agreements; and lending portfolio securities to brokers, dealers, banks, or
other recognized institutional borrowers of securities. The debt and equity
components of the Series' portfolio may include such investments.
The maturities of the debt securities in the Series' portfolio will vary based
in large part on the Portfolio Manager's expectations as to future changes in
interest rates. However, the Portfolio Manager expects that the debt component
of the Series' portfolio will normally be invested primarily in intermediate
debt securities, I.E., those with remaining maturities of five to ten years,
and/or long-term debt securities, I.E., those with remaining maturities in
excess of ten years. The Portfolio Manager expects that the equity portion of
the Series' portfolio will be widely diversified by both industry and the number
of issuers. The Portfolio Manager expects that the majority of the stocks in the
Series' portfolio will be selected on the basis of a proprietary computer-driven
stock selection model that evaluates and ranks higher dividend yield stocks. The
Portfolio Manager will consider, from a list of approximately 1,500 of the most
liquid stocks, approximately 750 stocks with the highest dividend yields. The
Portfolio Manager will then use, for the selection of stocks, a proprietary
computer-driven stock selection model that evaluates and ranks such higher
dividend yield stocks on the basis of various factors, which may include
earnings momentum, earnings growth, price-to-book value, price-to-earnings,
price-to-cash flow, cash flow trend, payout ratio trend and other market
measurements. Such stock selection model may evolve or be replaced by other
stock selection techniques intended to achieve the Series' objective.
From time to time the Series may invest in companies that are determined by the
Portfolio Manager to represent a "special situation." A special situation
reflects securities which are expected to be accorded favorable or unfavorable
market recognition within a reasonably estimable period of time, at an
appreciated or depreciated value, respectively, solely by reason of a
development particularly or uniquely applicable to the issuing company.
Developments that may create special situations include, among others: a buy
out; expected market recognition of asset value; asset reorganization;
recapitalization, tender offer or merger; material litigation; technological
breakthrough; and new management or management policies. However, since the
situations may not develop as anticipated, E.G., a tender offer may be
successfully defended against or a merger may fall through, the Series could
incur losses.
The Series may also invest in the equity securities (particularly common stocks)
of companies involved in the exploration, mining, development, production, and
distribution of gold. The Series may invest in issuers located in any part of
the world. The Portfolio Manager believes that the securities of companies
involved in gold operations may offer protection against inflation and monetary
instability and, thus, when deemed appropriate by the Portfolio Manager, the
Series may invest up to 10% of its total assets in such securities. The Series
may also invest in the securities of other companies primarily engaged in the
exploration, mining, processing, fabrication, or distribution of other natural
resources, including minerals and metals such as silver, platinum, uranium,
strategic metals, diamonds, coal, oil, and phosphates, but the Series expects
that such investments would be secondary to investments in companies involved in
gold operations,
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
as protection against inflation and monetary instability. Investment in gold and
other natural resources presents risks because the prices of gold and such other
resources have fluctuated substantially over short periods of time. Prices may
be affected by unpredictable monetary and political policies, such as currency
devaluations or revaluations, economic and social conditions within an
individual country, trade imbalances, or trade or currency restrictions between
countries. The prices of gold shares and other mining shares frequently
fluctuate even more dramatically than the prices of gold and other resources.
The unstable political and social conditions in South Africa and unsettled
political conditions prevailing in neighboring countries may have disruptive
effects on the market prices of securities in South African companies.
The Series may make short sales of securities. A short sale is a transaction in
which the Series sells a security it does not own in anticipation of a decline
in market price. The Series may make short sales to offset a potential decline
in a long position or a group of long positions, or if the Series' Portfolio
Manager believes that a decline in the price of a particular security or group
of securities is likely as a result of an unfavorable "special situation" or
other reasons. The Portfolio Manager expects that, even during normal or
favorable market conditions, the Series may make short sales in an attempt to
maintain portfolio flexibility and facilitate the rapid implementation of
investment strategies if the Portfolio Manager believes that the price of a
particular security or group of securities is likely to decline. For additional
information, see "Description of Securities and Investment Techniques -- Short
Sales."
The Series may from time to time increase its ownership of securities above the
amounts otherwise possible by borrowing from banks on an unsecured basis and
investing the borrowed funds. As further described under "Borrowing," in the
discussion on "Description of Securities and Investment Techniques," any such
borrowing will be made only from banks and is subject to certain percentage
limitations described under "Borrowing."
FULLY MANAGED SERIES
The Fully Managed Series' investment objective is to earn, over the long term, a
high total investment return, consistent with the preservation of capital and
prudent investment risk. It seeks to achieve this objective by investing
primarily in common stocks. The Series may also invest in fixed income
securities and money market instruments to preserve its principal value during
uncertain or declining market conditions. The Series' strategy is based on the
premise that, from time to time, certain asset classes are more attractive long
term investments than others. Total investment return consists of current
income, including dividends, interest and discount accruals, and capital
appreciation. Current income will be an important component of the Series'
effort to maximize total return. The Portfolio Manager for the Series is T. Rowe
Price Associates, Inc.
The Portfolio Manager expects that equity securities generally will constitute
25% to 85% of the Series' overall portfolio, and that the equity portfolio will
be widely diversified by number of issuers. The Portfolio Manager expects that
investment opportunities generally will be sought among securities of
large-capitalization, established companies, although securities of smaller,
less well-known companies may also be selected. The Series may invest up to 25%
of its total assets in preferred stock.
In selecting investments for the Series, the Portfolio Manager uses a
"valuation" discipline to identify stocks whose prospects for price
appreciation, over time, are believed to exceed the risk of loss of market
value. Through this process, a security's current market value is analyzed
relative to each of the following: the company's assets, such as natural
resources and real estate; the company's replacement cost of plant and
equipment; the company's consumer or commercial franchises, such as
well-recognized trademarks or established brand names; and the company's
earnings or growth potential. The Portfolio Manager also seeks to identify
securities that have been over-discounted due to adverse operating results,
deteriorating economic or industry conditions, or unfavorable publicity. By
investing after the adverse conditions are reflected in the price of the
company's securities, the risks associated with such out-of-favor investments
may be limited. The utilization of this contrarian approach may result in
investment selections which are counter to those of most investors.
It is anticipated that debt securities, including convertible bonds, may often
constitute between 25% and 50% of the Series' overall portfolio. Debt securities
purchased by the Series may be of any maturity. It is anticipated that the
weighted average maturity of the debt portfolio generally will be between four
and ten years, but may be shorter or longer. The Portfolio Manager may invest up
to 5% of the Series' assets, measured at the time of investment, in debt
securities that are rated below investment grade or, if not rated, of equivalent
quality. See "High Yield Bonds" in this Prospectus.
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
The balance of the Series' portfolio will generally be invested in the following
money market instruments which have remaining maturities not exceeding one year:
(i) obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (ii) negotiable certificates of deposit, bankers' acceptances
and fixed time deposits and other obligations of domestic banks (including
foreign branches) that have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation; (iii) commercial paper rated at the date of purchase in
the two highest rating categories; and (iv) repurchase agreements. The Series
also may invest in short-term U.S. dollar-denominated obligations of foreign
banks (including U.S. branches) at the time of purchase, if such banks have more
than $1 billion in total assets.
To maximize potential return, the Portfolio Manager may utilize the following
investment methods: writing "covered" listed put and call equity options,
including options on stock indices, and purchasing such options; purchasing and
selling, for hedging purposes, stock index, interest rate, and other futures
contracts, and purchasing options on such futures; purchasing warrants and
preferred and convertible preferred stocks; entering into repurchase agreements
and reverse repurchase agreements; lending portfolio securities to brokers,
dealers, banks, or other recognized institutional borrowers of securities;
purchasing restricted securities; purchasing securities of foreign issuers;
entering into forward currency contracts and currency exchange transactions for
hedging purposes; and borrowing from banks to purchase securities. The Series
will not engage in short sales of securities other than short sales "against the
box." See "Description of Securities and Investment Techniques" for further
discussion of these investment methods.
LIMITED MATURITY BOND SERIES
The Limited Maturity Bond Series' primary investment objective is the highest
current income consistent with low risk to principal and liquidity. As a
secondary objective, the Series also seeks to enhance its total return through
capital appreciation when market factors, such as falling interest rates and
rising bond prices, indicate that capital appreciation may be available without
significant risk to principal. The Portfolio Manager for this Series is Bankers
Trust Company.
The Series pursues its objectives primarily by investing in a diversified
portfolio of limited maturity debt securities. These are
short-to-intermediate-term debt securities with actual remaining maturities of
seven years or less, and other debt securities with special features (e.g.,
puts, variable or floating coupon rates, maturity extension arrangements,
mortgage pass-throughs, etc.) producing price characteristics similar to those
of short-to-intermediate-term debt securities. Generally, the Series' portfolio
securities are selected from as many as ten sectors of the fixed income market,
each representing a different type of fixed income investment. The ten sectors
are as follows:
(i) U.S. Treasury obligations;
(ii) U.S. Government agency and instrumentality
securities;
(iii)repurchase agreements with respect to U.S.
Treasury obligations and U.S. Government agency and instrumentality
securities;
(iv) asset-backed securities, including mortgage-
backed securities issued or guaranteed by U.S. Government agencies or
collateralized by U.S. Treasury obligations or U.S. Government agency
securities, mortgages pooled by high-quality financial institutions, and
other asset-backed securities representing pools of receivables unrelated
to mortgage loans;
(v) banking industry obligations, including
certificates of deposit, time deposits, and bankers' acceptances issued by
commercial banks;
(vi) savings industry obligations, including
certificates of deposit and time deposits issued by savings and loan
associations;
(vii)corporate debt securities;
(viii)
corporate commercial paper, consisting
primarily of unsecured notes with maturities of nine months or less issued to
finance short-term credit needs;
(ix) variable or floating rate securities, the coupon
rates of which vary with a designated money market index; and
(x) foreign securities denominated in U.S. dollars.
For additional information as to the characteristics and risks of investments in
several of these sectors, see the "Description of Securities and Investment
Techniques" in this Prospectus.
The Portfolio Manager conducts a continuing review of sector yields and other
information. These data are analyzed in light of market conditions and trends in
order to determine which investment sectors offer the best values on a total
return basis. Where the yield of a
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
sector exceeds that of comparable U.S. Treasury obligations, the excess yield or
"premium" is analyzed to determine whether and to what extent it reflects
additional risk in that sector. During periods that yield differentials
available in the non-governmental sectors do not appear to justify the
additional risks involved, the Series will invest more heavily in U.S. Treasury
obligations and U.S. Government agency and instrumentality securities.
Ordinarily, the Series' portfolio will include securities from five or more of
the investment sectors. The Series does not intend to concentrate 25% or more of
its total assets in debt securities of issuers in any single industry.
After the sectors for investment have been chosen, individual securities are
selected from within these sectors on the basis of yield, creditworthiness, and
liquidity. The Series will invest in corporate debt securities and variable or
floating rate securities only if such securities are rated Baa or better by
Moody's Investor Services, Inc. ("Moody's") or BBB or better by Standard &
Poor's, or, if not rated by Moody's or Standard & Poor's Ratings Group
("Standard & Poor's"), if the Portfolio Manager determines that they are of
equivalent quality. The Series will invest in corporate commercial paper only if
rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by Standard & Poor's, or, if
not rated by Moody's or Standard & Poor's, if the Portfolio Manager determines
that the commercial paper is of equivalent quality. For additional information,
see "Appendix 1: Description of Bond Ratings" in the Statement of Additional
Information.
The Series seeks to reduce risk, increase income, and preserve or enhance total
return by actively managing the maturity of its portfolio in light of market
conditions and trends. When, in the opinion of the Portfolio Manager, market
indicators point to higher interest rates and lower bond prices, average
maturity generally will be shortened. When falling interest rates and rising
bond prices are indicated, a longer average portfolio maturity generally can be
expected.
During periods of rising or falling interest rates, the Series may also seek to
hedge all or a part of its portfolio against related changes in securities
prices by buying or selling interest rate futures contracts and options thereon.
Such a strategy involves using the contracts as a maturity management device
that reduces risk and preserves total return while the Series is restructuring
its portfolio in response to the changing interest rate environment. For
information on such contracts, see "Description of Securities and Investment
Techniques."
The dollar-weighted average maturity of the Series' portfolio will not exceed
five years, and, in periods of rapidly rising interest rates, may be shortened
to one year or less. For these purposes, (i) the maturity of mortgage-backed
securities is determined on an "expected life" basis, (ii) variable or floating
rate securities are deemed to mature at the next interest rate adjustment date,
and (iii) debt securities with put features are deemed to mature at the next put
exercise date. Positions in interest rate futures contracts (long or short) will
be reflected in average portfolio maturity on the basis of the maturities of the
securities underlying the futures contracts.
The Series may invest in private placements of debt securities. The Series may
also purchase securities (including mortgage-backed securities such as GNMA,
FNMA, and FHLMC Certificates) on a when-issued basis. A description of these
techniques and their attendant risks is contained in the section of this
Prospectus entitled "Description of Securities and Investment Techniques."
NATURAL RESOURCES SERIES
The Natural Resources Series seeks long-term capital appreciation. The Series
seeks this objective by investing primarily in equity and debt securities of
companies engaged in the exploration, development, production, and distribution
of natural resources such as gold and other precious metals, strategic metals,
minerals, oil, natural gas, and coal. The Series may also invest in equity and
debt securities of companies which themselves invest in companies engaged in
these activities. Although current income may be realized, it is not an
investment objective; it is anticipated that the Series will realize only a
nominal amount of current income. The Series' Portfolio Manager is Van Eck
Associates Corporation.
The Series' Portfolio Manager believes securities of some natural resources
companies, sometimes referred to as "hard asset" companies, offer an opportunity
to protect wealth against eroding monetary values. The Portfolio Manager
believes that recent history indicates that the policies of many governments,
particularly persistent budget deficits and high rates of money supply growth,
have, at times, had long-term inflationary consequences. Generally, during
periods of accelerating inflation, the prices of many natural resources equity
securities sometimes have risen faster than the rate of inflation; and the
Portfolio Manager believes that they will continue to do so in the future.
During such periods, interest rates and yields on industrial shares have risen,
causing the prices of fixed income and industrial equity securities
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
to decline. The Portfolio Manager anticipates that inflation and the price of
certain natural resources will continue on a long-term upward trend with
alternating cycles as credit is overexpanded and subsequently tightened. Since
the market action of shares of companies engaged in certain natural resources
activities may move against or independently of the market trend of industrial
shares, the addition of such shares to an overall portfolio may increase the
return and reduce the fluctuations of such portfolio. There can be no assurance
that an increased rate of return or reduced fluctuation of a portfolio will be
achieved. Thus, an investment in the Series' shares should be considered part of
an overall investment program rather than a complete investment program.
The Series may invest in securities of foreign issuers, including securities of
South African issuers. The relative amount of the Series' investment in foreign
issuers will change from time to time, and the Series is subject to certain
guidelines for diversification of foreign security investments. Investments by
the Series in securities of foreign issuers may involve particular investment
risks. See "Description of Securities and Investment Techniques" in this
Prospectus. Political and social conditions in South Africa, due to former
segregation policies of the South African government and unsettled political
conditions prevailing in South Africa and neighboring countries, may pose
certain risks to the Series' investments. If aggravated by local or
international developments, such risks could have an adverse effect on
investments in South Africa, including the Series' investments and, under
certain conditions, on the liquidity of the Series' portfolio and its ability to
meet shareholder redemption requests.
The Series will normally invest at least 65% of its total assets in securities
of companies engaged in the above-described natural resources activities. The
Series reserves the right to invest up to 10% of its net assets, taken at market
value at the time of investment, in gold bullion and coins and other precious
metal (silver and platinum) bullion. The Series may invest over 25% of its
assets in securities of companies predominantly engaged in gold operations,
although the Series will not invest in any such security or in gold bullion and
coins if, after such acquisition, more than 50% of the Series' assets (taken at
market value at the time of such investment) would be invested in securities of
companies predominantly engaged in gold operations and in gold bullion and
coins. The Series may also invest directly in other commodities including
petroleum and strategic metals. The Series may invest up to 35% of the value of
its total assets in: (a) common stock of companies not engaged in natural
resources activities, (b) investment-grade corporate debt securities, (c)
obligations issued or guaranteed by U.S. or foreign governments, (d) money
market instruments, and (e) repurchase agreements.
During periods of less favorable economic and/or market conditions, the Series
may make substantial investments for temporary defensive purposes in obligations
of the U.S. Government, certificates of deposit, bankers' acceptances,
investment grade commercial paper, and repurchase agreements.
The Series may engage in short sales, and may lend portfolio securities. The
Series may also invest up to 5% of its assets at the time of purchase in
warrants, and may purchase or sell put or call options on securities and foreign
currencies. The Series may engage in futures contracts and options on those
contracts. These techniques are described in "Description of Securities and
Investment Techniques."
Since the Series may invest substantially all of its assets in securities of
companies engaged in natural resources/hard asset activities and may concentrate
in securities of companies engaged in gold operations, the Series may be subject
to greater risks and market fluctuations than other investment companies with
more diversified portfolios. At the present time, many major producers of gold
bullion are located in foreign countries, and the production and marketing of
gold, precious metals, and other natural resources may be affected by the risks
of investing in foreign countries, including actions of and changes in
governments. Gold and natural resources securities may be cyclical in nature.
Based upon historical experience, during periods of economic or financial
instability, the securities of some gold and other natural resources companies
may be subject to broad price fluctuations, reflecting volatility of prices and,
in some instances, instability of supply of precious and other metals, oil,
coal, timber, or other natural resources. Instability of prices may affect
earnings of gold and other natural resources companies and may adversely affect
the financial condition of such companies. In addition, some natural resources
companies may also be subject to the risks generally associated with extraction
of gold and natural resources, such as the risks of mining
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
and oil drilling, and the risks of the hazards associated with natural
resources, such as fire, drought, and others.
REAL ESTATE SERIES
The primary investment objective of the Real Estate Series is capital
appreciation. Current income is a secondary objective. The Series seeks these
objectives primarily through investment in publicly traded equity securities of
companies in the real estate industry that are listed on national exchanges or
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"). Securities are selected for long-term investment. It is generally
not the policy of the Series to purchase securities merely for short-term gain,
although there may be a limited number of short-term transactions. The Portfolio
Manager for the Series is E.I.I. Realty Securities, Inc.
The Series will invest not less than 65% of its total assets in common and
preferred stocks and convertible preferred securities of companies which have at
least 50% of the value of their assets in, or which derive at least 50% of their
revenues from, the ownership, construction, management, or sale of residential,
commercial, or industrial real estate, which include listed equity real estate
investment trusts which own properties, and listed mortgage real estate
investment trusts which make short-term construction and development mortgage
loans or which invest in long-term mortgages or mortgage pools. The Series may
invest more than 25% of its total assets in any of the foregoing sectors of the
real estate industry. The Series' assets may, however, be invested in money
market instruments and U.S. Government securities if, in the opinion of the
Portfolio Manager, market conditions warrant a temporary defensive investment
strategy.
The Series may invest up to 35% of its total assets in equity, debt, or
convertible securities of issuers whose products and services are related to the
real estate industry, such as manufacturers and distributors of building
supplies, and up to 25% of its total assets in financial institutions which
issue or service mortgages, such as savings and loans or mortgage bankers. The
Series also may invest in the securities of companies unrelated to the real
estate industry but which have significant real estate holdings believed to be
undervalued relative to the price of the companies' securities.
In addition to the common and preferred stocks described above, the Series may
invest up to 35% of its total assets in securities believed by the Portfolio
Manager to be undervalued and have capital appreciation potential, including
warrants and other rights to purchase securities (up to 5% of total assets),
bonds, convertible securities, and publicly traded limited partnerships listed
on national securities exchanges or NASDAQ. The Series may invest up to 5% of
its total assets in bonds, convertible securities, and limited partnerships
traded on the Toronto or London Stock Exchanges. The Series may also invest up
to 20% of its assets, measured at the time of investment, in high yield
convertible bonds that are rated below investment grade by one of the primary
rating agencies (or if not rated, deemed to be of comparable quality by the
Portfolio Manager). See "High Yield Bonds."
There are risks inherent in the Series' investment policies. The Series may be
subject to the risks associated with the direct ownership of real estate because
of its policy of concentration in the securities of companies which own,
construct, manage, or sell residential, commercial, or industrial real estate.
These risks include: declines in the value of real estate, adverse changes in
the climate for real estate, risks related to general and local economic
conditions, over-building and increased competition, increases in property taxes
and operating expenses, changes in zoning laws, casualty or condemnation losses,
limitations on rents, changes in neighborhood values, the appeal of properties
to tenants, leveraging of interests in real estate, and increases in interest
rates. The value of securities of companies which service the real estate
industry may also be affected by such risks.
In addition to the risks discussed above, equity real estate investment trusts
may be affected by any changes in the value of the underlying property owned by
the trusts, while mortgage real estate investment trusts may be affected by the
quality of any credit extended. Further, equity and mortgage real estate
investment trusts are dependent upon management skill, are not diversified, and
are therefore subject to the risk of financing single or a limited number of
projects. Such trusts are also subject to heavy cash flow dependency, defaults
by borrowers, self liquidation, and the possibility of failing to qualify for
special tax treatment under Subchapter M of the Internal Revenue Code of 1986
and to maintain an exemption under the Investment Company Act of 1940. Finally,
certain real estate investment trusts may be self-liquidating in that a specific
term of existence is provided for in the trust document. Such trusts run the
risk of liquidating at an economically inopportune time.
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
ALL-GROWTH SERIES
The All-Growth Series' investment objective is capital appreciation. The Series
seeks to achieve its objective through investment in securities selected on the
basis of fundamental investment research for their long-term growth prospects.
The Portfolio Manager for the Series is Warburg, Pincus Counsellors, Inc.
In considering securities for the Series, the Portfolio Manager (1) selects for
investment those companies whose unique characteristics or proprietary
advantages, it believes, offer the best prospects for above average increases in
revenues and earnings; (2) selects companies that tend to be grouped in
industries that, from time to time, are judged to be less likely to be affected
by the business cycle and/or have already experienced the negative effects of
the capital markets; and (3) monitors both companies and their industries to
make certain they retain the characteristics that led to their selection in the
first place.
The Series' policy stresses flexibility and adaptability in arranging its
portfolio to seek the desired results. Common stocks will generally constitute a
majority of the portfolio, but the Series may invest in preferred stocks and
debt securities (including money market obligations) when, in the judgment of
the Portfolio Manager, a more conservative investment position seems appropriate
in light of anticipated market conditions. The Series will not invest for
purposes of exercising management or control.
Assets of the Series will be subject to the risks of investment in equity
securities, I.E., there is no assurance of capital appreciation and there is a
substantial risk of decline. Investment in the securities of unseasoned
companies may in some instances involve a higher degree of risk than investments
in securities of companies with longer operating histories. Any current income
from dividends received from such securities will be entirely incidental. The
Series is not suitable for investors seeking a consistent and/or minimum level
of income.
The Series may invest up to 10% of its assets in securities of foreign issuers.
The Series may also engage in short sales. The Series may also write "covered"
listed put and call equity options including options on stock indices, and
purchase such options; purchase and sell stock index, interest rate, and other
futures contracts; and purchase options on such futures. It is not the policy of
the Series to invest in securities of companies with no operating history. The
Series is permitted to borrow for the purpose of making leveraged investments,
subject to regulatory restrictions. For discussion of the risks involved in
these investment techniques, see "Description of Securities and Investment
Techniques."
CAPITAL APPRECIATION SERIES
The investment objective of the Series is to generate long-term capital growth.
In seeking this objective, the Series will invest primarily in common stock and
preferred stock that will be allocated between two categories of stocks
described below and referred to as "components." The components in which the
Series will invest are the growth component and the value component. The
Portfolio Manager for the Series is Chancellor Trust Company.
The Portfolio Manager will allocate the Series' assets between the two
components in an effort to maximize the potential for achieving the Series'
overall objective. The Portfolio Manager may allocate the assets between the
components in its discretion in any proportion that it deems appropriate. The
Portfolio Manager is free to allocate the Series' assets such that, at any point
in time, there may be little or no assets allocated to one of the components.
The Portfolio Manager may select a particular security for inclusion in both
components, provided that it meets the criteria for each component. The
Portfolio Manager will select securities for each component based upon the
criteria for each component as described below:
THE GROWTH COMPONENT. The securities eligible for this component are those that
the Portfolio Manager believes have the following characteristics: they have
stability and quality of earnings and positive earnings momentum; have dominant
competitive positions; and demonstrate above-average growth rates as compared to
published Standard & Poor's 500 Composite Stock Price Index ("S&P 500") earnings
projections.
THE VALUE COMPONENT. Securities eligible for this component are those that the
Portfolio Manager regards as fundamentally undervalued, I.E., securities selling
at a discount to asset value and securities with a relatively low price/earnings
ratio. The securities eligible for this component may include real estate stock
such as securities of publicly-owned companies that, in the Portfolio Manager's
judgment, offer an optimum combination of current dividend yield, expected
dividend growth, and discount to current real estate value. Real estate stocks
may also include those issued by companies in industries related to real estate,
including companies that own, develop or provide services to income-producing
real estate, and
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
commercial and community developers, and may include real estate investment
trusts and "land rich" companies, which are companies that are not in the real
estate industry but that have significant real estate related assets and whose
stock price may be affected by the real estate assets they hold.
If the Portfolio Manager believes that the expected market return for equity
securities over a twelve-month period is less than a premium over U.S. Treasury
bills that equity securities have historically provided, the Series may, as a
temporary defensive measure, invest up to 40% of its assets in money market
instruments and short-term investment grade debt securities until market
conditions improve. Investment grade securities are generally those rated at
least Baa by Moody's or BBB by Standard & Poor's, or unrated securities that the
Portfolio Manager determines are of comparable quality. The Series from time to
time may invest in money market instruments to the extent appropriate, pending
investment in the types of securities in which the Series normally invests or in
anticipation of redemptions. Money market instruments in which the Series may
invest include U.S. Government securities, certificates of deposit, bankers'
acceptances, time deposits, commercial paper and other U.S. dollar-denominated
obligations of domestic and foreign corporations, and repurchase agreements.
To maximize potential return, the Portfolio Manager may use the following
investment methods: writing "covered" listed put and call equity options
including options on stock indices, and purchasing such options; purchasing and
selling stock index, interest rate, and other futures contracts, and purchasing
options on such futures; entering into repurchase agreements; and borrowing from
banks to purchase securities. The Series may also invest up to 20% of its total
assets in Depositary Receipts. The Series may engage in short sales and short
sales "against the box." See "Description of Securities and Investment
Techniques" for further discussion of these investment methods. For a discussion
of investment in investment grade debt securities, see "Debt Securities." For a
description of the risks of investment in industries related to real estate, see
"Investment Objectives and Policies -- Real Estate Series."
RISING DIVIDENDS SERIES
The investment objective of the Rising Dividends Series is capital appreciation.
Dividend income is a secondary objective. The Portfolio Manager for the Series
is Kayne, Anderson Investment Management, L.P.
In seeking these objectives the Series normally invests at least 80% of its net
assets in equity securities of companies determined to be of high quality by the
Portfolio Manager that meet the following four criteria:
(i) Consistent dividend increases -- The company must have increased its
dividends in seven of the last ten years.
(ii) Substantial dividend increases -- The company must have at least doubled
its dividends in the last ten years.
(iii) Reinvested profits -- The company must reinvest at least 35% of its
profits annually.
(iv) Under-leveraged balance sheet -- The company must have less than 35% of its
total capitalization in long term debt.
In selecting securities, the Portfolio Manager screens a universe of over 13,000
companies for those companies that meet the above criteria. From this universe,
the Portfolio Manager anticipates that approximately 350 companies will meet the
criteria, each of which is individually analyzed by the Portfolio Manager to
consider its past and present competitive position within its respective
industry. Each security is analyzed on a proprietary computer matrix, based on
the Portfolio Manager's projections of each company's growth in earnings, cash
flow, and dividends. Target prices and value ranges are developed from this
analysis. The securities are ranked based on their potential total return, and
their risk/reward ratio. The final decision to invest in a stock includes an
analysis of the company's position in its industry and the industry cycle in the
economy. The individual security selection is overlaid with a sector allocation
discipline to avoid overconcentration in any single sector.
It is anticipated that the Series' portfolio will generally contain a minimum of
30-40 issues. In addition, it is the policy of the Series that no equity
security will be acquired if, after its acquisition, more than 15% of the
Series' total assets would be invested in any one industry or more than 5% would
be invested in any one issuer. The Portfolio Manager does not intend to invest
any of the Series' assets in securities that, at the time of investment, it
believes to be illiquid. The Portfolio Manager periodically monitors the Series'
equity securities to assure they meet the four criteria. A security will
generally be sold when it reaches its target price, when negative changes occur
in either the company or its industry, or when any one or more of the four
criteria are no longer satisfied. A 15% price decline in a stock, relative to
the market, triggers a re-appraisal. The reappraisal may result in a sale, but
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
each buy/sell decision is made on the merits and fundamentals of that particular
situation. There may from time to time be other equity securities in the
Portfolio which meet most, but not all, of the criteria, but which the Portfolio
Manager deems a suitable investment. Equity securities are deemed to include
common stocks, securities convertible into common stocks, or rights or warrants
to subscribe for or purchase common stocks.
The Portfolio Manager may enter into forward currency contracts and currency
exchange transactions for hedging purposes. During those times when equity
securities that meet the Portfolio Manager's investment criteria cannot be
found, for temporary defensive purposes or pending longer-term investment, the
Series may invest any amount of its assets in short-term fixed income securities
or in cash or cash equivalents.
EMERGING MARKETS SERIES
The investment objective of the Emerging Markets Series is long-term growth of
capital. The Series seeks this objective by investing primarily in equity
securities of companies that are considered to be in emerging market countries.
Income is not an objective, and any production of current income is considered
incidental to the objective of growth of capital. The Series will be diversified
by issuer, and normally will be invested in companies located in at least six
different emerging market countries. The investment philosophy of the Series is
to attempt to capitalize upon emerging capital markets in developing nations and
other nations in which the Portfolio Manager believes that economic and
political factors are likely to produce above average growth rates. The Series'
Portfolio Manager is Bankers Trust Company. Bankers Trust Company has entered
into a sub-advisory agreement with BT Fund Managers (International) Limited
pursuant to which BT Fund Managers (International) Limited provides advisory and
management services with respect to the Series' assets allocated for investment
in the Pacific Basin.
At least 65% of the Series' assets normally will be invested in the equity
securities of issuers in countries that are identified as emerging market
countries in the Morgan Stanley Capital International Emerging Markets Free
Index or the International Finance Corporation Emerging Market Index, or a
country that the Portfolio Manager otherwise believes is an emerging market
country because it has a developing economy or because its markets have begun a
process of change and are growing in size and/or sophistication.
The Portfolio Manager will allocate the Series' assets for investment in
emerging market countries in its discretion, taking into account economic and
political factors that may include, among others, relative market valuation,
earnings momentum, supply and demand, the prospects for relative growth among
the regions and the countries therein, expected levels of inflation,
governmental policies influencing business conditions, the outlook for currency
relationships, and the range of alternative opportunities available to
international investors. The Portfolio Manager may determine to change its
allocation at any time.
For purposes of allocating the Series' investments, a company will be considered
located in the country in which the company is domiciled, in which it is
primarily traded, from which it derives a significant portion of its revenues,
or in which a significant portion of its goods or services are produced. Equity
securities that may be acquired include common stock and other securities with
equity characteristics, including preferred stock, rights and warrants,
convertible securities, which may consist of debt securities or preferred stock
that may be converted into common stock or that carry the right to purchase
common stock, and shares of investment companies.
In selecting securities in emerging market countries, the Portfolio Manager
seeks undervalued investment opportunities for growth. The Portfolio Manager
uses a disciplined, value-oriented investment philosophy that generally stresses
the inherent value of companies under examination, usually based upon the medium
term outlook for such companies. Securities may be considered for the company's
fundamental financial characteristics, its earnings potential, or the potential
for economic development of the country or region in which the company is
located.
To the extent that the Series' assets are not invested in emerging market equity
securities, the remainder of the Series' assets, which normally will not exceed
35% of net assets, may be invested in debt securities issued or guaranteed by
corporate or governmental issuers in an emerging market country (including Brady
Bonds) or an industrialized country, including the United States; in bank
deposits or bank obligations (including certificates of deposit, time deposits,
and bankers' acceptances) of banks in emerging market or industrialized
countries, including the United States; instruments issued by international
development agencies; and in high-quality money market instruments, including
commercial paper and other short-term corporate debt obligations of issuers in
industrialized and emerging market countries. The Portfolio Manager may invest
up to 10% of the Series'
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
assets, measured at the time of investment, in debt securities that are rated
below investment grade or, if not rated, of equivalent quality. See "High Yield
Bonds" in this Prospectus and "Debt Securities" in the Statement of Additional
Information.
For temporary defensive purposes, the Series may decrease its investment in
emerging market country equity securities, and may invest to a significant
degree in debt securities and bank and money market instruments as described
above. In addition, the Series may invest significantly in such securities after
receipt of new monies.
Most of the foreign securities in which the Series invests will be denominated
in foreign currencies. The Series may engage in foreign currency transactions in
anticipation of or to protect itself against fluctuations in currency exchange
rates in relation to the U.S. dollar. Such foreign currency transactions may
include forward foreign currency contracts, currency exchange transactions on a
spot (i.e., cash) basis, put and call options on foreign currencies, and foreign
exchange futures contracts. For a description on these techniques, see
"Description of Securities and Investment Techniques -- Foreign Currency
Transactions" in this Prospectus.
The Emerging Markets Series may use various investment strategies and techniques
to meet its investment objectives, including purchasing options on securities
and writing (selling) secured put and covered call options on securities and
securities indexes. The Series may purchase and sell futures contracts, and may
purchase and write options on such futures contracts. The Series may also
purchase and sell stock index futures contracts. When deemed appropriate by the
Portfolio Manager, the Series may enter into reverse repurchase agreements and
may invest cash balances in repurchase agreements and money market instruments
in an amount necessary to maintain liquidity, in an amount to meet expenses or
for day-to-day operating purposes. The Series may invest in shares of other
investment companies, provided that such investment companies invest a
significant portion of assets in emerging capital markets. The Series may invest
in restricted securities and warrants. These investment techniques are described
under the heading "Description of Securities and Investment Techniques" in this
Prospectus or in the Statement of Additional Information.
Investment in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. For a
description of these risks, see "Description of Securities and Investment
Techniques -- Foreign Securities" in this Prospecutus. Investment in emerging
markets countries presents risks in a greater degree than, and in addition to,
those presented by investment in foreign issuers in general. A number of
emerging market countries restrict, to varying degrees, foreign investment in
stocks. Repatriation of investment income, capital, and proceeds of sales by
foreign investors may require governmental registration and/or approval in some
emerging market countries. A number of the currencies of developing countries
have experienced significant declines against the U.S. dollar in recent years,
and devaluation may occur subsequent to investments in those currencies by the
Series. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries.
Many of the emerging securities markets are relatively small, have low trading
volumes, suffer periods of relative illiquidity, and are characterized by
significant price volatility. There is a risk in emerging market countries that
a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country) or creation of government
monopolies, any of which may have a detrimental effect on the Series'
investment. In addition, in many countries there is less publicly available
information about issuers than is available in the United States. Foreign
companies are not generally subject to uniform accounting, auditing, and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to U.S. companies. Further, the Series may
encounter difficulties or be unable to pursue legal remedies or obtain
judgements in foreign courts.
VALUE EQUITY SERIES
The investment objective of the Value Equity Series is capital appreciation.
Dividend income is a secondary objective. The Portfolio Manager for the Series
is Eagle Asset Management, Inc. At least 65% of the Series' assets normally will
be invested in equity securities.
In seeking these objectives the Series invests primarily in equity securities of
U.S. and foreign issuers which, when purchased, meet quantitative standards
believed by the Portfolio Manager to indicate above average financial soundness
and high intrinsic value relative to price. In selecting equity securities, the
Portfolio Manager analyzes companies using the four
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
criteria described below. While some companies selected for investment may meet
more than one of the criteria described below, the Series' investment policy is
to primarily invest, under normal circumstances, in companies that, at the time
of investment, meet at least one of the criteria. The criteria used by the
Portfolio Manager are as follows:
(i) Price/earnings or price/book value ratio approximates or falls below 75% of
that of the average of the companies in the S&P 500;
(ii) Dividend yield approximates at least 66% of the prevailing average yield to
maturity of the five most actively traded long-term U.S. Government bonds;
(iii) Per share going-concern value (I.E., a company's value if its major
subsidiaries and assets are sold), as estimated by the Portfolio Manager,
exceeds market value; or
(iv) Long-term debt of the company approximates or falls below its tangible net
worth.
In selecting securities, the Portfolio Manager screens a universe of over 2,500
companies for those companies that meet the above criteria. From this universe,
the Portfolio Manager anticipates that only a few hundred companies will meet
one or more of the criteria. Each company identified by the initial screening is
individually analyzed by the Portfolio Manager to consider its past and present
competitive position within its respective industry. Each security is analyzed
based on the Portfolio Manager's projections of each company's growth in
earnings and dividends, earnings momentum, and undervaluation based on a
discount dividend model. Target prices and value ranges are developed from this
analysis and portfolio selection is made from among the top rated securities.
The Series may also invest in debt securities, and intends to limit those
investments to U.S. Government and agency obligations. The portion of total
assets invested in common stocks and debt securities will vary based on the
availability of common stocks meeting the selection criteria and the Portfolio
Manager's judgment of the investment merit of common stocks relative to debt
securities. The Series may also invest cash balances in certificates of deposit,
bankers' acceptances, high quality commercial paper, Treasury bills, repurchase
agreements, and other money market instruments. During adverse market
conditions, as a temporary investment posture, the Series may invest
significantly in the debt securities and money market instruments described
above.
The Series may invest without limit in equity securities of foreign issuers,
including American Depositary Receipts. However, it is expected that under
ordinary circumstances, the Series will not invest more than 25% of its assets
in foreign issuers, measured at the time of investment. For a description of the
risks associated with investment in foreign issuers, see "Description of
Securities and Investment Techniques -- Foreign Securities" in this Prospectus.
It is anticipated that the Series' portfolio will contain a minimum of 50
issues. In addition, it is the policy of the Series that no equity security will
be acquired if, after its acquisition, more than 25% of the Series' total assets
would be invested in any one industry or more than 5% would be invested in any
one issuer. The Portfolio Manager periodically monitors the Series' equity
securities to assure they meet the selection criteria. A security usually will
be eliminated from the Series' portfolio when it reaches its target price, when
negative changes occur in either the company or its industry, or when there is a
significant change in one or more of the selection criteria. From time to time,
the Series may invest in equity securities that do not meet the selection
criteria described above, but which the Portfolio Manager deems a suitable
investment. For purposes of the Series' investment policies, equity securities
are deemed to include common stocks, securities convertible into common stocks,
options on equity securities, and rights or warrants to subscribe for or
purchase common stocks. The Series may also invest in Standard & Poor's
Depositary Receipts, which are publicly traded interests in a unit investment
trust that invests in substantially all of the common stocks in the S&P 500.
The Series may also invest in restricted or illiquid securities; however, the
Portfolio Manager does not intend to invest more than 15% of the Series' assets
in securities that, at the time of investment, it believes to be illiquid. In
pursuing its investment objective or for hedging purposes, the Series may, but
is not required to, utilize the following investment techniques: entering into
stock index, interest rate, foreign currency and other financial futures
contracts, and purchasing options on such futures contracts; purchasing and
writing "covered" listed put and call options on securities, stock indices, and
currencies; entering into forward currency contracts and currency exchange
transactions; and borrowing from banks to purchase securities. See "Description
of Securities and Investment Techniques" for a discussion of the risks
associated with these investment techniques.
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
STRATEGIC EQUITY SERIES
The investment objective of the Strategic Equity Series is to achieve capital
appreciation. The Series seeks to achieve this objective primarily through
investment in equity securities. The amount of the Series' assets allocated to
equities shall vary from time to time to seek positive investment performance
from advancing equity markets and to reduce exposure to equities when the
Portfolio Manager believes that their risk/ reward characteristics are less
attractive. The Series' investments in equities include both (1) stocks that the
Portfolio Manager selects for their "growth" characteristics (which may include
positive earnings momentum and above average earnings growth rates), and (2)
stocks that the Portfolio Manager selects for their "income" characteristics
(which may include above average dividend yields and favorable dividend growth).
To the extent not invested in equity securities, the Series' assets generally
will be invested in money market instruments or held as cash. The Series may
also invest in debt securities for defensive purposes. The Portfolio Manager for
the Series is Zweig Advisors Inc.
The extent of the Series' investment in equity securities will be based
primarily on various equity market timing techniques developed by Dr. Martin
Zweig (Ph.D. in Finance) and his staff. The equity market timing techniques
incorporate general market indicators, including interest rate and monetary
analysis, market sentiment indicators, price and trading volume statistics, and
measures of valuation, as well as other market indicators and statistics which
the Portfolio Manager believes tend to point to significant trends in the
overall performance and the risk of the stock market. For example, if the
Portfolio Manager believes that the stock market investment environment is
uncertain or unfavorable and justifies a defensive position, then the Series may
decrease its investments in equity securities and increase its investments in
money market instruments. During periods when the Portfolio Manager believes an
overall defensive position is advisable, greater than 50% (and under certain
circumstances perhaps all) of the Series' total assets may be invested in money
market instruments and cash. The Portfolio Manager expects that the Series will
be fully invested in equity securities only when the Portfolio Manager believes
that there is very low risk in the stock market. There is no assurance that
these equity market timing techniques will eliminate the risks of equity
investments, correctly predict market trends, or enable the Series to achieve
its investment objective.
The Portfolio Manager expects that the equity portion of the Series' portfolio
will generally be divided equally between "growth" stocks and "income" stocks.
Although the Portfolio Manager expects to invest assets proportionately in
growth stocks and income stocks in order to maintain an approximately equal
weighting between growth stocks and income stocks, the relative weighting of
growth stocks and income stocks will fluctuate from time to time because of,
among other things, changes in the market value of the growth stocks and income
stocks. The Portfolio Manager may change the relative weightings of the growth
stocks and income stocks from time to time if the Portfolio Manager determines
that such changes are appropriate in view of the then existing market
conditions. The equity portion of the Series' portfolio will be widely
diversified by the number of issues. The Portfolio Manager expects that the
majority of the stocks in the Series' portfolio will be selected on the basis of
proprietary computer-driven stock selection models that evaluate and rank
approximately 1,500 of the most liquid stocks on the basis of various factors,
which may include earnings momentum, earnings growth, price-to-book value,
price-to-earnings, price-to-cash flow, cash flow trend, price momentum, earnings
estimate revisions, payout ratio trend and other market measurements. Such stock
selection models may evolve or be replaced by other stock selection techniques
intended to achieve the Series' objective.
The Series may use various investment strategies and techniques when the
Portfolio Manager determines that such use is appropriate in an effort to meet
the Series' investment objective including: buying "covered" listed put equity
options and writing "covered" listed call equity options, including options on
stock indexes; short sales of securities; purchasing and selling stock index and
other futures contracts, and purchasing options on such futures contracts;
purchasing and selling interest rate and gold futures contracts; borrowing from
banks to purchase securities; investing in securities of foreign issuers;
entering into foreign currency transactions and options of foreign currencies;
entering into repurchase agreements or reverse repurchase agreements; and
lending portfolio securities to brokers, dealers, banks, or other recognized
institutional borrowers of securities.
SMALL CAP SERIES
The investment objective of the Small Cap Series is to acheive long-term capital
appreciation. Except during temporary defensive periods, the Series will invest
at least 65% of its total assets in equity securities of companies that, at the
time of purchase, have total market capitalization -- present market value per
share multiplied by the total number of shares outstanding -- of less than $1
billion. The Series may invest up to 35% of its total assets in equity
securities
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
of companies that, at the time of purchase, have total market capitalization of
$1 billion or greater and in excess of that amount (up to 100% of its assets)
during temporary defensive periods. The Portfolio Manager for the Series is Fred
Alger Management, Inc.
The Series seeks to achieve its objective by investing in equity securities,
such as common or preferred stocks, or securities convertible into or
exchangeable for equity securities, including warrants and rights. The Series
will invest primarily in companies whose securities are traded on domestic stock
exchanges or in the over-the-counter market. These companies may still be in the
developmental stage, may be older companies that appear to be entering a new
stage of growth owing to factors such as management changes or development of
new technology, products or markets, or may be companies providing products or
services with a high unit volume growth rate. In order to afford the Series the
flexibility to take advantage of new opportunities for investments in accordance
with its investment objective, it may hold up to 15% of its net assets in money
market instruments and repurchase agreements and in excess of that amount (up to
100% of its assets) immediately after the commencement of operations, after
receipt of new monies, or during temporary defensive periods. This amount may be
higher than that maintained by other funds with similar investment objectives.
Investing in smaller, newer issuers generally involves greater risk than
investing in larger, more established issuers. Companies in which the Series is
likely to invest may have limited product lines, markets or financial resources
and may lack management depth. The securities of such companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Accordingly, an investment in the Series may not be appropriate for all
investors.
The Series may use the following various investment strategies and techniques
when the Portfolio Manager determines that such use is appropriate in an effort
to meet the Series' investment objective: short sales of securities; investing
in securities of foreign issuers, including foreign government securities;
engaging in futures contracts, including purchasing and selling stock index
futures contracts and interest rate futures contracts; purchasing and selling
options on securities; purchasing options on stock index futures contracts,
interest rate futures contracts, and foreign currency futures contracts;
entering into foreign currency transactions and options on foreign currencies;
entering into repurchase agreements and reverse repurchase agreements; and
lending portfolio securities to brokers, dealers, bankers, and other recognized
institutional borrowers of securities.
LIQUID ASSET SERIES
The investment objective of the Liquid Asset Series is to achieve a high level
of current income consistent with the preservation of capital and liquidity. The
Portfolio Manager for the Series is Bankers Trust Company.
In managing the Series, the Portfolio Manager employs a number of professional
money management techniques, including varying the composition of investments
and the average maturity of the portfolio based upon the Portfolio Manager's
assessment of the relative values of the various money market securities and
future interest rate patterns. These assessments will change in response to
changing economic and money market conditions and to shifts in fiscal and
monetary policy. The Portfolio Manager also seeks to improve yield by taking
advantage of yield disparities that regularly occur in the money markets. For
example, market conditions frequently result in similar securities trading at
different prices. Also, there are frequently differences in the yield between
the various types of money market securities. The Series seeks to enhance yield
by purchasing and selling securities based upon these yield disparities.
The Series invests in one or more of the following:
(i) U.S. Government Securities. Obligations of the U.S. Government and its
agencies and instrumentalities maturing in 13 months or less from the date
of acquisition or purchased pursuant to repurchase agreements that provide
for repurchase by the seller within 13 months from the date of acquisition;
(ii) Bank Obligations. Obligations of commercial banks (including foreign
branches), savings and loan associations, and foreign banks with maturities
not exceeding 13 months. Such obligations include negotiable certificates of
deposit, variable rate certificates of deposit, bankers' acceptances, fixed
time deposits, and commercial paper. Bank money market instruments in which
the Series may invest must be issued by depository institutions with total
assets of at least $1 billion, except that up to 10% of total assets may be
invested in certificates of deposit of smaller institutions if such
certificates of deposit are federally insured. Fixed time deposits, unlike
negotiable certificates
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
of deposit, generally do not have a market and may be subject to penalties
for early withdrawal of funds;
(iii) Commercial Paper. Short-term unsecured promissory notes with maturities
not exceeding nine months issued in bearer form by bank holding companies,
corporations, and finance companies; and
(iv) Short-Term Corporate Debt Securities. Corporate debt securities (other
than commercial paper) maturing in 13 months or less.
The Series may invest only in U.S. dollar denominated money market instruments
that present minimal credit risk and, with respect to at least 95% of its total
assets, measured at the time of investment, that are of the highest quality. The
Portfolio Manager shall determine whether a security presents minimal credit
risk under procedures adopted by the Trust's Board of Trustees. A money market
instrument will be considered to be highest quality under standards adopted by
the Board of Trustees and consistent with applicable Securities and Exchange
Commission ("SEC") rules relating to money market funds. With respect to no more
than 5% of its total assets, measured at the time of investment, the Series may
also invest in money market instruments that are in the second-highest rating
category for short-term debt obligations. A money market instrument will be
considered to be in the second-highest rating category under the standards
described above.
The Series may not invest more than 5% of its total assets, measured at the time
of investment, in securities of any one issuer that are of the highest quality,
except that this limitation shall not apply to U.S. Government securities and
repurchase agreements thereon. The Series may not invest more than the greater
of 1% of its total assets or $1,000,000, measured at the time of investment, in
securities of any one issuer that are in the second-highest rating category,
except that this limitation shall not apply to U.S. Government securities. In
the event that an instrument acquired by the Series is downgraded or otherwise
ceases to be of the quality that is eligible for the Series, the Portfolio
Manager, under procedures approved by the Board of Trustees (or the Board of
Trustees itself if the Portfolio Manager becomes aware an unrated security is
downgraded below high quality and the Portfolio Manager does not dispose of the
security or such security does not mature within five business days) shall
promptly reassess whether such security presents minimal credit risk and
determine whether or not to retain the instrument.
From time to time, in the ordinary course of business, the Series may purchase
securities on a when-issued or delayed delivery basis. The Series may also enter
into repurchase agreements and may borrow under certain circumstances. See
"Description of Securities and Investment Techniques" for descriptions of these
techniques.
The Series seeks to maintain a net asset value of $1.00 per share for purposes
of purchases and redemptions; however, there can be no assurance that the net
asset value will not vary. The Series will be affected by general changes in
interest rates resulting in increases or decreases in the value of the
obligations held by the Series.
MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of the
Board of Trustees. The Trustees are Terry L. Kendall, Robert A. Grayson, M.
Norvel Young, and Roger B. Vincent. The Executive Officers of the Trust are
Terry L. Kendall, Barnett Chernow and Mary Bea Wilkinson. Additional information
about the Trustees and officers of the Trust may be found in the Statement of
Additional Information under the heading "Management of the Trust."
THE MANAGER
Directed Services, Inc. ("DSI" or the "Manager") serves as the Manager to the
Trust pursuant to a Management Agreement with the Trust. DSI is a New York
corporation that is a wholly owned subsidiary of BT Variable, Inc. ("BT
Variable") which, in turn, is an indirect subsidiary of Bankers Trust Company.
DSI is registered with the SEC as an investment adviser and a broker-dealer. The
Trust currently offers shares of its operating Series to, among other offerees,
separate accounts of Golden American Life Insurance Company ("Golden American")
to serve as the investment medium for Variable Contracts issued by Golden
American. DSI is the principal underwriter and distributor of the Variable
Contracts issued by Golden American. Golden American is a stock life insurance
company organized under the laws of the State of Delaware. Prior to December 30,
1993, Golden American was a Minnesota corporation. Golden American is an
indirect wholly owned subsidiary of Bankers Trust Company.
Bankers Trust Company is a New York banking corporation with executive offices
at 130 Liberty Street, New York, New York 10006, and is a wholly owned
subsidiary of Bankers Trust New York Corporation.
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MANAGEMENT OF THE TRUST (CONTINUED)
As of December 31, 1995, Bankers Trust New York Corporation was the seventh
largest bank holding company in the United States with total assets of
approximately $104 billion. Bankers Trust Company conducts a variety of general
banking and trust activities and is a leading wholesale supplier of financial
services to the domestic and international markets.
United States banking laws and regulations, including the Glass-Steagall Act as
currently interpreted by the Board of Governors of the Federal Reserve System
(the "Board"), prohibit a bank holding company registered under the Bank Holding
Company Act of 1956, or any affiliate thereof, from sponsoring, organizing,
controlling, or distributing the shares of a registered open-end investment
company, such as the Trust, continuously engaged in the issuance of its shares
and, except as otherwise provided by order of the Board, prohibit banks
generally from issuing, underwriting, selling or distributing securities. The
same laws and regulations generally permit a bank or bank affiliate to act as
investment adviser, transfer, dividend disbursing and shareholder servicing
agent and custodian to an investment company and to purchase such shares as
agent for and upon the order of a customer.
DSI performs the activities described above in this Prospectus and below under
the caption "Distributor." On September 30, 1992, a wholly owned subsidiary of
Bankers Trust Company acquired all of the issued and outstanding stock of Golden
American and DSI, and related assets, in a transaction involving settlement of
pre-existing claims of Bankers Trust Company against the former parent of Golden
American and DSI. Under applicable banking law, stock so acquired is subject to
various divestiture requirements, and Bankers Trust Company is likely to divest
its ownership of the stock of DSI in the future. In addition, judicial or
administrative decisions or interpretations, as well as changes in either U.S.
Federal or state banking statutes or regulations, could prevent Bankers Trust
Company from continuing to own stock of DSI or prevent Bankers Trust Company or
DSI from performing certain of the activities contemplated by this Prospectus.
In such event, changes in the operation of the Series might occur. It is not
expected, however, that the Trust would suffer adverse financial consequences as
a result of such occurrence.
Under the Management Agreement, DSI has overall responsibility, subject to the
supervision of the Board of Trustees, for engaging portfolio managers and for
monitoring and evaluating the management of the assets of each Series by the
Portfolio Managers. The Manager is also responsible for monitoring and
evaluating the Portfolio Managers on a periodic basis, and will consider their
performance records with respect to the investment objectives and policies of
each Series. The Manager may, if appropriate, recommend that the Trustees
consider a change in the Portfolio Manager, although the Manager does not expect
to recommend frequent changes in Portfolio Managers as a matter of operating
procedure for the Series.
As Manager, DSI is responsible, subject to the supervision of the Board of
Trustees, for providing administrative and other services necessary for the
ordinary operation of the Series in addition to advisory services. The Manager
provides the overall business management and administrative services necessary
for the Series' operation and provides or procures the services and information
necessary to the proper conduct of the business of the Series. The Manager is
responsible for providing or procuring, at the Manager's expense, the services
reasonably necessary for the ordinary operation of the Series, including
custodial, administrative, transfer agency, portfolio accounting, dividend
disbursing, auditing, and ordinary legal services. The Manager also acts as
liaison among the various service providers to the Series, including the
custodian, portfolio accounting agent, Portfolio Managers, and the insurance
company or companies to which the Series offer their shares. The Manager is also
responsible for ensuring that the Series operate in compliance with applicable
legal requirements and for monitoring the Portfolio Managers for compliance with
requirements under applicable law and with the investment policies and
restrictions of the Series. DSI does not bear the expense of brokerage fees and
other transactional expenses for securities or other assets (which are generally
considered part of the cost for the assets), taxes (if any) paid by a Series,
interest on borrowing, fees and expenses of the independent trustees, and
extraordinary expenses, such as litigation or indemnification expenses.
Pursuant to the Management Agreement, the Manager is authorized to exercise full
investment discretion and make all determinations with respect to the investment
of a Series' assets and the purchase and sale of portfolio securities for one or
more Series in the event that at any time no Portfolio Manager is engaged to
manage the assets of a Series. The Management Agreement may be terminated
without penalty by the vote of the Board of Trustees or the shareholders of the
Series, or by the Manager, upon 60 days' written notice by the Board or the
Manager, and will terminate automatically if assigned as that term is described
in the Investment Company Act of 1940.
29
<PAGE>
MANAGEMENT OF THE TRUST (CONTINUED)
- - --------------------------------------------------------------------------------
The Trust pays the Manager for its services under the Management Agreement a
monthly fee based on the following percentages of the average daily net assets
of the Series:
<TABLE>
<CAPTION>
FEE (based on combined assets of the indicated groups of
SERIES Series)
- - ------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
Multiple Allocation, Fully Managed, 1.0% on the first $750 million in combined assets of these
Natural Resources, Real Estate, Series;
All-Growth, Capital Appreciation, 0.95% on the next $1.250 billion;
Rising Dividends, Value Equity, 0.90% on the next $1.5 billion; and
Strategic Equity, and Small Cap 0.85% on the amount over $3.5 billion
Limited Maturity Bond 0.60% on the first $200 million in combined assets of these
Liquid Asset Series;
0.55% on the next $300 million; and
0.50% on the amount over $500 million
Emerging Markets 1.50%
</TABLE>
- - --------------------------------------------------------------------------------
As compensation for its services during the most recent fiscal year, the Trust,
pursuant to the Management Agreement, paid the Manager fees which represented
the following percentage of each Series' average daily net assets: Multiple
Allocation Series -- 1.00%; Fully Managed Series -- 1.00%; Limited Maturity Bond
Series -- 0.60%; Natural Resources Series -- 1.00%; Real Estate Series -- 1.00%;
All-Growth Series -- 1.00%; Capital Appreciation Series -- 1.00%; Rising
Dividends Series -- 1.00%; Value Equity Series -- 1.00%; Strategic Equity Series
- - -- 1.00%; Emerging Markets Series -- 1.50%; and Liquid Asset Series -- 0.60%.
The Small Cap Series had not commenced operations as of the end of the most
recent fiscal year. For more information on the Management Agreement, see the
Statement of Additional Information.
The Trust is distinct in that the expense structure of the Series is simpler and
more predictable than most mutual funds. Many of the ordinary expenses for the
Trust's Series, including custodial, administrative, transfer agency, portfolio
accounting, auditing, and ordinary legal expenses are paid by the Manager;
whereas, most mutual funds pay for these expenses directly from their own
assets.
THE PORTFOLIO MANAGERS
The Trust and the Manager have entered into Portfolio Management Agreements with
each of the Portfolio Managers. Under these Agreements, the Portfolio Manager of
each Series has full investment discretion and makes all determinations with
respect to the investment of a Series' assets and the purchase and sale of
portfolio securities and other investments. The Portfolio Management Agreements
may be terminated without penalty by the vote of the Board of Trustees or the
shareholders of a Series, by the Portfolio Manager, or by the Manager, on 60
days' written notice by any party to a Portfolio Management Agreement and will
terminate automatically if assigned as that term is described in the Investment
Company Act of 1940. A description of each Portfolio Manager follows.
ZWEIG ADVISORS INC.
The Portfolio Manager to the Multiple Allocation Series and the Strategic
Equity Series is Zweig Advisors Inc., located at 900 Third Avenue, New York,
NY 10022. The Portfolio Manager was organized on May 7, 1986 and currently
serves as investment adviser to The Zweig Fund, Inc., a closed-end,
diversified management investment company.
The asset allocation strategy for the Multiple Allocation Series is determined
by Dr. Martin E. Zweig, the day-to-day stock selection is made by Mr. Jeffrey
Lazar, and the day-to-day bond selection is made by Mr. Carlton Neel. The
asset allocation strategy for the Strategic Equity Series is determined by Dr.
Martin E. Zweig and the portfolio decisions for the Series are made by Mr.
David Katzen.
Dr. Zweig, the President of the Portfolio Manager, has been engaged in the
business of providing investment advisory and portfolio management services
for over 20 years. He is currently affiliated with investment advisers which,
as of December 31, 1995, managed in excess of $10 billion in total assets of
investment companies and pension plan, individual, and other securities
accounts. Dr. Zweig owns approximately 64% of the outstanding shares of the
Portfolio Manager.
30
<PAGE>
MANAGEMENT OF THE TRUST (CONTINUED)
Mr. Lazar is a Vice President of the Portfolio Manager and has been controller
of the Portfolio Manager since 1986. Mr. Lazar has also been Vice President of
The Zweig Fund, Inc. since 1987 and Vice President of The Zweig Total Return
Fund, Inc. since its inception in 1988.
Mr. Katzen is a Vice President of the Portfolio Manager and has held senior
positions with affiliates of the Portfolio Manager for more than five years.
Mr. Katzen is a Senior Vice President of The Zweig Series Trust mutual fund
and has been the portfolio manager of its Zweig Strategy Fund and Zweig
Appreciation Fund since their inceptions.
Mr. Carlton Neel joined the Portfolio Manager in June 1995. Mr Neel is a First
Vice President of The Zweig Series Trust mutual fund and has been the
portfolio manager for its Zweig Managed Assets and Government Securities
Series since July 1995. Prior to joining the Portfolio Manager, Mr. Neel was a
Vice President with J.P. Morgan & Co., Inc.
Pursuant to an Addendum to the Portfolio Management Agreement, the Manager
(and not the Trust) pays Zweig Advisors Inc. a monthly fee equal to an annual
rate of 0.50% of the average daily net assets of the Multiple Allocation
Series and 0.50% of the average daily net assets of the Strategic Equity
Series.
T. ROWE PRICE ASSOCIATES, INC.
The Portfolio Manager to the Fully Managed Series is T. Rowe Price Associates,
Inc. ("T. Rowe Price"), located at 100 East Pratt St., Baltimore, MD 21202. T.
Rowe Price was founded in 1937 by the late Thomas Rowe Price, Jr. As of
December 31, 1995, the firm and its affiliates managed over $70 billion in
assets of approximately 3.5 million individual and institutional investor
accounts.
With respect to its investment management of the Fully Managed Series, the
Portfolio Manager has an Investment Advisory Committee composed of the
following members: Richard P. Howard, Chairman; Arthur B. Cecil, III; Charles
A. Morris; David L. Rea; George A. Roche; and Richard T. Whitney. The
Committee Chairman has day-to-day responsibility for managing the Fully
Managed Series and works with the Committee in developing and executing the
Fully Managed Series' investment program. Mr. Howard has been Chairman of the
Committee since 1989. He joined T. Rowe Price in 1982 and has been managing
investments since 1989.
From the Fully Managed Series' commencement of operations through December 31,
1994, Weiss, Peck & Greer Advisers, Inc. served as Portfolio Manager.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays T. Rowe Price a monthly fee equal to an annual rate of 0.50% of the
average daily net assets of the Fully Managed Series.
BANKERS TRUST COMPANY
The Trust has entered into a Portfolio Management Agreement among the Trust,
DSI, and Bankers Trust Company under which Bankers Trust Company serves as
Portfolio Manager to the Limited Maturity Bond Series, Liquid Asset Series,
and Emerging Markets Series. The services to these Series are provided by the
Global Investment Management group of Bankers Trust Company.
The individual in charge of investment management decisions for the Limited
Maturity Bond Series is Louis Hudson, a Vice President and Portfolio Manager
of Bankers Trust Company since 1982.
Bluford Putnam, Managing Director and Chief Strategist of the Global
Investment Management Group (GIM), chairs the committee responsible for the
allocation of assets of the Emerging Markets Series. Mr. Putnam has eighteen
years of experience as an international economist and market analyst. He
joined Bankers Trust Company in 1994. Prior to that Mr. Putnam held positions
as the Chief Investment Officer of a $1 billion private quantatatively managed
portfolio, principal and head of the international bond strategy team at
Morgan Stanley, and was an economist at the Federal Reserve Bank of New York.
Steve Freidheim, head of Fixed Income and Emerging Markets (debt/equity)
co-chairs the emerging markets asset allocation committee. Mr. Freidheim has
10 years of investment experience. Prior to joining Bankers Trust Company in
1993, Mr. Freidheim was Senior Vice President and member of the Board of
Directors at Namura Corporate Research and Asset Management. From 1986 through
1988 he was a sell-side industry analyst for Kidder, Peabody & Co., Inc. In
addition, Mr. Freidheim was Director of Research at Kidder Peabody High Yield
Asset Management, where he structured and managed $3.5 billion of
collateralized bond obligations ("CBO's"), including the first public CBO in
1989.
31
<PAGE>
MANAGEMENT OF THE TRUST (CONTINUED)
The Emerging Markets Team of the Portfolio Manager manages a portion of the
Series' assets, including the assets allocated for investment in Latin
America, South Africa, and Eastern Europe. Maria-Elena Carrion, Vice President
and head of Latin American Equities since April, 1993, is primarily
responsible for the assets allocated to the Latin American, South Africa, and
Eastern European markets. Ms. Carrion is also a member of the asset allocation
committee. Prior to joining Bankers Trust Company, Ms. Carrion served as Fund
Manager for Latin American Securities (London). Prior to that Ms. Carrion
served as International Securities Analyst and Fund Manager at U.S. Trust (New
York).
Bankers Trust Company has entered into a sub-advisory agreement with BT Fund
Managers (International) Limited pursuant to which BT Fund Managers
(International) Limited provides investment advice with respect to advice with
respect to the Emerging Markets Series. Paul Durham, Fund Manager of BT Fund
Managers (International) Limited, is responsible for management of these
assets. Mr. Durham also is a member of the asset allocation committee and
serves as Vice President of Bankers Trust Australia Limited ("BTAL") and has
been in the Equities Group of BTAL since 1988. Prior to joining BTAL, Mr.
Durham completed an Honors degree majoring in accounting and finance under
scholarship from the Commonwealth Bank.
Under the Portfolio Management Agreement, the Manager (and not the Trust) pays
Bankers Trust Company a monthly fee equal to an annual rate based upon the
following percentages of the average daily net assets of the Limited Maturity
Bond Series: 0.30% of the first $25 million; 0.25% of the next $50 million;
0.20% of the next $75 million; and 0.15% of the amount over $150 million,
subject to a minimum annual fee of $35,000 (payable at the end of each
calendar year). The Manager (and not the Trust) pays Bankers Trust Company a
monthly fee equal to an annual rate based upon the following percentages of
the average daily net assets of the Liquid Asset Series: 0.20% of the first
$25 million; 0.15% of the next $50 million; and 0.10% of the amount over $75
million, subject to a minimum annual fee of $35,000 (payable at the end of
each calendar year). The Manager (and not the Trust) pays Bankers Trust
Company a monthly fee equal to an annual rate of 0.75% of the average daily
net assets of the Emerging Markets Series.
For information about Bankers Trust Company, see "The Manager," above. The
unit of Bankers Trust Company that serves as Portfolio Manager to the Limited
Maturity Bond Series, Liquid Asset Series, and Emerging Markets Series is the
Global Investment Management division which, as of December 31, 1995, managed
institutional assets approximating $185 billion. As of December 31, 1995,
Bankers Trust Company was an investment advisor to the following registered
investment companies: Short-Intermediate Fixed-Income Portfolio of Accessor
Funds, Inc.; Full Maturity Fixed Income Portfolio of AHA Investment Funds,
Inc.; MidCap Index Fund, Stock Index Fund, and Small Cap Index Fund of
American General Series Portfolio Company (VALIC); Asset Management Portfolio,
Asset Management Portfolio II, and Asset Management Portfolio III; the Bank
Fiduciary (Equity) Fund and the Bank Fiduciary (Fixed Income) Fund of the Bank
Fiduciary Funds; Capital Appreciation Portfolio; Cash Management Portfolio;
Equity 500 Index Portfolio of BT Institutional Funds; Global High Yield
Portfolio; Hercules Latin America Value Fund; Intermediate Tax Free Portfolio;
International Equity Portfolio; Latin American Equity Portfolio; Liquid Assets
Portfolio; NY Tax Free Money Portfolio; Pacific Basin Equity Portfolio; Equity
Index Series of Pacific Select Fund; Short/Intermediate Government Securities
Portfolio; Small Cap Portfolio; Tax Free Money Portfolio; Treasury Money
Portfolio; and Utility Portfolio.
From the Trust's commencement of operations through April 30, 1992, Neuberger
& Berman Management Incorporated served as Portfolio Manager to the Limited
Maturity Bond Series and Liquid Asset Series. Bankers Trust Company assumed
portfolio management responsibilities for these two Series on May 1, 1992.
VAN ECK ASSOCIATES CORPORATION
The Portfolio Manager to the Natural Resources Series is Van Eck Associates
Corporation ("Van Eck"), located at 99 Park Avenue, New York, New York 10016.
Van Eck acts as investment adviser to ten other mutual funds and portfolios of
pension plans with similar investment objectives to the Natural Resources
Series. In addition, the Portfolio Manager acts as an adviser to nine other
mutual funds with investment objectives different from the Natural Resources
Series. John C. van Eck and members of his family own 100% of the stock of Van
Eck.
Henry J. Bingham, Executive Managing Director of Van Eck in conjunction with
Derek van Eck and other members of Van Eck's Hard Assets group, is
32
<PAGE>
MANAGEMENT OF THE TRUST (CONTINUED)
primarily responsible for the day-to- day management of the Natural Resources
Series. Mr. Bingham has served in that capacity since the Series' commencement
of operations. Over the past five years, Mr. Bingham has served as an officer
and portfolio manager for mutual funds for which Van Eck Associates
Corporation serves as investment adviser or sub-investment adviser.
Mr. Derek van Eck is Director of Global Investments and Executive Vice
President of Van Eck since 1993 and an officer of other mutual funds advised
by Van Eck since 1988. During 1991-93, Mr. van Eck completed MBA course
requirements. He has been serving in his current capacity with the Series
since July 1995.
Total aggregate assets under management of Van Eck Associates Corporation as
of December 31, 1995 were approximately $1.65 billion.
Pursuant to an Addendum to the Portfolio Management Agreement, the Manager
(and not the Trust) pays Van Eck Associates Corporation a monthly fee equal to
an annual rate of 0.50% of the average daily net assets of the Natural
Resources Series.
WARBURG, PINCUS COUNSELLORS, INC.
The Portfolio Manager of the All-Growth Series is Warburg, Pincus Counsellors,
Inc., located at 466 Lexington Avenue, New York, New York 10017.
Warburg, Pincus Counsellors, Inc. was incorporated in Delaware on December 15,
1970. The company is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. The Portfolio
Manager is registered with the SEC as an investment adviser.
The individual responsible for the day-to-day management of the Series'
investments is Anthony G. Orphanos. Mr. Orphanos is a Managing Director of
Warburg, Pincus Counsellors, Inc. and has been employed by Warburg, Pincus
Counsellors, Inc. since 1977.
As of December 31, 1994, Warburg, Pincus Counsellors, Inc. managed
approximately $10 billion of assets, including approximately $4.0 billion of
assets in 16 investment company portfolios. The Portfolio Manager is a
wholly-owned subsidiary of Warburg, Pincus Counsellors G.P., a New York
general partnership which has no business other than being a holding company
of the Portfolio Manager and its subsidiaries. The Portfolio Manager is
controlled by E.M. Warburg, Pincus & Co., Inc. through its ownership of a
class of voting preferred stock.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays Warburg, Pincus Counsellors, Inc. a monthly fee equal to an annual rate
of 0.50% of the average daily net assets of the All-Growth Series.
From the Trust's commencement of operations through June 30, 1994, J.M.
Hartwell & Company, Inc. served as Portfolio Manager for the All-Growth
Series. Warburg, Pincus Counsellors, Inc. assumed management of the Series on
July 1, 1994.
CHANCELLOR TRUST COMPANY
The Portfolio Manager to the Capital Appreciation Series is Chancellor Trust
Company ("Chancellor"), located at 1166 Avenue of the Americas, New York, New
York 10036.
The Portfolio Manager is a New York State chartered limited purpose trust
company. The Portfolio Manager is a wholly owned subsidiary of Chancellor
Capital Management, Inc. ("Chancellor Capital"), which is owned 51% on a
fully-diluted basis by Chancellor Partners, L.P. (the "Partnership").
Chancellor Partners, Inc. is the General Partner of the Partnership and a
group of employees of Chancellor Capital are the limited partners of the
Partnership. Robert Wade, Jr. is the President and sole stockholder of
Chancellor Partners, Inc. USF&G Investment Management Group, Inc. owns
convertible exchangeable preferred stock in Chancellor Capital, representing
the remaining 49% ownership interest on a fully-diluted basis of Chancellor
Capital. Chancellor, its parent, and its affiliates had over $31.53 billion in
assets under management as of February 29, 1996.
The individuals responsible for the management of the Capital Appreciation
Series, since May 1, 1992 (the commencement of Chancellor's and its
predecessor, Chancellor Capital's, management of the Series), are Warren Shaw
and Ted Ujazdowski. Mr. Shaw, Chief Executive Officer and Chief Investment
Officer of Chancellor since 1994, previously served as President since 1994
and Managing Director since 1988. Mr. Ujazdowski has served as Managing
Director of Chancellor since 1989.
Prior to July 27, 1993, Chancellor Capital served as Portfolio Manager to the
Capital Appreciation Series. Chancellor became the Portfolio Manager on
33
<PAGE>
MANAGEMENT OF THE TRUST (CONTINUED)
July 27, 1993 pursuant to an assignment agreement. This assignment did not
result in any change in the personnel managing the assets of the Capital
Appreciation Series.
Pursuant to an Addendum to the Portfolio Management Agreement, the Manager
(and not the Trust) pays Chancellor a monthly fee equal to an annual rate of
0.50% of the average daily net assets of the Capital Appreciation Series.
KAYNE, ANDERSON INVESTMENT MANAGEMENT, L.P.
The Portfolio Manager to the Rising Dividends Series is Kayne, Anderson
Investment Management, L.P. ("Kayne, Anderson"), located at 1800 Avenue of the
Stars, Suite 200, Los Angeles, California 90067. The Portfolio Manager is a
registered investment adviser organized on June 24, 1994 as a California
limited partnership succeeding to the investment advisory business of Kayne,
Anderson Investment Management, Inc. which was formed in 1984.
Kayne, Anderson is in the business of furnishing investment advice to
institutional and private clients. The General Partner is Kayne, Anderson
Investment Management, Inc., which was founded by Richard A. Kayne and John E.
Anderson. Messrs. Kayne, Anderson and Rudnick in the aggregate own 97% of the
limited partnership interests in the Portfolio Manager. As of December 31,
1995, Kayne, Anderson managed portfolios which, in the aggregate, amounted to
approximately $1.631 billion.
Allan M. Rudnick, Senior Vice President and Chief Investment Officer of Kayne,
Anderson since August, 1989 is the Senior Portfolio Manager responsible for
the management of the Rising Dividends Series. Prior to August, 1989, Mr.
Rudnick was President of Pilgrim Asset Management and Chief Investment Officer
of the Pilgrim Group of Mutual Funds.
Prior to January 1, 1995, Kayne, Anderson Investment Management, Inc. served
as Portfolio Manager to the Rising Dividends Series. Kayne, Anderson became
the Portfolio Manager on January 1, 1995 pursuant to a substitution agreement.
This substitution agreement did not result in any change in the personnel
managing the assets of the Rising Dividends Series.
Pursuant to an Addendum to the Portfolio Management Agreement, the Manager
(and not the Trust) pays Kayne, Anderson a monthly fee equal to an annual rate
of 0.50% of the average daily net assets of the Rising Dividends Series.
EAGLE ASSET MANAGEMENT, INC.
The Portfolio Manager to the Value Equity Series is Eagle Asset Management,
Inc. ("Eagle"), located at 880 Carillon Parkway, St. Petersburg, Florida
33716. The Portfolio Manager is a registered investment adviser organized on
February 8, 1984 as a Florida corporation.
The individual responsible for the day-to-day operation of the Series'
investments is Christian C. Bertelsen. Mr. Bertelsen is a Senior Vice
President of Eagle, and has been employed by Eagle since 1993. Prior to
joining Eagle, Mr. Bertelsen served as senior equity manager at Colonial
Advisory Services, where he was portfolio manager of Colonial Fund from 1986
to 1993. Prior to that, he held management and analyst positions at India
Wharf Associates, Batterymarch Financial Management, Gardner & Preston Moss
and Thorndike, Doran, Paine & Lewis.
Eagle is in the business of managing institutional clients and individual
accounts on a discretionary basis. Eagle serves as sub-adviser to the Eagle
Growth Equity Portfolio of American Scandia Trust and Heritage Income Growth
Trust. Eagle is a wholly-owned subsidiary of Raymond James Financial, Inc., a
publicly traded company whose shares are listed on the New York Stock
Exchange. Thomas A. James is the principal shareholder of Raymond James
Financial, Inc.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays Eagle a monthly fee equal to an annual rate of 0.50% of the average daily
net assets of the Value Equity Series.
E.I.I. REALTY SECURITIES, INC.
The Portfolio Manager to the Real Estate Series is E.I.I. Realty Securities,
Inc., located at 667 Madison Avenue, 16th Floor, New York, NY 10021.
The Portfolio Manager is a professional investment adviser which, with its
affiliates, has been providing services to employee benefit plans,
corporations, and high net worth individuals, both foreign and domestic, since
1983. As of December 31, 1995, the Portfolio Manager and/or its affiliates had
investment management authority with respect to approximately $520 million of
real estate securities assets. The Portfolio Manager is a wholly-owned
subsidiary of European Investors Incorporated.
34
<PAGE>
MANAGEMENT OF THE TRUST (CONTINUED)
Richard J. Adler, Managing Director, and Cydney C. Donnell, Managing Director
of the Portfolio Manager, are the individuals primarily responsible for the
day-to-day operation of the Series. For the past five years, they have been
portfolio managers or real estate securities analysts for the Portfolio
Manager and its affiliates.
From the Trust's commencement of operations through December 20, 1991, Cohen &
Steers Capital Management, Inc. served as Portfolio Manager for the Real
Estate Series. Chancellor Trust Company and its affiliate, Chancellor Capital
Management, Inc., assumed management of the Series from December 21, 1991 to
December 31, 1994.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays the Portfolio Manager a monthly fee equal to an annual rate of 0.50% of
the average daily net assets of the Real Estate Series.
FRED ALGER MANAGEMENT, INC.
The Portfolio Manager to the Small Cap Series is Fred Alger Management, Inc.,
located at 75 Maiden Lane, New York, NY 10038. The Portfolio Manager has been
in the business of providing investment advisory services since 1964 and, as
of March 31, 1996, had approximately $5.5 billion under management, $3.7
billion in mutual fund accounts and $1.8 billion in other advisory accounts.
The Portfolio Manager is owned by Fred Alger & Company, Incorporated ("Alger
Inc."), which in turn is owned by Alger Associates, Inc., a financial services
holding company. Fred M. Alger III and his brother, David D. Alger, are the
majority shareholders of Alger Associates, Inc. and may be deemed to control
that company and its subsidiaries.
David D. Alger, President of the Portfolio Manager, is primarily responsible
for the day-to-day management of the Series. He has been employed by the
Portfolio Manager as Executive Vice President and Director of Research since
1971 and as President since 1995 and he serves as portfolio manager for other
mutual funds and investment accounts managed by the Portfolio Manager. Also
participating in the management of the Series are Ronald Tartaro and Seilai
Khoo. Mr. Tartaro has been employed by the Portfolio Manager since 1990 and he
serves as a senior research analyst. Prior to 1990, he was a member of the
technical staff at AT&T Bell Laboratories. Ms. Khoo has been employed by the
Portfolio Manager since 1989 and she serves as a senior research analyst.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays the Portfolio Manager a monthly fee equal to an annual rate of 0.50% of
the average daily net assets of the Small Cap Series.
OTHER EXPENSES
The expenses of the ordinary operations of the Series are borne by the Manager
pursuant to the Management Agreement. The Trust bears the expenses of taxes (if
any) paid by a Series, the fees and expenses of its independent trustees, any
extraordinary expenses, such as any litigation or indemnification expenses, as
well as other expenses as described under "The Manager." Any such Trust expenses
directly attributable to a Series are charged to that Series; other expenses are
allocated among all the Series. For the Trust's fiscal year ended December 31,
1995, total Series expenses as a percentage of net assets were as follows:
Multiple Allocation Series -- 1.01%; Fully Managed Series -- 1.01%; Limited
Maturity Bond Series -- 0.61%; Natural Resources Series -- 1.01%; Real Estate
Series -- 1.01%; All-Growth Series -- 1.01%; Capital Appreciation Series --
1.01%; Rising Dividends Series -- 1.01%; Value Equity Series -- 1.01%; Strategic
Equity Series -- 1.00%; Emerging Markets Series -- 1.53%; and Liquid Asset
Series -- 0.61%.
DISTRIBUTOR
Directed Services, Inc. acts as distributor ("Distributor") of shares of the
Series, in addition to serving as Manager for the Trust. The Distributor's
address is 1001 Jefferson Street, Wilmington, Delaware 19801. The Distributor is
a registered broker-dealer and a member of the National Association of
Securities Dealers and acts as Distributor without remuneration from the Trust.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Series is Bankers Trust Company. First Data Investors
Services Group of First Data Corporation, formerly The Shareholder Services
Group, Inc., provides certain administrative and portfolio accounting services
for all Series.
35
<PAGE>
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes potential risks associated with different
types of securities and investment techniques used by the individual Series, as
described in "Investment Objectives and Policies."
For more detailed information on these investment techniques, as well as
information on some types of securities in which some or all of the Series may
invest, including information on U.S. Government securities, debt securities
generally, variable and floating rate securities, reverse repurchase agreements,
lending portfolio securities, warrants, other investment companies, and short
sales, including short sales against the box, see the Statement of Additional
Information.
MORTGAGE-BACKED SECURITIES
All Series may invest in mortgage-backed securities.
MORTGAGE PASS-THROUGH SECURITIES
Many mortgage-backed securities are mortgage pass-through securities, which
are securities representing interests in "pools" of mortgages in which
payments of both interest and principal on the securities are made
periodically, in effect "passing through" periodic payments made by the
individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities and
possibly others). Such instruments differ from typical bonds because principal
is repaid monthly over the term of the loan rather than returned in a lump sum
at maturity. Timely payment of principal and interest on some mortgage
pass-through securities may be guaranteed by the full faith and credit of the
U.S. Government, as in the case of securities guaranteed by the Government
National Mortgage Association, or "GNMA," or guaranteed by agencies or
instrumentalities of the U.S. Government, as in the case of securities
guaranteed by the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"), which are supported only by
the discretionary authority of the U.S. Government to purchase the agency's
obligations and not by the full faith and credit of the U.S. Government. For
more information on GNMA certificates and FNMA and FHLMC mortgage-backed
obligations, see "Mortgage-Backed Securities" in the Statement of Additional
Information.
OTHER MORTGAGE-BACKED SECURITIES
All Series other than the Liquid Asset, Capital Appreciation, Rising
Dividends, and Emerging Markets Series may purchase mortgage-backed securities
issued by financial institutions such as commercial banks, savings and loan
associations, mortgage banks, and securities broker-dealers (or affiliates of
such institutions established to issue these securities) in the form of either
collateralized mortgage obligations ("CMOs") or mortgage-backed bonds. CMOs
are obligations fully collateralized directly or indirectly by a pool of
mortgages on which payments of principal and interest are dedicated to payment
of principal and interest on the CMOs. Payments are passed through to the
holders, although not necessarily on a pro rata basis, on the same schedule as
they are received. Mortgage-backed bonds are general obligations of the issuer
fully collateralized directly or indirectly by a pool of mortgages. The
mortgages serve as collateral for the issuer's payment obligations on the
bonds but interest and principal payments on the mortgages are not passed
through either directly (as with GNMA certificates and FNMA and FHLMC
pass-through securities) or on a modified basis (as with CMOs). Accordingly, a
change in the rate of prepayments on the pool of mortgages could change the
effective maturity of a CMO but not that of a mortgage-backed bond (although,
like many bonds, mortgage-backed bonds can provide that they are callable by
the issuer prior to maturity). Although the mortgage-related securities
securing these obligations may be subject to a government guarantee or third-
party support, the obligation itself is not so guaranteed. Therefore, if the
collateral securing the obligation is insufficient to make payment on the
obligation, a holder could sustain a loss.
RISKS OF MORTGAGE-BACKED SECURITIES
Although mortgage loans constituting a pool of mortgages, such as those
underlying GNMA certificates, may have maturities of up to 30 years, the
actual average life of a mortgage-backed security typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. In the case of mortgage
pass-through securities such as GNMA certificates or FNMA and FHLMC
mortgage-backed obligations, or modified pass-through securities such as
collateralized mortgage obligations issued by various financial institutions,
early repayment of principal arising from prepayments of principal on the
underlying mortgage loans due to the sale of the underlying property, the
refinancing of the loan, or foreclosure may expose a Series to a lower rate of
return upon reinvestment of the principal. Prepayment rates vary widely and
may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of the mortgage-backed security.
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the mortgage-backed
security. Accordingly, it is not possible to accurately predict the average
life of a particular pool. Reinvestment of prepayments may occur at higher or
lower rates than the original yield on the certificates. Therefore, the actual
maturity and realized yield on pass-through or modified pass-through
mortgage-backed securities will vary based upon the prepayment experience of
the underlying pool of mortgages.
With respect to GNMA certificates, although GNMA guarantees timely payment
even if homeowners delay or default, tracking the "pass-through" payments may,
at times, be difficult. Expected payments may be delayed due to the delays in
registering the newly traded paper securities. The custodian's policies for
crediting missed payments while errant receipts are tracked down may vary.
Other mortgage-backed securities such as those of FHLMC and FNMA trade in
book-entry form and are not subject to this risk of delays in timely payment
of income.
OTHER ASSET-BACKED SECURITIES
Any Series other than the Liquid Asset, Capital Appreciation, Rising Dividends,
and Emerging Markets Series may purchase other asset-backed securities
(unrelated to mortgage loans) such as "CARS-SM-" ("Certificates for Automobile
Receivables") and Credit Card Receivable Securities and any other asset-backed
securities that may be developed in the future. See the Statement of Additional
Information for a description of these instruments.
HIGH YIELD BONDS
The Real Estate Series may invest up to 20% of its assets in high yield
convertible bonds and the Fully Managed Series and Emerging Markets Series may
invest up to 5% and 10% of their assets, respectively, in high yield bonds.
Generally, high yield/high risk debt securities are those rated lower than Baa
or BBB, or, if not rated by Moody's or Standard & Poor's, of equivalent quality
and which are commonly referred to as "junk bonds." Investment in such
securities generally provides greater income and increased opportunity for
capital appreciation than investments in higher quality debt securities, but
they also typically entail greater potential price volatility and principal and
income risk.
In general, high yield bonds are not considered to be investment grade. They are
regarded as predominately speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in high
yield bond prices. In the case of high yield bonds structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield bonds are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Series could sell a
high yield bond, and could adversely affect the daily net asset value of the
Series' shares. At times of less liquidity, it may be more difficult to value
the high yield bonds because such valuation may require more research, and
elements of judgment may play a greater role in the valuation because there is
less reliable, objective data available.
REPURCHASE AGREEMENTS
All Series may enter into repurchase agreements. Repurchase agreements permit an
investor to maintain liquidity and earn income over periods of time as short as
overnight. Repurchase agreements may be characterized as loans collateralized by
the underlying securities. In these transactions, a Series purchases securities
such as U.S. Treasury obligations or U.S. Government securities (the "underlying
securities") from a broker or bank, which agrees to repurchase the underlying
securities on a certain date or on demand and at a fixed price calculated to
produce a previously agreed-upon return to the Series. If the broker or bank
were to default on its repurchase obligation and the underlying securities were
sold for a lesser amount, the Series would realize a loss, and may incur
disposition costs in connection with liquidating the collateral. In the event
bankruptcy proceedings are commenced with respect to the seller, realization of
the collateral by a Series may be delayed or limited, and a loss may be incurred
if the collateral securing the repurchase agreement declines in value during the
bankruptcy proceedings.
A Series may engage in repurchase transactions in accordance with guidelines
approved by the Board of
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
Trustees of the Trust, which include monitoring the creditworthiness of the
parties with which the Series engages in repurchase transactions, obtaining
collateral at least equal in value to the repurchase obligation, and marking the
collateral to market on a daily basis. See the Statement of Additional
Information "Description of Securities and Investment Techniques" for further
information regarding repurchase agreements.
RESTRICTED AND ILLIQUID SECURITIES
The Multiple Allocation, Fully Managed, Limited Maturity Bond, Natural
Resources, Real Estate, All-Growth, Capital Appreciation, and Liquid Asset
Series may invest up to 10% of their net assets in illiquid securities. The
Rising Dividends, Emerging Markets, Value Equity, Strategic Equity, and Small
Cap Series may invest up to 15% of their net assets in illiquid securities. All
Series except the Liquid Asset, Capital Appreciation, and Rising Dividends
Series may invest in restricted securities such as private placements.
Restricted securities owned by a Series that are determined to be illiquid are
subject to that Series' illiquidity cap. Restricted securities may be sold only
in privately negotiated transactions, in a public offering with respect to which
a registration statement is in effect under the Securities Act of 1993, or in a
transaction that is exempt from such registration. Where registration is
required, a Series may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Series may be permitted to sell a security under an
effective registration statement. If, during such a period adverse market
conditions were to develop, the Series might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities may be priced at fair
value as determined in good faith by the Series' Portfolio Manager.
SHORT SALES
The Multiple Allocation, Natural Resources, All-Growth, Capital Appreciation,
Strategic Equity, and Small Cap Series may make short sales of securities. A
short sale is a transaction in which the Series sells a security it does not own
in anticipation of a decline in market price. The Multiple Allocation Series'
Portfolio Manager expects that, even during normal or favorable market
conditions, the Series may make short sales in an attempt to maintain portfolio
flexibility and facilitate the rapid implementation of investment strategies if
the Portfolio Manager believes that the price of a particular security or group
of securities is likely to decline.
When a Series makes a short sale, the proceeds it receives are retained by the
broker until the Series replaces the borrowed security. In order to deliver the
security to the buyer, the Series must arrange through a broker to borrow the
security and, in so doing, the Series becomes obligated to replace the security
borrowed at its market price at the time of replacement, whatever that price may
be. The Series may have to pay a premium to borrow the security. The Series must
also pay any dividends or interest payable on the security until the Series
replaces the security.
The Series' obligation to replace the security borrowed in connection with the
short sale will be secured by collateral deposited with the broker, consisting
of cash or U.S. Government securities or other securities acceptable to the
broker. In addition, with respect to any short sale, other than short sales
against the box, the Series will be required to deposit collateral consisting of
cash, cash items, or U.S. Government securities in a segregated account with its
custodian in an amount such that the value of the sum of both collateral
deposits is at all times equal to at least 100% of the current market value of
the securities sold short. The deposits do not necessarily limit the Series'
potential loss on a short sale, which may exceed the entire amount of the
collateral.
The Series may make a short sale only if, at the time the short sale is made and
after giving effect thereto, the market value of all securities sold short is
25% or less of the value of its net assets and the market value of securities
sold short which are not listed on a national securities exchange does not
exceed 10% of the Series' net assets. In addition, the Series will not make
short sales of the securities of any one issuer to the extent of more than 2% of
the Series' net assets, nor will the Series make short sales of more than 2% of
the outstanding securities of one class of any issuer. The Series is not
required to liquidate an existing short sale position solely because a change in
market values has caused one or more of these percentage limitations to be
exceeded. For more information on short sales, see the Statement of Additional
Information.
FOREIGN SECURITIES
The Multiple Allocation, Fully Managed, Natural Resources, All-Growth, Rising
Dividends, Emerging Markets, Value Equity, Strategic Equity, and Small Cap
Series may invest in equity securities of foreign issuers. The Fully Managed
Series may invest up to 20% of its net assets in such securities. The All-Growth
Series may invest up to 10% of its net assets in such securities. The Emerging
Markets Series will normally invest at least 65% of its net assets in equity
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
securities of foreign issuers. The Value Equity Series may invest without limit
in equity securities of foreign issuers; however, it is expected that under
ordinary circumstances, the Series will not invest more than 25% of its assets
in foreign issuers, measured at the time of investment. The Multiple Allocation,
Fully Managed, Natural Resources, All-Growth, Capital Appreciation, Rising
Dividends, Emerging Markets, Value Equity, Strategic Equity, and Small Cap
Series may invest in American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and Global Depositary Receipts ("GDRs") (collectively,
"Depositary Receipts") which are described below. The Capital Appreciation
Series may invest up to 20% of its total assets in Depositary Receipts and the
Value Equity Series may invest without limit in Depositary Receipts, although it
is expected that under ordinary circumstances, the Series will not invest more
than 25% of its assets in foreign issuers, including Depositary Receipts. The
Multiple Allocation, Limited Maturity Bond, Liquid Asset, Emerging Markets,
Strategic Equity, and Small Cap Series may invest in foreign government
securities that are denominated in U.S. dollars, although the Multiple
Allocation, Limited Maturity Bond, Liquid Asset, Strategic Equity, and Small Cap
Series will not purchase foreign government securities if, as a result, more
than 10% of the value of its total assets would be invested in such securities.
The Emerging Markets Series may also invest in foreign government and corporate
debt securities that are not denominated in U.S. dollars. The Multiple
Allocation, Liquid Asset, Emerging Markets, Strategy Equity, and Small Cap
Series may invest in foreign branches of commercial banks and foreign banks. See
the "Banking Industry and Savings Industry Obligations" discussion in the
Statement of Additional Information for further description of these securities.
Each Series is subject to the following guidelines for diversification of
foreign security investments. If a Series has less than 20% of its assets in
foreign issuers, then all of such investment may be in issuers located in one
country. If a Series has at least 20% but less than 40% of its assets in foreign
issuers, then such investment must be allocated to issuers located in at least
two different countries. Similarly, if a Series has at least 40% but less than
60% of its assets in foreign issuers, such investment must be allocated in at
least three different countries. Foreign investments must be allocated to at
least four different countries if at least 60% of a Series' assets is in foreign
issuers, and to at least five different countries if at least 80% is in foreign
issuers. For purposes of allocating a Series' investments, a company will be
considered located in the country in which it is domiciled, in which it is
primarily traded, from which it derives a significant portion of its revenues,
or in which a significant portion of its goods or services are produced.
A Series may have no more than 20% of its net assets invested in securities of
issuers located in any one country, except that a Series may have an additional
15% of its net assets invested in securities of issuers located in any one of
the following countries: Australia, Canada, France, Japan, the United Kingdom,
or Germany. In addition, the Natural Resources Series may invest up to 35% of
its net assets in securities of issuers located in South Africa. A Series'
investments in United States issuers are not subject to the foreign country
diversification guidelines.
Investments in foreign securities offer potential benefits not available solely
in securities of domestic issuers by offering the opportunity to invest in
foreign issuers that appear to offer growth potential, or in foreign countries
with economic policies or business cycles different from those of the United
States, or to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Series may invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, other foreign taxation, political or social instability, or diplomatic
developments that could adversely affect investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the United States. A Series
might have greater difficulty taking appropriate legal action with respect to
foreign investments in non-U.S. courts than with respect to domestic issuers in
U.S. courts. In addition, transactions in foreign securities may involve greater
time from the trade date until settlement than domestic securities transactions
and involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries.
The Emerging Markets Series may invest in debt obligations ("sovereign debt") of
governmental issuers in emerging market countries and industrialized countries.
The sovereign debt issued or guaranteed by certain emerging market governmental
entities and corporate issuers in which the Series may invest potentially
involves a high degree of risk and may be deemed the equivalent in terms of
quality to high risk, low rated securities (I.E., high yield bonds) and subject
to many of the same risks as such securities. Similarly, the Series may have
difficulty disposing of certain of these debt obligations because there may be a
thin trading market for such securities. In the event a governmental issuer
defaults on its obligations, the Series may have limited legal recourse against
the issuer or guarantor, if any. Remedies must, in some cases, be pursued in the
courts of the defaulting party itself, and the ability of the holder of foreign
government debt securities to obtain recourse may be subject to the political
climate in the relevant country. The issuers of the government debt securities
in which the Series may invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which has led to
defaults on certain obligations and the restructuring of certain indebtedness.
See "Description of Securities and Investment Techniques -- High Yield Bonds" in
this Prospectus and "Debt Securities -- Sovereign Debt" in the Statement of
Additional Information.
Dividend and interest income from foreign securities may generally be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by a Series or its investors.
ADRs are Depositary Receipts typically issued by a U.S. bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the securities underlying unsponsored Depositary Receipts are not obligated
to disclose material information in the United States and, therefore, there may
be less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts. Depositary Receipts also involve the risks of other investments in
foreign securities.
INVESTMENT IN GOLD AND
OTHER PRECIOUS METALS
The Natural Resources Series may invest up to 10% of its total assets in gold
bullion and coins and other precious metals (silver or platinum) bullion and in
futures contracts with respect to such metals. The Multiple Allocation and
Strategic Equity Series may engage in gold futures contracts. (See "Gold Futures
Contracts" for further explanation of this investment technique.) The Series may
further restrict the level of their metal investments in order to comply with
applicable regulatory requirements. In order to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended, each Series intends to manage its metal investments and/or futures
contracts on metals so that less than 10% of the gross income of the Series for
tax purposes during any fiscal year (the current limit on so-called
non-qualifying income) is derived from these and other sources that produce such
non-qualifying income.
Metals will not be purchased in any form that is not readily marketable, and
gold coins will be purchased for their intrinsic value only, I.E., coins will
not be purchased for their numismatic value. Any metals purchased by the Series
will be delivered to and stored with a qualified custodian bank. Metal
investments do not generate interest or dividend income.
Metal investments are considered speculative and are affected by various
worldwide economic, financial, and political factors. Prices may fluctuate
sharply over short time periods due to changes in inflation expectations in
various countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and
governmental prohibitions or restriction
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
on the private ownership of certain precious metals or minerals. Furthermore, at
the present time, there are four major producers of gold bullion: the Republic
of South Africa, the United States, Canada, and Australia. Political and
economic conditions in these countries will have a direct effect on the mining
and distribution of gold and, consequently, on its price. Many of these risks
also may affect the value of securities of companies engaged in operations
respecting gold and other precious metals.
FUTURES CONTRACTS
The Multiple Allocation, Fully Managed, Limited Maturity Bond, Natural
Resources, All-Growth, Capital Appreciation, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may engage in futures contracts. The
Multiple Allocation, Limited Maturity Bond, Natural Resources, Emerging Markets,
Value Equity, Strategic Equity, and Small Cap Series may purchase and sell
interest rate futures contracts. The Limited Maturity Bond, Emerging Markets,
and Value Equity Series may also purchase and write options on such futures
contracts and the Small Cap Series may only purchase options on such futures
contracts. The Multiple Allocation, Fully Managed, Natural Resources,
All-Growth, Capital Appreciation, Emerging Markets, Value Equity, Strategic
Equity, and Small Cap Series may purchase and sell stock index futures contracts
and futures contracts based upon other financial instruments, and purchase
options on such contracts. The Multiple Allocation, Natural Resources, and
Strategic Equity Series may also engage in gold and other futures contracts. The
Fully Managed Series will not write options on any futures contracts. For a
general description of these futures contracts and options thereon, including
information on margin requirements, see the Statement of Additional Information.
These Series may engage in such futures transactions as an adjunct to their
securities activities. The transactions in futures contracts must constitute
bona fide hedging or other strategies under regulations promulgated by the
Commodities Futures Trading Commission (the "CFTC"), under which a Series
engaging in futures transactions would not be a "commodity pool."
At the time a Series purchases a futures contract, an amount of cash, U.S.
Government securities, or money market instruments equal to the fair market
value less initial and variation margin of the futures contract will be
deposited in a segregated account with the Trust's custodian to collateralize
the position and thereby ensure that such futures contract is covered. In
addition, each Series will comply with certain regulations of the CFTC to
qualify for an exclusion from being a "commodity pool," which require a Series
to set aside cash and short-term obligations with respect to long positions in a
futures contract or a futures option. These requirements are described in the
Statement of Additional Information.
RISKS ASSOCIATED WITH
FUTURES AND FUTURES OPTIONS
There are several risks associated with the use of futures and futures
options. The value of a futures contract may decline. While a Series'
transactions in futures may protect the Series against adverse movements in
the general level of interest rates or other economic conditions, such
transactions could also preclude the Series from the opportunity to benefit
from favorable movements in the level of interest rates or other economic
conditions. With respect to transactions for hedging, there can be no
guarantee that there will be correlation between price movements in the
hedging vehicle and in the portfolio securities being hedged. An incorrect
correlation could result in a loss on both the hedged securities in a Series
and the hedging vehicle so that the Series' return might have been better if
hedging had not been attempted. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities,
and creditworthiness of issuers. A decision as to whether, when, and how to
hedge involves the exercise of skill and judgment and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
There can be no assurance that a liquid market will exist at a time when a
Series seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there
is no assurance that an active secondary market will develop or continue to
exist. The daily limit governs only price movements during a particular
trading day and therefore does not
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
limit potential losses because the limit may work to prevent the liquidation
of unfavorable positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses. Lack of a liquid
market for any reason may prevent the Series from liquidating an unfavorable
position and the Series would remain obligated to meet margin requirements and
continue to incur losses until the position is closed.
Any Series, other than the Emerging Market Series, will only enter into
futures contracts or futures options which are standardized and traded on a
U.S. exchange or board of trade, or, in the case of futures options, for which
an established over-the-counter market exists. A Series will not enter into a
futures contract or purchase a futures option if immediately thereafter the
initial margin deposits for futures contracts held by the Series plus premiums
paid by it for open futures options positions, less the amount by which any
such positions are "in-the-money," would exceed 5% of the Series' total
assets.
The Emerging Markets Series may engage in futures contracts and options on
futures contracts not only on U.S. domestic markets, but also on exchanges and
other markets outside of the United States. Foreign markets may offer
advantages such as trading in indices that are not currently traded in the
United States. Foreign markets, however, may have greater risk potential than
domestic markets. Unlike trading on domestic commodity exchanges, trading on
foreign commodity markets is not regulated by the CFTC and may be subject to
greater risk than trading on domestic exchanges. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
a trader may look only to the broker for performance of the contract. Trading
in foreign futures or foreign options contracts may not be afforded certain of
the protective measures provided by the Commodity Exchange Act, the CFTC's
regulations, and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. Amounts received for foreign
futures or foreign options transactions may not be provided the same
protections as funds received in respect of transactions on United States
futures exchanges. In addition, the Emerging Markets Series could incur losses
or lose any profits that had been realized in trading by adverse changes in
the exchange rate of the currency in which the transaction is denominated.
Transactions on foreign exchanges may include both commodities that are traded
on domestic exchanges and boards of trade and those that are not.
The Trust reserves the right to engage in other types of futures transactions
in the future and to use futures and related options for other than hedging
purposes to the extent permitted by regulatory authorities.
OPTIONS ON SECURITIES
The following Series may engage in transactions on options on securities: the
Multiple Allocation, the Fully Managed, Limited Maturity Bond, Natural
Resources, Real Estate, All-Growth, Capital Appreciation, Emerging Markets,
Value Equity, Strategic Equity, and Small Cap Series. The Multiple Allocation,
Fully Managed, All-Growth, Capital Appreciation, Emerging Markets, Value Equity,
and Small Cap Series may purchase and write put and call options on securities
and on stock indexes at such times as the Series' Portfolio Manager deems
appropriate and consistent with the Series' investment objective. The Natural
Resources and Real Estate Series may purchase and write put and call options on
securities. These Series will write call and put options only if they are
covered or secured, and may purchase or sell options to effect closing
transactions. The Strategic Equity Series may buy covered listed put equity
options and sell covered listed call equity options, including options on stock
indices. The Multiple Allocation Series will not purchase listed put or call
options if, immediately after such purchase, the premiums paid for all such
options owned at that time would exceed 2% of the Series' net assets. The Fully
Managed, All-Growth, Capital Appreciation, and Value Equity Series may write
covered call or put options with respect to not more than 25% of its net assets,
may purchase protective puts with a value of up to 25% of its net assets, and
may purchase calls and puts other than protective puts with a value of up to 5%
of the Series' net assets. The Emerging Markets Series may engage in options
transactions not only on U.S. domestic markets but also on exchanges and other
markets outside the United States.
The Limited Maturity Bond Series may write covered call options and purchase put
options, and purchase call and write put options to close out options previously
written by the Series. The Series may engage in
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
options transactions to reduce the effect of price fluctuations of securities
owned by the Series (and involved in the options) on the Series' net asset value
per share. This Series will purchase put options involving portfolio securities
only when the Portfolio Manager believes that a temporary defensive position is
desirable in light of market conditions, but does not desire to sell the
portfolio security.
Any of these Series may enter into closing transactions in order to terminate
its obligations either as a writer or a purchaser of an option prior to the
expiration of the option. For a general description of purchasing and writing
options on securities and securities indexes, see "Options on Securities and
Securities Indexes" in the Statement of Additional Information.
RISKS OF OPTIONS TRANSACTIONS
The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligation as a
writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation
under the option and must deliver the underlying securities at the exercise
price. If a put or call option purchased by the Series is not sold when it has
remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, the Series
will lose its entire investment in the option. Also, where a put or call
option on a particular security is purchased to hedge against price movements
in a related security, the price of the put or call option may move more or
less than the price of the related security.
There can be no assurance that a liquid market will exist when a Series seeks
to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Series may be unable to
close out a position. If a Series cannot effect a closing transaction, it will
not be able to sell the underlying security while the previously written
option remains outstanding, even though it might otherwise be advantageous to
do so. Possible reasons for the absence of a liquid secondary market on a
national securities exchange could include: insufficient trading interest,
restrictions imposed by national securities exchanges, trading halts or
suspensions with respect to call options or their underlying securities,
inadequacy of the facilities of national securities exchanges or The Options
Clearing Corporation due to a high trading volume or other event, and a
decision by one or more national securities exchanges to discontinue the
trading of call options or to impose restrictions on types of orders.
Since option premiums paid or received by a Series, as compared to underlying
investments, are small in relation to the market value of such investments,
buying and selling put and call options offer large amounts of leverage. Thus,
the leverage offered by trading in options could result in the Series' net
asset value being more sensitive to changes in the value of the underlying
securities.
No Series except the Multiple Allocation Series will write a covered call
option or purchase a put option if, as a result, the aggregate market value of
all portfolio securities covering call options or subject to put options
exceeds 25% of the market value of the Series' net assets. Unless otherwise
indicated above, as in the case of the Emerging Markets Series, a Series will
enter only into options which are standardized and traded on a U.S. exchange
or board of trade, or for which an established over-the-counter market exists.
FOREIGN CURRENCY TRANSACTIONS
The Multiple Allocation, Fully Managed, Natural Resources, Emerging Markets,
All-Growth, Rising Dividends, Value Equity, Strategic Equity, and Small Cap
Series may enter into forward currency contracts and enter into currency
exchange transactions on a spot (I.E., cash) basis. A forward currency contract
is an obligation to purchase or sell a currency against another currency at a
future date and price as agreed upon by the parties. A Series may either accept
or make delivery of the currency at the maturity of the forward contract or,
prior to maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. A Series will engage in forward currency
transactions in anticipation of or to protect itself against fluctuations in
currency exchange rates, as further described in the Statement of Additional
Information. None of the Series will commit more than 15% of the total assets of
the Series computed at market value at the time of commitment to forward
contracts for hedging purposes, and none will purchase and sell foreign currency
as an investment.
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
A Series will not enter into a forward contract with a term of greater than one
year. At the maturity of a forward contract, a Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. If the Series retains the portfolio security and engages in an
offsetting transaction, the Series will incur a gain or a loss to the extent
that there has been movement in forward contract prices. For more information on
closing a forward currency position, including information on associated risks,
see the Statement of Additional Information.
Forward contracts are not traded on regulated commodities exchanges. There can
be no assurance that a liquid market will exist when a Series seeks to close out
a forward currency position, in which case a Series might not be able to effect
a closing purchase transaction at any particular time. In addition, a Series
entering into a forward foreign currency contract incurs the risk of default by
the counter party to the transaction.
While forward foreign currency contracts tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time, they tend to
limit any potential gain which might result should the value of such currency
increase.
Although the Series values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Series may do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Series at one rate, while offering a lesser rate of exchange should the
Series desire to resell that currency to the dealer.
OPTIONS ON FOREIGN CURRENCIES
The Multiple Allocation, Natural Resources, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may engage in transactions in options on
foreign currencies. The Natural Resources Series may invest up to 5% of its
assets, taken at market value at the time of investment, in call and put options
on domestic and foreign securities and foreign currencies. For a description of
options on securities, see "Options on Securities."
A Series may purchase call and put options on foreign currencies as a hedge
against changes in the value of the U.S. dollar (or another currency) in
relation to a foreign currency in which portfolio securities of the Series may
be denominated. For a general description and other information on options on
foreign currencies, see "Options on Foreign Currencies" in the Statement of
Additional Information. Hedging against a change in the value of a foreign
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude the opportunity for gain if the value of
the hedged currency should change relative to the U.S. dollar. A Series will not
speculate in options on foreign currencies. A Series may invest in options on
foreign currency which are either listed on a domestic securities exchange or
traded on a recognized foreign exchange.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a Series will
purchase only exchange-traded options, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at any
particular time. In the event no liquid secondary market exists, it might not be
possible to effect closing transactions in particular options. If a Series
cannot close out an exchange- traded option which it holds, it would have to
exercise its option in order to realize any profit and would incur transactional
costs on the sale of the underlying assets.
BORROWING
Each Series may borrow up to 10% of the value of its net assets. For temporary
purposes, such as to facilitate redemptions, a Series may increase its
borrowings up to 25% of its net assets. Leveraging by means of borrowing will
exaggerate the effect of any increase or decrease in the value of portfolio
securities on a Series' net asset value; money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances), which may or may not exceed the income
received from the securities purchased with borrowed funds. The use of borrowing
tends to result in a faster than average movement, up or down, in the net asset
value of the Series' shares. A Series also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES (CONTINUED)
Reverse repurchase agreements, short sales of securities, and short sales of
securities against the box will be included as borrowing subject to the
borrowing limitations described above, except that the Multiple Allocation
Series, Natural Resources Series, Strategic Equity, and Small Cap Series are
permitted to engage in short sales of securities with respect to an additional
15% of the Series' net assets in excess of the limits otherwise applicable to
borrowing. Securities purchased on a when-issued or delayed delivery basis will
not be subject to the Series' borrowing limitations to the extent that a Series
establishes and maintains liquid assets in a segregated account with the Trust's
custodian equal to the Series' obligations under the when-issued or delayed
delivery arrangement.
The Multiple Allocation, Fully Managed, Limited Maturity Bond, All-Growth,
Capital Appreciation, Strategic Equity, Small Cap, and Liquid Asset Series may,
in connection with permissible borrowings, transfer as collateral securities
owned by the Series.
INVESTMENT RESTRICTIONS
The Series are subject to investment restrictions that are described in the
Statement of Additional Information. Those investment restrictions so designated
and the investment objective of each Series are "fundamental policies" of the
Series, which means that they may not be changed without a majority vote of the
shareholders of the affected Series. Except for those restrictions specifically
identified as fundamental and each Series's investment objective, all other
investment policies and practices described in this Prospectus and the Statement
of Additional Information are not fundamental, meaning that the Board of
Trustees may change them without shareholder approval. The vote of a majority of
the outstanding voting securities of a Series means the vote, at an annual or
special meeting, of (a) 67% or more of the voting securities present at such
meeting, if the holders of more than 50% of the outstanding voting securities of
such Series are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of such Series, whichever is less.
The investment restrictions are stated in full in the Statement of Additional
Information, and a brief description of some of them follows. A Series will not,
with respect to 75% of its assets, invest more than 5% of its assets (taken at
market value at the time of such investment) in securities of any one issuer,
except that this restriction does not apply to U.S. Government securities. A
Series will not, with respect to 75% of its assets, invest more than 10% (taken
at market value at the time of such investment) of any one issuer's outstanding
voting securities, except that this restriction does not apply to U.S.
Government securities. No Series will concentrate more than 25% of its assets in
any particular industry, except that this restriction does not apply to (a) U.S.
Government securities, (b) with respect to the Liquid Asset Series, to
securities or obligations issued by U.S. banks, and (c) with respect to the Real
Estate Series, which will normally invest more than 25% of its total assets in
securities of issuers in the real estate and related industries, or with respect
to the Natural Resources Series, which will normally invest more than 25% of its
total assets in the group of industries engaged in natural resources activities,
provided that such concentration for these two Series is permitted under tax law
requirements for regulated investment companies that are investment vehicles for
variable contracts.
PURCHASE OF SHARES
Shares of the Series may be offered for purchase by separate accounts of
insurance companies to serve as an investment medium for the Variable Contracts
issued by the insurance companies and to certain qualified pension and
retirement plans, as permitted under the federal tax rules relating to the
Series serving as investment mediums for Variable Contracts. Shares of the
Series are sold to insurance company separate accounts funding both variable
annuity contracts and variable life insurance contracts and may be sold to
insurance companies that are not affiliated. The Trust currently does not
foresee any disadvantages to Variable Contract Owners or other investors arising
from offering the Trust's shares to separate accounts of unaffiliated insurers,
separate accounts funding both life insurance policies and annuity contracts, or
certain qualified pension and retirement plans; however, due to differences in
tax treatment or other considerations, it is theoretically possible that the
interests of owners of various contracts or pension and retirement plans
participating in the Trust might at some time be in conflict. However, the Board
of Trustees and insurance companies whose separate accounts invest in the Trust
are required to monitor events in order to identify any material conflicts
between variable annuity contract owners and variable life policy owners,
between separate accounts of unaffiliated insurers, and between various contract
owners and pension and retirement plans. The Board of Trustees will determine
what action, if any, should be taken in the event of such a conflict. If such a
conflict were to occur, one or more insurance company separate accounts might
45
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PURCHASE OF SHARES (CONTINUED)
withdraw their investment in the Trust. This might force the Trust to sell
securities at disadvantageous prices.
Shares of each Series are sold at their respective net asset values (without a
sales charge) next computed after receipt of a purchase order by an insurance
company whose separate account invests in the Trust.
NET ASSET VALUE
A Series' net asset value is determined by dividing the value of each Series'
net assets by the number of its shares outstanding. That determination is made
once each business day, Monday through Friday, at or about 4:00 p.m., New York
City time, on each day that the New York Stock Exchange is open for trading. The
Board of Trustees has established procedures to value each Series' assets to
determine net asset value. In general, these valuations are based on actual or
estimated market value, with special provisions for assets not having readily
available market quotations and short-term debt securities. The net asset values
per share of each Series will fluctuate in response to changes in market
conditions and other factors, except that the net asset value of the shares of
the Liquid Asset Series will not fluctuate in response to changes in market
conditions for so long as the Series is using the amortized cost method of
valuation.
The Liquid Asset Series' portfolio securities are valued using the amortized
cost method of valuation. This involves valuing a security at cost on the date
of acquisition and thereafter assuming a constant accretion of a discount or
amortization of a premium to maturity. See the Statement of Additional
Information for a description of certain conditions and procedures followed by
the Series in connection with amortized cost valuation.
All other Series are valued as follows:
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last reported
sales price, or, if no sales are reported, the mean between representative bid
and asked quotations obtained from a quotation reporting system or from
established market makers. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Trustees, although the actual
calculations will be made by persons acting under the direction of the Board and
subject to the Board's review. Money market instruments are valued at market
value, except that instruments maturing in sixty days or less may be valued
using the amortized cost method of valuation. The value of a foreign security is
determined in its national currency based upon the price on the foreign exchange
as of its close of business immediately preceding the time of valuation.
Securities traded in over-the-counter markets outside the United States are
valued at the last available price in the over-the-counter market prior to the
time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at their
date of acquisition valued under the amortized cost method), are normally valued
on the basis of quotes obtained from brokers and dealers or pricing services,
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. Debt obligations having a
maturity of sixty days or less may be valued at amortized cost unless the
Portfolio Manager believes that amortized cost does not approximate market
value.
When a Series writes a put or call option, the amount of the premium is included
in the Series' assets and an equal amount is included in its liabilities. The
liability thereafter is adjusted to the current market value of the option. The
premium paid for an option purchased by the Series is recorded as an asset and
subsequently adjusted to market value. Futures and options thereon which are
traded on commodities exchanges or boards of trade will be valued at their
closing settlement price on such exchange or board of trade. Foreign securities
quoted in foreign currencies generally are valued at appropriately translated
foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in European and
Pacific Basin countries is normally completed well before 4:00 p.m., New York
City time. Trading on these exchanges may not take place on all New York
business days and in addition, trading takes place in various foreign markets on
days which are not business days in New York and on which the Trust's net asset
value is not calculated. As a result, the calculation of the net asset value of
a Series investing in foreign securities may not take place contemporaneously
with the determination of the prices of the securities included in the
calculation. Further, under the Trust's procedures, the prices of foreign
securities are determined using information derived from pricing services and
other sources. Prices derived under these procedures will be used in determining
daily net asset value. Information that becomes known to the Trust or its agents
after the time
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NET ASSET VALUE (CONTINUED)
that the net asset value is calculated on any business day may be assessed in
determining net asset value per share after the time of receipt of the
information, but will not be used to retroactively adjust the price of the
security so determined earlier or on a prior day. Events that may affect the
value of these securities that occur between the time their prices are
determined and the time the Series' net asset value is determined may not be
reflected in the calculation of net asset value of the Series unless the Manager
or the Portfolio Manager, acting under authority delegated by the Board of
Trustees, deems that the particular event would materially affect net asset
value. In this event, the securities would be valued at fair market value as
determined in good faith by the Board of Trustees of the Fund, although the
actual calculations will be made by the Manager or the Portfolio Manager acting
under the direction of the Board and subject to the Board's review.
REDEMPTION OF SHARES
Shares of any Series may be redeemed on any business day. Redemptions are
effected at the per share net asset value next determined after receipt of the
redemption request by an insurance company whose separate account invests in the
Series. Redemption proceeds normally will be paid within seven days following
receipt of instructions in proper form. The right of redemption may be suspended
by the Trust or the payment date postponed beyond seven days when the New York
Stock Exchange is closed (other than customary weekend and holiday closings) or
for any period during which trading thereon is restricted because an emergency
exists, as determined by the SEC, making disposal of portfolio securities or
valuation of net assets not reasonably practicable, and whenever the SEC has by
order permitted such suspension or postponement for the protection of
shareholders.
If the Board of Trustees should determine that it would be detrimental to the
best interests of the remaining shareholders of a Series to make payment wholly
or partly in cash, the Series may pay the redemption price in whole or part by a
distribution in kind of securities from the portfolio of the Series, in lieu of
cash, in conformity with applicable rules of the SEC. If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets into cash.
EXCHANGES
Shares of any one Series may be exchanged for shares of any of the other Series
described in this Prospectus. Exchanges are treated as a redemption of shares of
one Series and a purchase of shares of one or more of the other Series and are
effected at the respective net asset values per share of each Series on the date
of the exchange. The Trust reserves the right to modify or discontinue its
exchange privilege at any time without notice. Variable Contract Owners do not
deal directly with the Trust with respect to the purchase, redemption, or
exchange of shares of the Series, and should refer to the prospectus for the
applicable Variable Contract for information on allocation of premiums and on
transfers of account value among divisions of the pertinent insurance company
separate account that invest in the Series.
The Trust reserves the right to discontinue offering shares of one or more
Series at any time. In the event that a Series ceases offering its shares, any
investments allocated by an insurance company to such Series will be invested in
the Liquid Asset Series or any successor to such Series.
PORTFOLIO TRANSACTIONS
BROKERAGE SERVICES
Pursuant to the Portfolio Management Agreements, the Portfolio Manager places
orders for the purchase and sale of portfolio investments for the Series'
accounts with brokers or dealers selected by the Portfolio Manager in its
discretion. In executing transactions, the Portfolio Manager will attempt to
obtain the best execution for a Series, taking into account such factors as
price (including the applicable brokerage commission or dollar spread), size of
order, the nature of the market for the security, the timing of the transaction,
the reputation, the experience and financial stability of the broker-dealer
involved, the quality of the service, the difficulty of execution, execution
capabilities, and operational facilities of the firms involved, and the firm's
risk in positioning a block of securities. In transactions on stock exchanges in
the United States, payments of brokerage commissions are negotiated. In
effecting purchases and sales of portfolio securities in transactions on U.S.
stock exchanges for the account of a Series, the Portfolio Manager may pay
higher commission rates than the lowest available when the Portfolio Manager
believes it is reasonable to do so in light of the value of the
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PORTFOLIO TRANSACTIONS (CONTINUED)
brokerage and research services provided by the broker effecting the
transaction. In the case of securities traded on some foreign stock exchanges,
brokerage commissions may be fixed and the Portfolio Manager may be unable to
negotiate commission rates for these transactions. In the case of securities
traded on the over-the-counter markets, there is generally no stated commission,
but the price includes an undisclosed commission or markup.
Some securities considered for investment by the Series may also be considered
for other clients served by the Portfolio Manager and/or its affiliaties. For
information on trade allocation, see "Portfolio Transactions and Brokerage --
Investment Decisions" in the Statement of Additional Information.
A Portfolio Manager may place orders for the purchase and sale of portfolio
securities with itself, acting as broker-dealer, or with a broker-dealer that is
an affiliate of the Portfolio Manager or the Trust where, in the judgment of the
Portfolio Manager, such firm will be able to obtain a price and execution at
least as favorable as other qualified brokers.
SEC rules further require that commission paid to such an affiliated
broker-dealer or Portfolio Manager by a Series on exchange transactions not
exceed "usual and customary brokerage commissions."
PORTFOLIO TURNOVER
For reporting purposes, each Series' portfolio turnover rate is calculated by
dividing the value of the lesser of purchases or sales of portfolio securities
for the fiscal year by the monthly average of the value of portfolio securities
owned by the Series during the fiscal year. In determining such portfolio
turnover, all securities whose maturities at the time of acquisition were one
year or less are excluded. A 100% portfolio turnover rate would occur, for
example, if all of the securities in the portfolio (other than short-term
securities) were replaced once during the fiscal year. The portfolio turnover
rate for each of the Series will vary from year to year, and depending on market
conditions, turnover could be greater in periods of unusual market movement and
volatility. A higher turnover rate would result in heavier brokerage commissions
or other transactional expenses which must be borne, directly or indirectly, by
a Series and ultimately by the Series' shareholders. The portfolio turnover
rates for each Series are presented in the data shown in "Financial Highlights"
in this Prospectus.
DIVIDENDS AND DISTRIBUTIONS
Net investment income of the Liquid Asset Series is declared as a dividend daily
and paid monthly. For all other Series, net investment income will be paid
annually, except that the Limited Maturity Bond Series may declare a dividend
monthly or quarterly. Any net realized long-term capital gains (the excess of
net long-term capital gains over net short-term capital losses) for any Series
will be declared and paid at least once annually. Net realized short-term
capital gains may be declared and paid more frequently.
Any distributions made by any Series will be automatically reinvested in
additional shares of that Series, unless an election is made by a shareholder to
receive distributions in cash. Dividends or distributions by a Series other than
the Liquid Asset Series (which attempts to maintain a constant $1.00 per share
net asset value) will reduce the per share net asset value by the per share
amount so paid.
FEDERAL INCOME TAX STATUS
Each Series intends to qualify each year and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, a Series generally expects not to be subject
to federal income tax if it meets certain source of income, diversification of
assets, income distribution, and other requirements, to the extent it
distributes its investment company taxable income and its net capital gains.
Distributions of investment company taxable income and net realized capital
gains are automatically reinvested in additional shares of the Series, unless an
election is made by a shareholder to receive distributions in cash. Tax
consequences to the Variable Contract Owners are described in the prospectuses
for the pertinent Separate Accounts.
Certain requirements relating to the qualification of a Series as a regulated
investment company under the Code may limit the extent to which a Series will be
able to engage in transactions in options, futures contracts, or forward
contracts.
To comply with regulations under Section 817(h) of the Code, each Series
generally will be required to diversify its investments, so that on the last day
of each quarter of a calendar year, no more than 55% of the value of its assets
is represented by any one investment, no more than 70% is represented by any two
investments, no more than 80% is represented by any
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FEDERAL INCOME TAX STATUS (CONTINUED)
three investments, and no more than 90% is represented by any four investments.
For this purpose, securities of a single issuer are treated as one investment
and each U.S. Government agency or instrumentality is treated as a separate
issuer. Any security issued, guaranteed, or insured (to the extent so guaranteed
or insured) by the United States or an agency or instrumentality of the United
States is treated as a security issued by the U.S. Government or its agency or
instrumentality, whichever is applicable. These regulations will limit the
ability of a Series to invest more than 55% of its assets in direct obligations
of the U.S. Treasury or in obligations which are deemed to be issued by a
particular agency or instrumentality of the U.S. Government. If a Series fails
to meet the diversification requirements under Code Section 817(h), income with
respect to Variable Contracts invested in the Series at any time during the
calendar quarter in which the failure occurred could become currently taxable to
the owners of such Variable Contracts and income for prior periods with respect
to such Contracts also would be taxable, most likely in the year of the failure
to achieve the required diversification. Other adverse tax consequences also
could ensue. If a Series failed to qualify as a regulated investment company,
the results would be substantially the same as a failure to meet the
diversification requirements under Code Section 817(h).
In connection with the issuance of the regulations governing diversification
under Section 817(h) of the Code, the Treasury Department announced that it
would issue future regulations or rulings addressing the circumstances in which
a Variable Contract Owner's control of the investments of a separate account may
cause the contract owner, rather than the insurance company, to be treated as
the owner of the assets held by the separate account. If the Variable Contract
Owner is considered the owner of the securities underlying the separate account,
income and gains produced by those securities would be included currently in the
Variable Contract Owner's gross income. It is not known what standards will be
incorporated in future regulations or other pronouncements.
In the event that unfavorable rules or regulations are adopted, there can be no
assurance that the Series will be able to operate as currently described in the
Prospectus, or that a Series will not have to change its investment objectives,
investment policies, or investment restrictions. While a Series' investment
objective is fundamental and may be changed only by a vote of a majority of its
outstanding shares, the Trustees have reserved the right to modify the
investment policies of a Series as necessary to prevent any such prospective
rules and regulations from causing the Variable Contract Owners to be considered
the owners of the Series underlying the Separate Accounts.
See "Taxation" in the Trust's Statement of Additional Information for more
information on taxes, including information on the taxation of distributions
from a Series. Reference is made to the prospectus or offering memorandum of the
applicable Separate Account for information regarding the federal income tax
treatment respecting a Variable Contract.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on August 3, 1988, and
currently consists of fifteen portfolios that are operational, thirteen of which
are described in this Prospectus. Other portfolios may be offered by means of a
separate prospectus. The Board of Trustees may establish additional portfolios
in the future. The capitalization of the Trust consists solely of an unlimited
number of shares of beneficial interest with a par value of $0.001 each. When
issued in accordance with the terms of the Trust's Agreement and Declaration of
Trust ("Declaration of Trust"), shares of the Trust are fully paid, freely
transferable, and non-assessable by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations
and thus should be considered remote.
VOTING RIGHTS
Shareholders of the Series are given certain voting rights. Each share of each
Series will be given one vote, unless a different allocation of voting rights is
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OTHER INFORMATION (CONTINUED)
required under applicable law for a mutual fund that is an investment medium for
variable insurance products.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
Series, or for the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies, or approving a contract for investment
advisory services. In the case of Variable Contracts, in accordance with current
laws, it is anticipated that an insurance company issuing a Variable Contract
funded by a Separate Account that invests in a Series and that is registered
with the SEC as a unit investment trust will request voting instructions from
Variable Contract Owners and will vote shares or other voting interests in the
separate account in proportion to the voting instructions received.
CHANCELLOR ADMINISTRATIVE ORDER
On October 18, 1994, Chancellor Capital Management, Inc. ("CCM"), the parent of
Chancellor Trust Company, Parag Saxena, one of CCM's managing directors in his
capacity as a CCM employee and who has no involvement in managing the Trust's
assets, and James A. Long, IV, in his capacity as CCM employee, consented to the
filing of an administrative order by the SEC without admitting or denying the
allegations or substance of the order. SEE IN THE MATTER OF CHANCELLOR CAPITAL
MANAGEMENT, INC., PARAG SAXENA AND JAMES A. LONG, IV, Investment Advisers Act of
1940 Release No. 1447, October 18, 1994.
The SEC's order alleges that, during the period October 1988 through August
1992, CCM and Messrs. Saxena and Long did not adequately disclose the conflict
of interest arising from certain personal trades by Mr. Saxena and that CCM did
not maintain all required records of Mr. Saxena's personal trades. Specifically,
the SEC order states that (i) CCM should have disclosed that its employees
purchased privately issued securities for their personal accounts and
subsequently invested for clients in publicly traded securities of the same
issuers, and (ii) CCM and Mr. Saxena should have disclosed, when investing for
clients in companies founded by a venture capitalist that over a year earlier,
Mr. Saxena had invested for his own account, at nominal prices, in securities of
two of those companies and a third company founded by the venture capitalist
after providing advice to the venture capitalist. The SEC did not allege that
these acts were intended to harm CCM's clients and acknowledged that clients
profited from the transactions examined.
The order censured CCM and Messrs. Saxena and Long and ordered them to comply
with certain provisions of the Investment Advisers Act and fined Mr. Saxena.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and effective yield of its
Liquid Asset Series, the current yield of the remaining Series, and the total
return of all Series in advertisements and sales literature. In the case of
Variable Contracts, performance information for the Series will not be
advertised or included in sales literature unless accompanied by comparable
performance information for a separate account to which the Series offers their
shares.
Current yield for the Liquid Asset Series will be based on income received by a
hypothetical investment over a given 7-day period (less expenses accrued during
the period), and then "annualized" (I.E., assuming that the 7-day yield would be
received for 52 weeks, stated in terms of an annual percentage return on the
investment). "Effective yield" for the Liquid Asset Series is calculated in a
manner similar to that used to calculate yield, but reflects the compounding
effect of earnings on reinvested dividends.
For the remaining Series, any quotations of yield will be based on all
investment income per share earned during a given 30-day period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income by
the maximum public offering price per share on the last day of the period.
Quotations of average annual total return for any Series will be expressed in
terms of the average annual compounded rate of return on a hypothetical
investment in the Series over a period of one, five, or ten years (or, if less,
up to the life of the Series), will reflect the deduction of a proportional
share of Series expenses (on an annual basis), and will assume that all
dividends and distributions are reinvested when paid. Quotations of total return
may also be shown for other periods.
Quotations of yield or total return for the Series will not take into account
charges or deductions against any separate account to which the Series' shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the separate account will take
such charges into account. Performance information for any Series reflects only
the performance of a hypothetical investment in the Series during the particular
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OTHER INFORMATION (CONTINUED)
time period on which the calculations are based. Performance information should
be considered in light of the Series' investment objectives and policies,
characteristics, and quality of the portfolios, and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future. For a description of the methods used to
determine yield and total return for the Series, see the Statement of Additional
Information.
LEGAL COUNSEL
Dechert Price & Rhoads, Washington, D.C., has passed upon certain legal matters
in connection with the shares offered by this Prospectus, and also acts as
outside counsel to the Trust.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as
independent auditors of the Trust.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the Series dated as of December 31,
1995, including notes thereto, are incorporated by reference in the Statement of
Additional Information from the Trust's Annual Report dated as of December 31,
1995. The financial statements do not include information on the Small Cap
Series because the Series had not commenced operations on December 31, 1995.
Information in the financial statements for the years ended December 31, 1995,
1994 and 1993 has been audited by Ernst & Young LLP. Information in the
financial statements for the years ended December 31, 1992, 1991, 1990, and 1989
was audited by another independent auditor.
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
A Subsidiary of Bankers Trust Company
GOLDEN AMERICAN LIFE INSURANCE COMPANY IS A STOCK COMPANY
DOMICILED IN WILMINGTON, DELAWARE
IN 3058 5/96
<PAGE>
THE GCG TRUST
1001 Jefferson Street, Suite 400
Wilmington, Delaware 19801
(302) 576-3400
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information
is May 1, 1996.
This Statement of Additional Information discusses fourteen portfolios (the
"Series") of The GCG Trust (the "Trust"), which is an open-end management
investment company. The Series described herein are as follows: the Multiple
Allocation Series; the Fully Managed Series; the Limited Maturity Bond Series;
the Natural Resources Series; the Real Estate Series; the All-Growth Series; the
Capital Appreciation Series; the Rising Dividends Series; the Emerging Markets
Series; the Value Equity Series; the Strategic Equity Series; the Small Cap
Series; the Liquid Asset Series; and the Market Manager Series. The Series'
Manager is Directed Services, Inc. (the "Manager").
This Statement of Additional Information is intended to supplement the
information provided to investors in the Prospectus of The GCG Trust dated
May 1, 1996 (which pertains to all Series other than the Market Manager Series)
and the Prospectus of the Market Manager Series dated May 1, 1996. The
Prospectuses have been filed with the Securities and Exchange Commission as part
of the Trust's Registration Statement. Investors should note, however, that
this Statement of Additional Information is not itself a prospectus and should
be read carefully in conjunction with the Prospectuses and retained for future
reference. The contents of this Statement of Additional Information are
incorporated by reference in the Prospectuses in their entirety. A copy of
either Prospectus may be obtained free of charge from the Trust at the address
and telephone number listed above.
MANAGER:
DIRECTED SERVICES, INC.
(800) 447-3644
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES. . . . . . . . . . 1
U.S. Government Securities. . . . . . . . . . . . . . . . . . . . 1
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . 1
High Yield Bonds. . . . . . . . . . . . . . . . . . . . . . . . . 2
Brady Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sovereign Debt. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Mortgage-Backed Securities. . . . . . . . . . . . . . . . . . . . 5
GNMA Certificates. . . . . . . . . . . . . . . . . . . . . . 5
FNMA and FHLMC Mortgage-Backed Obligations . . . . . . . . . 6
Collateralized Mortgage Obligations (CMOs) . . . . . . . . . 7
Other Mortgage-Backed Securities . . . . . . . . . . . . . . 7
Other Asset-Backed Securities . . . . . . . . . . . . . . . . . . 8
Variable and Floating Rate Securities . . . . . . . . . . . . . . 9
Banking Industry and Savings Industry Obligations . . . . . . . . 9
Commercial Paper. . . . . . . . . . . . . . . . . . . . . . . . . 10
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . 11
Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . 12
Lending Portfolio Securities. . . . . . . . . . . . . . . . . . . 12
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Investment Companies. . . . . . . . . . . . . . . . . . . . 13
Short Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . 14
Futures Contracts and Options on Futures Contracts. . . . . . . . 14
General Description of Futures Contracts . . . . . . . . . . 14
Interest Rate Futures Contracts. . . . . . . . . . . . . . . 15
Options on Futures Contracts . . . . . . . . . . . . . . . . 15
Stock Index Futures Contracts. . . . . . . . . . . . . . . . 15
Gold Futures Contracts . . . . . . . . . . . . . . . . . . . 16
Limitations. . . . . . . . . . . . . . . . . . . . . . . . . 18
Options on Securities and Securities Indexes. . . . . . . . . . . 18
Purchasing Options on Securities . . . . . . . . . . . . . . 18
Writing Covered Call and Secured Put Options . . . . . . . . 19
Options on Securities Indexes. . . . . . . . . . . . . . . . 19
General. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
When-Issued or Delayed Delivery Securities. . . . . . . . . . . . 20
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . 20
Options on Foreign Currencies . . . . . . . . . . . . . . . . . . 22
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . 22
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . 25
The Management Agreement. . . . . . . . . . . . . . . . . . . . . 28
Distribution of Trust Shares. . . . . . . . . . . . . . . . . . . 33
Purchases and Redemptions . . . . . . . . . . . . . . . . . . . . 33
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PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . 34
Investment Decisions. . . . . . . . . . . . . . . . . . . . . . . 34
Brokerage and Research Services . . . . . . . . . . . . . . . . . 34
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 38
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . 45
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Custodian and Other Service Providers . . . . . . . . . . . . . . 46
Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . 46
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Registration Statement. . . . . . . . . . . . . . . . . . . . . . 46
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 47
APPENDIX 1: Description of Bond Ratings. . . . . . . . . . . . . . . . A-1
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INTRODUCTION
This Statement of Additional Information is designed to elaborate upon
information contained in the Prospectuses for the Series, including the
discussion of certain securities and investment techniques. The more detailed
information contained herein is intended solely for investors who have read the
Prospectuses and are interested in a more detailed explanation of certain
aspects of some of the Series' securities and some investment techniques. Some
of the Series' investment techniques are described only in the Prospectuses and
are not repeated herein. Captions and defined terms in this Statement of
Additional Information generally correspond to like captions and terms in the
Series' Prospectuses.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
Each Series may invest in U.S. Government securities. U.S. Government
securities are obligations of, or are guaranteed by, the U.S. Government, its
agencies or instrumentalities. Treasury bills, notes, and bonds are direct
obligations of the U.S. Treasury. Securities guaranteed by the U.S. Government
include: federal agency obligations guaranteed as to principal and interest by
the U.S. Treasury (such as GNMA certificates, described in the section on
"Mortgage-Backed Securities," and Federal Housing Administration debentures). In
guaranteed securities, the payment of principal and interest is unconditionally
guaranteed by the U.S. Government, and thus they are of the highest credit
quality. Such direct obligations or guaranteed securities are subject to
variations in market value due to fluctuations in interest rates, but, if held
to maturity, the U.S. Government is obligated to or guarantees to pay them in
full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of nor guaranteed by the Treasury.
However, they involve federal sponsorship in one way or another: some are
backed by specific types of collateral; some are supported by the issuer's right
to borrow from the Treasury; some are supported by the discretionary authority
of the Treasury to purchase certain obligations of the issuer; others are
supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to, Federal Land Banks, Farmers Home Administration, Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"),
Student Loan Mortgage Association, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, and Federal Home Loan Banks.
All Series except the Market Manager Series may also purchase obligations
of the International Bank for Reconstruction and Development, which, while
technically not a U.S. Government agency or instrumentality, has the right to
borrow from the participating countries, including the United States.
DEBT SECURITIES
All Series may invest in U.S. dollar-denominated corporate debt securities
of domestic issuers and the Multiple Allocation, Fully Managed, Limited Maturity
Bond, Natural Resources, Liquid Asset, Capital Appreciation, Emerging Markets,
Strategic Equity, Small Cap, and Market Manager Series may invest in debt
securities of foreign issuers that are denominated in U.S. dollars. The
Multiple Allocation, Fully Managed, Natural Resources, Emerging Markets,
Strategic
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Equity, and Small Cap Series may invest in non-U.S. dollar-denominated debt
securities of foreign issuers. The debt securities in which the Series may
invest are limited to corporate debt securities (corporate bonds, debentures,
notes, and other similar corporate debt instruments) which meet the minimum
ratings criteria set forth for that particular Series, or, if not so rated, are,
in the Portfolio Manager's determination, comparable in quality to corporate
debt securities in which a Series may invest.
Those Series that do not specify any particular ratings criteria, i.e., the
Multiple Allocation, Natural Resources, All-Growth, Strategic Equity, and Small
Cap Series, may invest only in debt securities that are investment grade, i.e.,
rated BBB or better by Standard & Poor's Rating Group ("Standard & Poor's") and
Baa or better by Moody's Investors Service, Inc. ("Moody's"), or, if not rated
by Standard & Poor's or Moody's, of equivalent quality as determined by the
Portfolio Manager.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Bonds rated BBB or Baa, which
are considered medium-grade category bonds, do not have economic characteristics
that provide the high degree of security with respect to payment of principal
and interest associated with higher rated bonds, and generally have some
speculative characteristics. A bond will be placed in this rating category
where interest payments and principal security appear adequate for the present,
but economic characteristics that provide longer term protection may be lacking.
Any bond, and particularly those rated BBB or Baa, may be susceptible to
changing conditions, particularly to economic downturns, which could lead to a
weakened capacity to pay interest and principal.
New issues of certain debt securities are often offered on a when-issued or
firm-commitment basis; that is, the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment, but delivery and payment
for the securities normally take place after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery depending on market conditions and
changes in interest rate levels. However, the Series will not accrue any income
on these securities prior to delivery. The Series will maintain in a segregated
account with its custodian an amount of cash or high quality debt securities
equal (on a daily marked-to-market basis) to the amount of its commitment to
purchase the when-issued securities or securities purchased on a firm-commitment
basis.
Many securities of foreign issuers are not rated by Moody's or Standard and
Poor's; therefore, the selection of such issuers depends, to a large extent, on
the credit analysis performed or used by the Series' Portfolio Manager.
HIGH YIELD BONDS
The Real Estate Series may invest up to 20% of its assets in convertible
bonds and the Fully Managed Series and Emerging Markets Series may invest up to
5% and 10% of their assets, respectively, in bonds rated lower than Baa or BBB,
or, if not rated by Moody's or Standard & Poor's, of equivalent quality ("high
yield bonds," which are commonly referred to as "junk bonds"). In general, high
yield bonds are not considered to be investment grade, and investors
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should consider the risks associated with high yield bonds before investing in
the pertinent Series. Investment in such securities generally provides greater
income and increased opportunity for capital appreciation than investments in
higher quality securities, but they also typically entail greater price
volatility and principal and income risk.
Investment in high yield bonds involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
bonds are regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The high yield bond
market is relatively new, and many of the outstanding high yield bonds have not
endured a lengthy business recession. A long-term track record on bond default
rates, such as that for investment grade corporate bonds, does not exist for the
high yield market. Analysis of the creditworthiness of issuers of debt
securities, and the ability of a Series to achieve its investment objective may,
to the extent of investment in high yield bonds, be more dependent upon such
creditworthiness analysis than would be the case if the Series were investing in
higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade bonds. The
prices of high yield bonds have been found to be less sensitive to interest rate
changes than higher rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in high yield bond prices because the advent of a recession could lessen
the ability of a highly leveraged company to make principal and interest
payments on its debt securities. If an issuer of high yield bonds defaults, in
addition to risking payment of all or a portion of interest and principal, the
Series may incur additional expenses to seek recovery. In the case of high
yield bonds structured as zero coupon or pay-in-kind securities, their market
prices are affected to a greater extent by interest rate changes, and therefore
tend to be more volatile than securities which pay interest periodically and in
cash.
The secondary market on which high yield bonds are traded may be less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which the Series could sell a
high yield bond, and could adversely affect and cause large fluctuations in the
daily net asset value of the Series' shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield bonds, especially in a thinly traded market.
When secondary markets for high yield bonds are less liquid than the market for
higher grade bonds, it may be more difficult to value the securities because
such valuation may require more research, and elements of judgment may play a
greater role in the valuation because there is less reliable, objective data
available.
There are also certain risks involved in using credit ratings for
evaluating high yield bonds. For example, credit ratings evaluate the safety of
principal and interest payments, not the market value risk of high yield bonds.
Also, credit rating agencies may fail to reflect subsequent events.
BRADY BONDS
The Emerging Markets Series may invest in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady
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Bonds are not considered U.S. Government securities and are considered
speculative. Brady Plan debt restructurings have been implemented to date in
several countries, including Mexico, Venezuela, Argentina, Uruguay, Costa Rica,
Bulgaria, the Dominican Republic, Jordan, Nigeria, Bolivia, Ecuador, Niger,
Poland and the Philippines (collectively, the "Brady Countries"). In addition,
Brazil has concluded a Brady-like plan. It is expected that other countries will
undertake a Brady Plan debt restructuring in the future, including Peru and
Panama. Brady Bonds have been issued only recently, and accordingly, do not
have a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are U.S. dollar-denominated) and
they are actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds which have the same
maturity as the Brady Bonds. Interest payments on these Brady Bonds generally
are collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at the time and is adjusted at regular intervals
thereafter.
Certain Brady Bonds are entitled to "value recovery payments" in certain
circumstances, which in effect constitute supplemental interest payments but
generally are not collateralized. Brady Bonds are often viewed as having three
or four valuation components: (i) the collateralized repayment of principal at
final maturity; (ii) the collateralized interest payments; (iii) the
uncollateralized interest payments; and (iv) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the "residual
risk").
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Series may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Series to suffer
a loss of interest or principal on any of its holdings.
SOVEREIGN DEBT
The Emerging Markets Series may invest in debt obligations ("sovereign
debt") of governmental issuers in emerging market countries and industrialized
countries. Certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. The issuer or governmental authority
that controls the repayment of sovereign debt may not be willing or able to
repay the principal and/or pay interest when due in
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accordance with the terms of such obligations. A governmental entity's
willingness or ability to repay principal and pay interest due in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the government's dependence on expected
disbursements from third parties, the government's policy toward the
International Monetary Fund and the political constraints to which a government
may be subject. Governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others
abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a debtor's implementation of economic
reforms or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds to the
government debtor, which may further impair such debtor's ability or
willingness to timely service its debts. Holders of sovereign debt may be
requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. In addition, no assurance can
be given that the holders of commercial bank debt will not contest payments
to the holders of other foreign government debt obligations in the event
of default under their commercial bank loan agreements.
The issuers of the government debt securities in which the Series may
invest have in the past experienced substantial difficulties in servicing
their external debt obligations, which led to defaults on certain obligations
and the restructuring of certain indebtedness. Restructuring arrangements
have included, among other things, reducing and rescheduling interest and
principal payments by negotiating new or amended credit agreements or
converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. There can be no assurance
that the Brady Bonds and other foreign government debt securities in which the
Series may invest will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely affect the
Series' holdings. Furthermore, certain participants in the secondary market
for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available
to other market participants.
MORTGAGE-BACKED SECURITIES
All Series except the Market Manager Series may invest in mortgage-backed
securities.
GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which
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consists of both interest and principal payments. In effect, these payments are
a "pass-through" of the periodic payments made by the individual borrowers on
the residential mortgage loans, net of any fees paid to the issuer or guarantor
of such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Mortgage-backed
securities issued by GNMA are described as "modified pass-through" securities.
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates, regardless of whether or not the mortgagor actually makes the
payment. Although GNMA guarantees timely payment even if homeowners delay or
default, tracking the "pass-through" payments may, at times, be difficult.
Expected payments may be delayed due to the delays in registering the newly
traded paper securities. The custodian's policies for crediting missed payments
while errant receipts are tracked down may vary. Other mortgage-backed
securities, such as those of the Federal Home Loan Mortgage Corporation
("FHLMC") and the Federal National Mortgage Association ("FNMA"), trade in book-
entry form and should not be subject to the risk of delays in timely payment of
income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Series to a lower rate of
return upon reinvestment of principal. Prepayment rates vary widely and may be
affected by changes in market interest rates. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of the GNMA certificates. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the GNMA certificates. Accordingly, it is not possible to
accurately predict the average life of a particular pool. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, GNMA certificates can be less
effective than typical bonds of similar maturities at "locking in" yields during
periods of declining interest rates, although they may have comparable risks of
decline in value during periods of rising interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
the FNMA and the FHLMC. FNMA, a federally chartered and privately owned
corporation, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest, but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA also issues REMIC Certificates, which represent an
interest in a trust funded with FNMA Certificates. REMIC Certificates are
guaranteed by FNMA, and not by the full faith and credit of the U.S. Government.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions,
and mortgage bankers. FHLMC, a corporate instrumentality of the United States,
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from
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FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal and maintains reserves to protect holders
against losses due to default. PCs are not backed by the full faith and credit
of the U.S. Government. As is the case with GNMA certificates, the actual
maturity and realized yield on particular FNMA and FHLMC pass-through securities
will vary based on the prepayment experience of the underlying pool of
mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying investors, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner-than-desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
Series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to the principal; a like amount is paid as principal on the Series A, B,
or C Bond currently being paid off. When the Series A, B, and C Bonds are paid
in full, interest and principal on the Series Z Bond begin to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-backed securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments in the former pools. Timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers,
and the mortgage poolers. Such insurance, guarantees, and the creditworthiness
of the issuers thereof will be considered in determining whether a mortgage-
backed security meets a Series' investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements.
All Series other than the Liquid Asset Series, the Capital Appreciation
Series, the Rising Dividends Series, the Emerging Markets Series, and the Market
Manager Series may buy
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mortgage-backed securities without insurance or guarantees, if the Portfolio
Manager determines that the securities meet a Series' quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. A Series will not purchase mortgage-backed securities or any other
assets which, in the opinion of the Portfolio Manager, are illiquid if, as a
result, more than 10% of the value of a Series' total assets will be illiquid.
As new types of mortgage-backed securities are developed and offered to
investors, the Portfolio Manager will, consistent with a Series' investment
objectives, policies, and quality standards, consider making investments in such
new types of mortgage-backed securities.
It is expected that governmental, government-related, or private entities
may create mortgage loan pools and other mortgage-backed securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-backed securities are developed
and offered to investors, investments in such new types of mortgage-backed
securities may be considered for the Series.
OTHER ASSET-BACKED SECURITIES
All Series other than the Liquid Asset Series, the Capital Appreciation
Series, the Rising Dividends Series, the Emerging Markets Series, and the Market
Manager Series may purchase other asset-backed securities (unrelated to mortgage
loans) such as "CARS-SM-" ("Certificates for Automobile Receivables-SM-") and
Credit Card Receivable Securities.
CARS-SM- represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS-SM- are "passed-through" monthly to
certificate holders, and are guaranteed up to certain amounts by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to prepayment,
which may reduce the overall return to certificate holders. Certificate holders
may also experience delays in payment or losses on CARS-SM- if the full amounts
due on underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage, or loss of the vehicles securing the contracts,
or other factors.
If consistent with its investment objective and policies, a Series may
invest in "Credit Card Receivable Securities." Credit Card Receivable
Securities are asset-backed securities backed by receivables from revolving
credit card agreements. Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used to
fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account. The
initial fixed period usually may be shortened upon the occurrence of specified
events which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying Accounts during the initial period and the non-
occurrence of specified events. The Tax
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Reform Act of 1986, pursuant to which a taxpayer's ability to deduct consumer
interest in his or her federal income tax calculation was completely phased out
for taxable years beginning in 1991, as well as competitive and general economic
factors, could adversely affect the rate at which new receivables are created in
an Account and conveyed to an issuer, shortening the expected weighted average
life of the related Credit Card Receivable Security, and reducing its yield. An
acceleration in cardholders' payment rates or any other event which shortens the
period during which additional credit card charges on an Account may be
transferred to the pool of assets supporting the related Credit Card Receivable
Security could have a similar effect on the weighted average life and yield.
Credit card holders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
VARIABLE AND FLOATING RATE SECURITIES
All Series may invest in variable and floating rate securities.
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some securities which
do not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Series may invest in (i) certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in (ii) certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). The Multiple
Allocation, Limited Maturity Bond, Liquid Asset, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may invest in obligations of foreign
branches of commercial banks and foreign banks so long as the securities are
U.S. dollar-denominated, and the Emerging Markets Series may also invest in
obligations of foreign branches of commercial banks and foreign banks if the
securities are not U.S. dollar-denominated. See "Foreign Securities" discussion
in The GCG Trust Prospectus for further information regarding risks attending
investment in foreign securities.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, which are normally drawn by an importer or exporter to
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pay for specific merchandise, and which are "accepted" by a bank, meaning, in
effect, that the bank unconditionally agrees to pay the face value of the
instrument on maturity. Fixed-time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate. Fixed-time deposits
may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed-time deposit to a third
party, because there is no market for such deposits. A Series will not invest
in fixed-time deposits (i) which are not subject to prepayment or (ii) which
provide for withdrawal penalties upon prepayment (other than overnight
deposits), if, in the aggregate, more than 10% of its assets would be invested
in such deposits, in repurchase agreements maturing in more than seven days, and
in other illiquid assets, except that the Rising Dividends Series, Emerging
Markets Series, and Market Manager Series may invest up to 15% of assets in such
deposits, repurchase agreements, and other illiquid assets.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, which include: (i) the
possibility that their liquidity could be impaired because of future political
and economic developments; (ii) their obligations may be less marketable than
comparable obligations of U.S. banks; (iii) a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; (iv) foreign
deposits may be seized or nationalized; (v) foreign governmental restrictions,
such as exchange controls, may be adopted which might adversely affect the
payment of principal and interest on those obligations; and (vi) the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks and/or because the accounting,
auditing, and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to U.S. banks.
Foreign banks are not generally subject to examination by any U.S. Government
agency or instrumentality.
Certain of the Series, including the Fully Managed Series and Liquid Asset
Series, invest only in bank and S&L obligations as specified in that Series'
investment policies. Other Series will not invest in obligations issued by a
commercial bank or S&L unless:
(i) the bank or S&L has total assets of least $1 billion, or the
equivalent in other currencies, and the institution has outstanding
securities rated A or better by Moody's or Standard and Poor's, or, if the
institution has no outstanding securities rated by Moody's or Standard &
Poor's, it has, in the determination of the Portfolio Manager, similar
creditworthiness to institutions having outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured by
the FDIC or the Savings Association Insurance Fund ("SAIF"), as the case
may be; and
(iii) in the case of a foreign bank, the security is, in the
determination of the Series' Portfolio Manager, of an investment quality
comparable with other debt securities which may be purchased by the Series.
These limitations do not prohibit investments in securities issued by
foreign branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
COMMERCIAL PAPER
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All of the Series may invest in commercial paper (including variable amount
master demand notes), denominated in U.S. dollars, issued by U.S. corporations
or foreign corporations. Unless otherwise indicated in the investment policies
for a Series, a Series may invest in commercial paper (i) rated, at the date of
investment, Prime-1 or Prime-2 by Moody's or A-1 or A-2 by Standard & Poor's;
(ii) if not rated by either Moody's or Standard & Poor's, issued by a
corporation having an outstanding debt issue rated Aa or better by Moody's or AA
or better by Standard & Poor's; or (iii) if not rated, are determined to be of
an investment quality comparable to rated commercial paper in which a Series may
invest.
Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
Series, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. The lender has the right to increase or to decrease the
amount under the note at any time up to the full amount provided by the note
agreement; and the borrower may prepay up to the full amount of the note without
penalty. Because variable amount master demand notes are direct lending
arrangements between the lender and borrower, and because no secondary market
exists for those notes, such instruments will probably not be traded. However,
the notes are redeemable (and thus immediately repayable by the borrower) at
face value, plus accrued interest, at any time. In connection with master
demand note arrangements, the Portfolio Manager will monitor, on an ongoing
basis, the earning power, cash flow, and other liquidity ratios of the borrower
and its ability to pay principal and interest on demand. The Portfolio Manager
also will consider the extent to which the variable amount master demand notes
are backed by bank letters of credit. These notes generally are not rated by
Moody's or Standard & Poor's; the Series may invest in them only if the
Portfolio Manager believes that at the time of investment the notes are of
comparable quality to the other commercial paper in which the Series may invest.
Master demand notes are considered by the Series to have a maturity of one day,
unless the Portfolio Manager has reason to believe that the borrower could not
make immediate repayment upon demand. See the Appendix for a description of
Moody's and Standard & Poor's ratings applicable to commercial paper.
For purposes of limitations on purchases of restricted securities,
commercial paper issued pursuant to Section 4(2) of the 1933 Act as part of a
private placement that meets liquidity standards under procedures adopted by the
Board shall not be considered to be restricted.
REPURCHASE AGREEMENTS
All Series may invest in repurchase agreements. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. The resale price is in excess of the purchase price by an amount
which reflects an agreed-upon market rate of return, effective for the period of
time the Series is invested in the security. This results in a fixed rate of
return protected from market fluctuations during the period of the agreement.
This rate is not tied to the coupon rate on the security subject to the
repurchase agreement.
The Portfolio Manager to a Series monitors the value of the underlying
securities at the time the repurchase agreement is entered into and at all times
during the term of the agreement to ensure that its value always equals or
exceeds the agreed-upon repurchase price to be paid to the Series. The
Portfolio Manager, in accordance with procedures established by the Board of
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Trustees, also evaluates the creditworthiness and financial responsibility of
the banks and brokers or dealers with which the Series enters into repurchase
agreements.
A Series may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Series engages in
repurchase transactions, obtaining collateral at least equal in value to the
repurchase obligation, and marking the collateral to market on a daily basis.
A Series may not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements, together with any
other securities that are not readily marketable, would exceed 10% of the net
assets of the Series, except that the Rising Dividends, Emerging Markets, Value
Equity, Strategic Equity, Small Cap, and Market Manager Series may invest up to
15% of net assets in such securities and repurchase agreements. If the seller
should become bankrupt or default on its obligations to repurchase the
securities, a Series may experience delay or difficulties in exercising its
rights to the securities held as collateral and might incur a loss if the value
of the securities should decline. A Series also might incur disposition costs
in connection with liquidating the securities.
REVERSE REPURCHASE AGREEMENTS
A reverse repurchase agreement may be entered into by the Multiple
Allocation, Fully Managed, Capital Appreciation, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series and involves the sale of a security by
the Series and its agreement to repurchase the instrument at a specified time
and price. A Series will use the proceeds of a reverse repurchase agreement to
purchase other money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase agreement
or which are held under an agreement to resell maturing as of that time. A
Series will maintain a segregated account consisting of cash, U.S. Government
securities, or high-grade debt obligations to cover its obligations under
reverse repurchase agreements. Under the Investment Company Act of 1940,
reverse repurchase agreements may be considered to be borrowings by the seller;
accordingly, a Series will limit its investments in reverse repurchase
agreements consistent with the borrowing limits applicable to the Series. See
"Borrowing" for further information on these limits. The use of reverse
repurchase agreements by a Series creates leverage which increases a Series'
investment risk. If the income and gains on securities purchased with the
proceeds of reverse repurchase agreements exceed the cost of the agreements, the
Series' earnings or net asset value will increase faster than otherwise would be
the case; conversely, if the income and gains fail to exceed the costs, earnings
or net asset value would decline faster than otherwise would be the case.
LENDING PORTFOLIO SECURITIES
The Multiple Allocation, Fully Managed, Limited Maturity Bond, Natural
Resources, Capital Appreciation, Rising Dividends, Emerging Markets, Strategic
Equity, and Small Cap Series may lend portfolio securities to broker-dealers or
institutional investors for the purpose of realizing additional income.
A Series will only enter into this transaction if (1) the loan is fully
collateralized at all times with U.S. Government securities, cash, or cash
equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances, or letters of credit) maintained on a daily
marked-to-market basis, in an amount at least equal to the value of the
securities loaned;
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(2) it may at any time call the loan and obtain the return of the securities
loaned within five business days; (3) it will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed 30% of the total assets of the Series. As
with other extensions of secured credit, loans of portfolio securities involve
some risk of loss of rights in the collateral should the borrower fail
financially. Accordingly, the Series' Portfolio Manager will monitor the value
of the collateral, which will be marked-to-market daily, and will monitor the
creditworthiness of the borrowers. There is no assurance that a borrower will
return any securities loaned; however, as discussed above, a borrower of
securities from a Series must maintain with the Series cash or U.S. Government
securities equal to at least 100% of the market value of the securities
borrowed. Voting rights attached to the loaned securities may pass to the
borrower with the lending of portfolio securities; however, a Series lending
such voting securities may call them if important shareholder meetings are
imminent. A Series may only lend portfolio securities to entities that are not
affiliated with either the Manager or a Portfolio Manager.
WARRANTS
Each of the following Series may invest in warrants: the Multiple
Allocation, Fully Managed, Natural Resources, Real Estate, All-Growth, Emerging
Markets, Value Equity, Strategic Equity, and Small Cap Series. Each of these
Series may invest up to 5% of its net assets in warrants (not including those
that have been acquired in units or attached to other securities), measured at
the time of acquisition, and none of these Series, except the Emerging Markets
Series, may acquire a warrant not listed on the New York or American Stock
Exchanges if, after the purchase, more than 2% of the Series' assets would be
invested in such warrants.
The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. They pay no dividends and confer no rights other than
a purchase option. If a warrant is not exercised by the date of its expiration,
the Series will lose its entire investment in such warrant.
OTHER INVESTMENT COMPANIES
All Series may invest in shares issued by other investment companies. A
Series is limited in the degree to which it may invest in shares of another
investment company in that it may not, at the time of the purchase, (1) acquire
more than 3% of the outstanding voting shares of the investment company, (2)
invest more than 5% of the Series' total assets in the investment company, or
(3) invest more than 10% of the Series' total assets in all investment company
holdings. As a shareholder in any investment company, a Series will bear its
ratable share of the investment company's expenses, including management fees in
the case of a management investment company.
SHORT SALES
The Multiple Allocation, Natural Resources, All-Growth, Capital
Appreciation, Strategic Equity, and Small Cap Series may make short sales of
securities. A short sale is a transaction in which the Series sells a security
it does not own in anticipation of a decline in market price. A
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Series may make short sales to offset a potential decline in a long position or
a group of long positions, or if the Series' Portfolio Manager believes that a
decline in the price of a particular security or group of securities is likely.
The Multiple Allocation Series' Portfolio Manager expects that, even during
normal or favorable market conditions, the Series may make short sales in an
attempt to maintain portfolio flexibility and facilitate the rapid
implementation of investment strategies if the Portfolio Manager believes that
the price of a particular security or group of securities is likely to decline.
Under current income tax laws, any capital gains realized by the Series
from short sales will generally be treated and distributed as short-term capital
gains. If the price of the security sold short increases between the time of
the short sale and the time the Series replaces the borrowed security, the
Series will incur a loss, and if the price declines during this period, the
Series will realize a capital gain. Any realized gain will be decreased, and
any incurred loss increased, by the amount of transactional costs and any
premium, dividend, or interest which the Series may have to pay in connection
with such short sale.
SHORT SALES AGAINST THE BOX
All Series, except the Limited Maturity Bond Series, Liquid Asset Series,
and Market Manager Series, may make short sales "against the box." A short sale
"against the box" is a short sale where, at the time of the short sale, the
Series owns or has the immediate and unconditional right, at no added cost, to
obtain the identical security. The Series would enter into such a transaction
to defer a gain or loss for Federal income tax purposes on the security owned by
the Series. Short sales against the box are not subject to the percentage
limitations on short sales described above.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Multiple Allocation, Fully Managed, Limited Maturity Bond, Natural
Resources, All-Growth, Capital Appreciation, Emerging Markets, Value Equity,
Strategic Equity, Small Cap, and Market Manager Series may engage in futures
contracts. The Multiple Allocation, Fully Managed, Limited Maturity Bond,
Natural Resources, Capital Appreciation, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may purchase and sell interest-rate
futures contracts. The Limited Maturity Bond Series may also purchase and write
options on interest rate futures contracts, and the Value Equity Series may also
purchase options on interest rate futures contracts. The Multiple Allocation,
Fully Managed, Natural Resources, All-Growth, Capital Appreciation, Emerging
Markets, Value Equity, Strategic Equity, and Small Cap Series may purchase and
sell stock index futures contracts and futures contracts based upon other
financial instruments, and purchase options on such contracts. The Market
Manager Series may purchase futures contracts on securities or stock indexes and
purchase options on such contracts, but will not sell futures contracts. The
Multiple Allocation, Natural Resources, and Strategic Equity Series may engage
in gold and other futures contracts. The Fully Managed Series will not write
options on any futures contracts.
GENERAL DESCRIPTION OF FUTURES CONTRACTS. A futures contract provides for
the future sale by one party and purchase by another party of a specified amount
of a particular financial instrument (debt security) or commodity for a
specified price at a designated date, time, and place. Although futures
contracts by their terms require actual future delivery of and payment for
financial instruments, commodities futures contracts are usually closed out
before the delivery
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date. Closing out an open futures contract position is effected by entering
into an offsetting sale or purchase, respectively, for the same aggregate amount
of the same financial instrument or commodities and the same delivery date.
Where a Series has sold a futures contract, if the offsetting purchase price is
less than the original futures contract sale price, the Series realizes a gain;
if it is more, the Series realizes a loss. Where a Series has purchased a
futures contract, if the offsetting price is more than the original futures
contract purchase price, the Series realizes a gain; if it is less, the Series
realizes a loss.
INTEREST RATE FUTURES CONTRACTS. The Multiple Allocation, Fully Managed,
Limited Maturity Bond, Natural Resources, Capital Appreciation, Emerging
Markets, Value Equity, Strategic Equity, and Small Cap Series may purchase and
sell interest rate futures contracts. An interest rate futures contract is an
obligation traded on an exchange or board of trade that requires the purchaser
to accept delivery, and the seller to make delivery, of a specified quantity of
the underlying financial instrument, such as U.S. Treasury bills and bonds, in a
stated delivery month, at a price fixed in the contract.
The Series may purchase and sell interest rate futures as a hedge against
adverse changes in debt instruments and other interest rate sensitive securities
held in the Series' portfolio. As a hedging strategy a Series might employ, a
Series would purchase an interest rate futures contract when it is not fully
invested in long-term debt securities but wishes to defer their purchase for
some time until it can orderly invest in such securities or because short-term
yields are higher than long-term yields. Such a purchase would enable the
Series to earn the income on a short-term security while at the same time
minimizing the effect of all or part of an increase in the market price of the
long-term debt security which the Series intends to purchase in the future. A
rise in the price of the long-term debt security prior to its purchase either
would be offset by an increase in the value of the futures contract purchased by
the Series or avoided by taking delivery of the debt securities under the
futures contract.
A Series would sell an interest rate futures contract in order to continue
to receive the income from a long-term debt security, while endeavoring to avoid
part or all of the decline in market value of that security which would
accompany an increase in interest rates. If interest rates did rise, a decline
in the value of the debt security held by the Series would be substantially
offset by the ability of the Series to repurchase at a lower price the interest
rate futures contract previously sold. While the Series could sell the long-
term debt security and invest in a short-term security, ordinarily the Series
would give up income on its investment, since long-term rates normally exceed
short-term rates.
OPTIONS ON FUTURES CONTRACTS. The Multiple Allocation, Fully Managed,
Natural Resources, All-Growth, Capital Appreciation, and Emerging Markets Series
may purchase options on interest rate futures contracts, although these Series
will not write options on any such contracts. The Strategic Equity and Market
Manager Series may purchase options on futures contracts and stock index futures
contracts, but will not write options on such contracts. The Value Equity and
Small Cap Series may purchase options on stock index futures contracts, interest
rate futures contracts, and foreign currency futures contracts, but will not
write options on such contracts. The Limited Maturity Bond Series may purchase
and write options on interest-rate futures contracts. A futures option gives
the Series the right, in return for the premium paid, to assume a long position
(in the case of a call) or short position (in the case of a put) in a futures
contract at a specified exercise price prior to the expiration of the option.
Upon exercise of a call option, the purchaser acquires a long position in the
futures contract and the writer of the option is
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assigned the opposite short position. In the case of a put option, the converse
is true. A futures option may be closed out (before exercise or expiration) by
an offsetting purchase or sale of a futures option by the Series.
The Series may use options on futures contracts in connection with hedging
strategies. Generally these strategies would be employed under the same market
conditions in which a Series would use put and call options on debt securities,
as described hereafter in "Options on Securities and Securities Indexes."
STOCK INDEX FUTURES CONTRACTS. The Multiple Allocation, Fully Managed,
Natural Resources, All-Growth, Capital Appreciation, Emerging Markets, Value
Equity, Strategic Equity, and Small Cap Series may purchase and sell stock index
futures contracts, and the Market Manager Series may purchase stock index
futures contracts. A "stock index" assigns relative values to the common stock
included in an index (for example, the Standard & Poor's 500 Index of Composite
Stocks or the New York Stock Exchange Composite Index), and the index fluctuates
with changes in the market values of such stocks. A stock index futures
contract is a bilateral agreement to accept or make payment, depending on
whether a contract is purchased or sold, of an amount of cash equal to a
specified dollar amount multiplied by the difference between the stock index
value at the close of the last trading day of the contract and the price at
which the futures contract is originally purchased or sold.
To the extent that changes in the value of the Multiple Allocation, Fully
Managed, Natural Resources, All-Growth, Capital Appreciation, Emerging Markets,
Value Equity, Strategic Equity, and Small Cap Series' portfolio corresponds to
changes in a given stock index, the sale of futures contracts on that index
("short hedge") would substantially reduce the risk to the portfolio of a market
decline and, by so doing, provide an alternative to a liquidation of securities
position, which may be difficult to accomplish in a rapid and orderly fashion.
Stock index futures contracts might also be sold:
(1) when a sale of portfolio securities at that time would appear to be
disadvantageous in the long-term because such liquidation would:
(a) forego possible price appreciation,
(b) create a situation in which the securities would be difficult to
repurchase, or
(c) create substantial brokerage commissions;
(2) when a liquidation of the portfolio has commenced or is contemplated,
but there is, in the Series' Portfolio Manager's determination, a
substantial risk of a major price decline before liquidation can be
completed; or
(3) to close out stock index futures purchase transactions.
Where a Series anticipates a significant market or market sector advance,
the purchase of a stock index futures contract ("long hedge") affords a hedge
against not participating in such advance at a time when the Series is not fully
invested. Such purchases would serve as a temporary substitute for the purchase
of individual stocks, which may then be purchased in an orderly fashion. As
purchases of stock are made, an amount of index futures contracts which is
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comparable to the amount of stock purchased would be terminated by offsetting
closing sales transactions. Stock index futures might also be purchased:
(1) if the Series is attempting to purchase equity positions in issues
which it had or was having difficulty purchasing at prices considered by
the Series' Portfolio Manager to be fair value based upon the price of the
stock at the time it qualified for inclusion in the portfolio, or
(2) to close out stock index futures sales transactions.
GOLD FUTURES CONTRACTS. The Multiple Allocation, Natural Resources, and
Strategic Equity Series may enter into futures contracts on gold. A gold
futures contract is a standardized contract which is traded on a regulated
commodity futures exchange, and which provides for the future delivery of a
specified amount of gold at a specified date, time, and price. When the Series
purchases a gold futures contract it becomes obligated to take delivery of and
pay for the gold from the seller, and when the Series sells a gold futures
contract, it becomes obligated to make delivery of precious metals to the
purchaser, in each case at a designated date and price. A Series will enter
into gold futures contracts only for the purpose of hedging its holdings or
intended holdings of gold stocks and, with regard to the Natural Resources
Series, gold bullion. The Series will not engage in these contracts for
speculation or for achieving leverage. The Series' hedging activities may
include purchases of futures contracts as an offset against the effect of
anticipated increases in the price of gold or sales of futures contracts as an
offset against the effect of anticipated declines in the price of gold.
As long as required by regulatory authorities, each investing Series will
limit its use of futures contracts and futures options to hedging transactions
and other strategies as described under the heading "Limitations" in this
section, in order to avoid being deemed a commodity pool. For example, a Series
might use futures contracts to hedge against anticipated changes in interest
rates that might adversely affect either the value of the Series' securities or
the price of the securities which the Series intends to purchase. The Series'
hedging may include sales of futures contracts as an offset against the effect
of expected increases in interest rates and purchases of futures contracts as an
offset against the effect of expected declines in interest rates. Although
other techniques could be used to reduce that Series' exposure to interest rate
fluctuations, a Series may be able to hedge its exposure more effectively and
perhaps at a lower cost by using futures contracts and futures options. See the
Prospectuses for a discussion of other strategies involving futures and futures
options.
If a purchase or sale of a futures contract is made by a Series, the Series
is required to deposit with its custodian a specified amount of cash or U.S.
Government securities ("initial margin"). The margin required for a futures
contract is set by the exchange or board of trade on which the contract is
traded and may be modified during the term of the contract. The initial margin
is in the nature of a performance bond or good faith deposit on the futures
contract which is returned to the Series upon termination of the contract,
assuming all contractual obligations have been satisfied. Each investing Series
expects to earn interest income on its initial margin deposits. A futures
contract held by a Series is valued daily at the official settlement price of
the exchange on which it is traded. Each day the Series pays or receives cash,
called "variation margin" equal to the daily change in value of the futures
contract. This process is known as "marking to market." The payment or receipt
of the variation margin does not represent a borrowing or loan by a Series but
is settlement between the Series and the broker of the amount one would owe the
other if the
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futures contract expired. In computing daily net asset value, each Series will
mark-to-market its open futures positions.
A Series is also required to deposit and maintain margin with respect to
put and call options on futures contracts it writes. Such margin deposits will
vary depending on the nature of the underlying futures contract (including the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Series.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security, and delivery month). If an offsetting purchase
price is less than the original sale price, the Series realizes a capital gain,
or if it is more, the Series realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Series
realizes a capital gain, or if it is less, the Series realizes a capital loss.
The transaction costs must also be included in these calculations.
LIMITATIONS. When purchasing a futures contract, a Series must maintain
with its custodian cash or cash equivalents (including any margin) equal to the
market value of such contract. When writing a call option on a futures
contract, the Series similarly will maintain with its custodian, cash or cash
equivalents (including any margin) equal to the amount such option is "in-the-
money" until the option expires or is closed out by the Series. A call option
is "in-the-money" if the value of the futures contract that is the subject of
the option exceeds the exercise price.
A Series may not maintain open short positions in futures contracts or call
options written on futures contracts if, in the aggregate, the market value of
all such open positions exceeds the current value of its portfolio securities,
plus or minus unrealized gains and losses on the open positions, adjusted for
the historical relative volatility of the relationship between the Series and
the positions. For this purpose, to the extent the Series has written call
options on specific securities it owns, the value of those securities will be
deducted from the current market value of the securities portfolio.
In compliance with the requirements of the Commodity Futures Trading
Commission ("CFTC") under which an investment company may engage in futures
transactions, the Trust will comply with certain regulations of the CFTC to
qualify for an exclusion from being a "commodity pool." The regulations require
that the Trust enter into futures and options (1) for "bona fide hedging"
purposes, without regard to the percentage of assets committed to initial margin
and options premiums, or (2) for other strategies, provided that the aggregate
initial margin and premiums required to establish such positions do not exceed
5% of the liquidation value of a Series' portfolio, after taking into account
unrealized profits and unrealized gains on any such contracts entered into.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
In pursuing their investment objectives, the Multiple Allocation, Fully
Managed, Limited Maturity Bond, Natural Resources, Real Estate, All-Growth,
Capital Appreciation, Emerging Markets, Value Equity, Strategic Equity, and
Small Cap Series may engage in transactions on options on securities. The
Multiple Allocation Series, All-Growth Series, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may engage in transactions on options on
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securities indexes. The Market Manager Series may purchase put and call options
on securities and on securities indexes, but will not write such options. See
"Description of Securities and Investment Techniques" in the Prospectuses for a
description of the options transactions in which each Series may engage.
PURCHASING OPTIONS ON SECURITIES. An option on a security is a contract
that gives the purchaser of the option, in return for the premium paid, the
right to buy a specified security (in the case of a call option) or to sell a
specified security (in the case of a put option) from or to the seller
("writer") of the option at a designated price during the term of the option. A
Series may purchase put options on securities to protect holdings in an
underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
to one another. For example, the purchase of put options on debt securities
held by a Series would enable a Series to protect, at least partially, an
unrealized gain in an appreciated security without actually selling the
security. In addition, the Series would continue to receive interest income on
such security.
A Series may purchase call options on securities to protect against
substantial increases in prices of securities the Series intends to purchase
pending its ability to invest in such securities in an orderly manner. A Series
may sell put or call options it has previously purchased, which could result in
a net gain or loss depending on whether the amount realized on the sale is more
or less than the premium and other transactional costs paid on the put or call
option which is sold.
WRITING COVERED CALL AND SECURED PUT OPTIONS. In order to earn additional
income on its portfolio securities or to protect partially against declines in
the value of such securities, a Series may write covered call options. The
exercise price of a call option may be below, equal to, or above the current
market value of the underlying security at the time the option is written.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. Closing purchase transactions will ordinarily be effected to
realize a profit on an outstanding call option, to prevent an underlying
security from being called, to permit the sale of the underlying security, or to
enable the Series to write another call option on the underlying security with
either a different exercise price or expiration date or both.
In order to earn additional income or to facilitate its ability to purchase
a security at a price lower than the current market price of such security, a
Series may write secured put options. During the option period, the writer of a
put option may be assigned an exercise notice by the broker-dealer through whom
the option was sold requiring the writer to purchase the underlying security at
the exercise price.
A Series may write a call or put option only if the option is "covered" or
"secured" by the Series holding a position in the underlying securities. This
means that so long as the Series is obligated as the writer of a call option, it
will own the underlying securities subject to the option or if the Series holds
a call at the same exercise price, for the same exercise period, and on the same
securities as the written call. Alternatively, a Series may maintain, in a
segregated account with the Trust's custodian, cash, cash equivalents, or U.S.
Government securities with a value sufficient to meet its obligation as writer
of the option. A put is secured if the Series maintains cash, cash equivalents,
or U.S. Government securities with a value equal to the exercise price in a
segregated
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account, or holds a put on the same underlying security at an equal or greater
exercise price. Prior to exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series.
OPTIONS ON SECURITIES INDEXES. Call and put options on securities indexes
also may be purchased or sold by the Series for the same purposes as the
purchase or sale of options on securities. The Market Manager Series may only
purchase options on securities indexes. Options on securities indexes are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. In addition, securities index options are designed to reflect
price fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security. When such options are
written, the Series is required to maintain a segregated account consisting of
cash, cash equivalents or high grade obligations or the Series must purchase a
like option of greater value that will expire no earlier than the option sold.
Purchased options may not enable the Series to hedge effectively against stock
market risk if they are not highly correlated with the value of the Series'
portfolio securities. Moreover, the ability to hedge effectively depends upon
the ability to predict movements in the stock market.
GENERAL. If an option written by a Series expires unexercised, the Series
realizes a capital gain equal to the premium received at the time the option was
written. If an option purchased by a Series expires unexercised, the Series
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Series desires.
A Series will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or if it is more, the Series will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Series will realize a capital gain or, if it is
less, the Series will realize a capital loss. The principal factors affecting
the market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security in relation to the
exercise price of the option, the volatility of the underlying security, and the
time remaining until the expiration date.
The premium paid for a put or call option purchased by a Series is recorded
as an asset of the Series and subsequently adjusted. The premium received for
an option written by a Series is included in the Series' assets and an equal
amount is included in its liabilities. The value of an option purchased or
written is marked to market daily and valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Series except the Market Manager Series may purchase securities on a
when-issued or delayed delivery basis if the Series holds, and maintains until
the settlement date in a segregated account, cash, U.S. Government securities,
or high-grade debt obligations in an amount sufficient to meet the purchase
price, or if the Series enters into offsetting contracts for the forward sale of
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other securities it owns. Purchasing securities on a when-issued or delayed
delivery basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Series' other assets. Although a Series
would generally purchase securities on a when-issued basis or enter into forward
commitments with the intention of acquiring securities, the Series may dispose
of a when-issued or delayed delivery security prior to settlement if the
Portfolio Manager deems it appropriate to do so. The Series may realize short-
term profits or losses upon such sales.
FOREIGN CURRENCY TRANSACTIONS
The Multiple Allocation, Fully Managed, Natural Resources, Rising
Dividends, Emerging Markets, Value Equity, Strategic Equity, and Small Cap
Series may enter into forward currency contracts and enter into currency
exchange transactions on a spot (i.e., cash) basis. A forward currency contract
is an obligation to purchase or sell a currency against another currency at a
future date and price as agreed upon by the parties. A Series may either accept
or make delivery of the currency at the maturity of the forward contract or,
prior to maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. A Series will engage in forward currency
transactions in anticipation of or to protect itself against fluctuations in
currency exchange rates. A Series might sell a particular currency forward, for
example, when it wanted to hold bonds or bank obligations denominated in that
currency but anticipated or wished to be protected against a decline in the
currency against the dollar. Similarly, it might purchase a currency forward to
"lock in" the dollar price of securities denominated in that currency which it
anticipated purchasing.
A Series may enter into forward foreign currency contracts in two
circumstances. When a Series enters into a contract for the purchase or sale of
a security denominated in a foreign currency, the Series may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
a fixed amount of dollars for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Series will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and such foreign currency during the period
between the date on which the security is purchased or sold and the date on
which payment is made or received.
Second, when the Series' Portfolio Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars to
sell the amount of foreign currency approximating the value of some or all of
the Series' portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Series will enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Series to deliver an amount of
foreign currency in excess of the value of the Series' portfolio securities or
other assets denominated in that currency.
At the maturity of a forward contract, a Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual
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obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, if a decision is made
to sell the security and make delivery of the foreign currency, it may be
necessary for the Series to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Series is
obligated to deliver.
If the Series retains the portfolio security and engages in an offsetting
transaction, the Series will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between the Series' entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Series will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Series will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
Forward contracts are not traded on regulated commodities exchanges. There
can be no assurance that a liquid market will exist when a Series seeks to close
out a forward currency position, and in such an event, a Series might not be
able to effect a closing purchase transaction at any particular time. In
addition, a Series entering into a forward foreign currency contract incurs the
risk of default by the counter party to the transaction. The CFTC has indicated
that it may in the future assert jurisdiction over certain types of forward
contracts in foreign currencies and attempt to prohibit certain entities from
engaging in such foreign currency forward transactions.
For more information on forward currency contracts, including limits upon
the Series with respect to such contracts, see "Foreign Currency Transactions"
in The GCG Trust Prospectus.
OPTIONS ON FOREIGN CURRENCIES
The Multiple Allocation, Natural Resources, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may engage in transactions in options on
foreign currencies. A call option on a foreign currency gives the buyer the
right to buy, and a put option the right to sell, a certain amount of foreign
currency at a specified price during a fixed period of time. Currently, options
are traded on the following foreign currencies on a domestic exchange: British
Pound, Canadian Dollar, German Mark, Japanese Yen, French Franc, and Swiss
Franc. A Series may enter into closing sale transactions with respect to such
options, exercise them, or permit them to expire.
A Series may employ hedging strategies with options on currencies before
the Series purchases a foreign security denominated in the hedged currency that
the Series anticipates acquiring, during the period the Series holds the foreign
security, or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received.
In those situations where foreign currency options may not be readily
purchased (or where such options may be deemed illiquid) in the currency in
which the hedge is desired, the hedge may
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be obtained by purchasing or selling an option on a "surrogate" currency, i.e.,
a currency where there is tangible evidence of a direct correlation in the
trading value of the two currencies. A surrogate currency is a currency that
can act, for hedging purposes, as a substitute for a particular currency because
the surrogate currency's exchange rate movements parallel that of the primary
currency. Surrogate currencies are used to hedge an illiquid currency risk,
when no liquid hedge instruments exist in world currency markets for the primary
currency.
INVESTMENT RESTRICTIONS
Each Series' investment objective as set forth under "Investment Objectives
and Policies" in the Prospectus, together with the investment restrictions set
forth below, are, unless otherwise noted, fundamental policies of each Series
and may not be changed with respect to any Series without the approval of a
majority of the outstanding voting shares of that Series. The vote of a
majority of the outstanding voting securities of a Series means the vote, at an
annual or special meeting, of the lesser of (a) 67% or more of the voting
securities present at such meeting, if the holders of more than 50% of the
outstanding voting securities of such Series are present or represented by
proxy; or (b) more than 50% of the outstanding voting securities of such Series.
Under these restrictions, a Series may not:
(1) Invest in a security if, with respect to 75% of its total assets, more
than 5% of the total assets (taken at market value at the time of such
investment) would be invested in the securities of any one issuer, except
that this restriction does not apply to securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities, and except that
this restriction shall not apply to the Market Manager Series;
(2) Invest in a security if, with respect to 75% of its assets, it would
hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any one issuer, except securities issued
or guaranteed by the U.S. Government, or its agencies or instrumentalities;
(3) Invest in a security if more than 25% of its total assets (taken at
market value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except that this
restriction does not apply: (a) to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase
agreements with respect thereto), (b) with respect to the Liquid Asset
Series, to securities or obligations issued by U.S. banks, (c) with respect
to the Market Manager Series, to options on stock indexes issued by
eligible broker-dealers or banks, as described in the Market Manager
Series' Prospectus; and (d) to the Real Estate Series, which will normally
invest more than 25% of its total assets in securities of issuers in the
real estate industry and related industries, or to the Natural Resources
Series, which will normally invest more than 25% of its total assets in the
group of industries engaged in natural resources activities, provided that
such concentration for these two Series is permitted under tax law
requirements for regulated investment companies that are investment
vehicles for variable contracts;
(4) Purchase or sell real estate, except that a Series may invest in
securities secured by real estate or real estate interests or issued by
companies in the real estate industry or which invest in real estate or
real estate interests;
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(5) Purchase securities on margin (except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities),
except a Series engaged in transactions in options, futures, and options on
futures may make margin deposits in connection with those transactions,
except that effecting short sales will be deemed not to constitute a margin
purchase for purposes of this restriction, and except that the Natural
Resources Series may, consistent with its investment objective and subject
to the restrictions described in the Prospectus and in the Statement of
Additional Information, purchase securities on margin;
(6) Lend any funds or other assets, except that a Series may, consistent
with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of such
obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance with applicable
guidelines established by the Securities and Exchange Commission and
any guidelines established by the Board of Trustees;
(7) Issue senior securities, except insofar as a Series may be deemed to
have issued a senior security by reason of borrowing money in according
with that Series' borrowing policies, and except, for purposes of this
investment restriction, collateral or escrow arrangements with respect to
the making of short sales, purchase or sale of futures contracts or related
options, purchase or sale of forward currency contracts, writing of stock
options, and collateral arrangements with respect to margin or other
deposits respecting futures contracts, related options, and forward
currency contracts are not deemed to be an issuance of a senior security;
(8) Act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, a Series may be
deemed to be an underwriter under the federal securities laws;
(9) With respect to the Multiple Allocation, Fully Managed, Limited
Maturity Bond, Natural Resources, Real Estate, All-Growth, Capital
Appreciation, and Liquid Asset Series, make short sales of securities,
except short sales against the box, and except that this restriction shall
not apply to the Multiple Allocation, Natural Resources, All-Growth, or
Capital Appreciation Series, which may engage in short sales within the
limitations described in the Prospectus and in the Statement of Additional
Information;
(10) Borrow money or pledge, mortgage, or hypothecate its assets, except
that a Series may:
(a) borrow from banks, but only if immediately after each borrowing and
continuing thereafter there is asset coverage of 300%; and (b) enter into
reverse repurchase agreements and transactions in options, futures, options
on futures, and forward currency contracts as described in the Prospectus
and in the Statement of Additional Information. (The deposit of assets in
escrow in connection with the writing of covered put and call options and
the purchase of securities on a "when-issued" or delayed delivery basis and
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collateral arrangements with respect to initial or variation margin and
other deposits for futures contracts, options on futures contracts, and
forward currency contracts will not be deemed to be pledges of a Series'
assets);
(11) With respect to the Multiple Allocation, Fully Managed, Limited
Maturity Bond, Natural Resources, Real Estate, All-Growth, Capital
Appreciation, and Liquid Asset Series, invest in securities that are
illiquid because they are subject to legal or contractual restrictions on
resale, in repurchase agreements maturing in more than seven days, or other
securities which in the determination of the Portfolio Manager are illiquid
if, as a result of such investment, more than 10% of the total assets of
the Series (taken at market value at the time of such investment) would be
invested in such securities;
(12) Purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts), except:
(a) any Series may engage in interest rate futures contracts, stock
index futures contracts, futures contracts based on other financial
instruments, and on options on such futures contracts;
(b) the Natural Resources Series may invest in gold bullion and coins
and other precious metals bullion and engage in futures contracts with
respect to such commodities; and
(c) the Multiple Allocation, Natural Resources and Strategic Equity
Series may engage in futures contracts on gold; and
(13) Invest in puts, calls, straddles, spreads, or any combination thereof,
provided that this restriction does not apply to puts that are a feature of
variable or floating rate securities or to puts that are a feature of other
corporate debt securities, and except that any Series may engage in
transactions in options, futures contracts, and options on futures.
The Rising Dividends Series, Emerging Markets Series, Value Equity Series,
Strategic Equity Series, Small Cap Series, and Market Manager Series are also
subject to the following restrictions and policies that are not fundamental and
may, therefore, be changed by the Board of Trustees (without shareholder
approval). Unless otherwise indicated, the Rising Dividends Series, Emerging
Markets Series, Value Equity Series, Strategic Equity Series, Small Cap Series,
and Market Manager Series may not:
(1) Make short sales of securities, except short sales against the box
(this restriction shall not apply to the Strategic Equity and Small Cap
Series, which may make short sales within the limitations described in the
Prospectus and elsewhere in this Statement of Additional Information); and
(2) Invest in securities that are illiquid because they are subject to
legal or contractual restrictions on resale, in repurchase agreements
maturing in more than seven days, or other securities which in the
determination of the Portfolio Manager are illiquid if, as a result of such
investment, more than 15% of the net assets of the Series (taken at market
value at the time of such investment) would be invested in such securities.
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MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of
the Board of Trustees according to the applicable laws of the Commonwealth of
Massachusetts and the Trust's Agreement and Declaration of Trust. The Trustees
are Terry L. Kendall, Robert A. Grayson, John L. Murphy, M. Norvel Young, and
Roger B. Vincent. The Executive Officers of the Trust are Terry L. Kendall,
Barnett Chernow, Myles R. Tashman, and Mary Bea Wilkinson.
The Trustees and Executive Officers of the Trust, their business addresses,
and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST BUSINESS AFFILIATIONS AND PRINCIPAL OCCUPATIONS
<S> <C> <C>
Terry L. Kendall Chairman of the Board Managing Director, Bankers Trust Company;
*Golden American Life and President President, Director, and Chief Executive Officer,
Insurance Co. Golden American Life Insurance Company;
1001 Jefferson Street President, Director, and Chief Executive Officer,
Wilmington, DE 19801 BT Variable, Inc.; Chairman of the Board and
President of Separate Account of Golden
American Life Insurance Company ("Separate
Account D"); formerly, President and Chief
Executive Officer, United Pacific Life
Insurance Company (1983-1993).
Barnett Chernow Vice President Executive Vice President, BT Variable, Inc.;
Golden American Life Executive Vice President, Golden American Life
Insurance Co. Insurance Company; Executive Vice President,
1001 Jefferson Street Directed Services, Inc.; Senior Vice President
Wilmington, DE 19801 and Chief Financial Officer, Reliance Insurance
Company, August 1977 to July 1993.
John L. Murphy* Trustee Former Managing Director, Bankers Trust
32 Talmadgeville Road Company and group head of Bankers Trust
Darien, CT 06820 Global Investors; Member of the Board of
Governors of Separate Account D. Mr. Murphy
joined Bankers Trust Company in 1969 and served
as a Managing Director (1986-1996).
Robert A. Grayson Trustee Co-founder, Grayson Associates, Inc.; Adjunct
Grayson Associates Professor of Marketing, New York University
108 Loma Media Road School of Business Administration; Member of
Santa Barbara, CA the Board of Governors of Separate Account D;
93103 former Director, The Golden Financial Group,
Inc.; former Senior Vice President, David &
Charles Advertising.
26
<PAGE>
Myles R. Tashman Secretary Executive Vice President and Secretary, Golden
Golden American Life American Life Insurance Company; Executive
Insurance Co. Vice President, BT Variable, Inc.; Executive
1001 Jefferson Street Vice President and Secretary, Directed
Wilmington, DE 19801 Services, Inc; Secretary of GCG Trust;
formerly, Senior Vice President and General
Counsel, United Pacific Life Insurance Company
(1986-1993).
M. Norvel Young Trustee Chancellor Emeritus and Board of Regents,
Pepperdine University Pepperdine University; Director of Imperial
Malibu, CA 90263 Bancorp, Imperial Bank, Imperial Trust Co. and
20th Century Christian Publishing Company;
Member of the Board of Governors of Separate
Account D; formerly: Chancellor, Pepperdine
University, 1971 to 1984; President, Pepperdine
University, 1957 to 1971; Director, National
Conference of Christians and Jews, 1978 to
1982.
</TABLE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST BUSINESS AFFILIATIONS AND PRINCIPAL OCCUPATIONS
<S> <C> <C>
Mary Bea Wilkinson Treasurer Senior Vice President and Treasurer, Golden
Golden American Life American Life Insurance Company; Senior Vice
Insurance Co. President and Treasurer, BT Variable, Inc.;
1001 Jefferson Street President and Treasurer, Directed Services,
Wilmington, DE 19801 Inc.; Assistant Vice President, CIGNA
Insurance Companies, August 1993 to
October 1993; various positions with United
Pacific Life Insurance Company, January 1987
to July 1993, and was Vice President and
Controller upon leaving.
Roger B. Vincent Trustee President, Springwell Corporation; Director,
230 Park Avenue Petralone, Inc.; Member of the Board of
New York, NY 10169 Governors of Separate Account D; formerly,
Managing Director, Bankers Trust Company.
</TABLE>
- - --------------------------
*Messrs. Kendall and Murphy are "interested persons" of the Trust (as that
term is defined in the Investment Company Act of 1940) because of their
affiliations with the Manager and its affiliated companies as shown above.
As of April 15, 1996, none of the Trustees directly owns shares of the
Series. In addition, as of April 15, 1996, the Trustees and Officers as a group
owned Variable Contracts that entitled them to give voting instructions with
respect to less than one percent of the outstanding shares of each Series in the
aggregate.
27
<PAGE>
As indicated above, the Trustees and officers hold positions with Separate
Account D of Golden American Life Insurance Company ("Separate Account D"),
another fund for which the Manager serves as investment adviser. Through
December 31, 1995, Trustees other than those affiliated with the Manager or a
Portfolio Manager ("Non-Affiliated Trustees") received a fee for each Board of
Trustees meeting attended based on the level of the Trust's assets at the time
of the meeting as follows: $2,000 per meeting for aggregate assets up to $500
million; $3,000 per meeting for aggregate assets in excess of $500 million and
up to $1 billion; $4,000 per meeting for aggregate assets in excess of $1
billion and up to $2 billion; and $5,000 per meeting for aggregate assets in
excess of $2 billion. Effective January 1, 1996, Non-Affiliated Trustees
receive a flat fee of $6,000 for each Board of Trustees meeting attended.
Trustees have been and will continue to be reimbursed for any expenses incurred
in attending such meetings or otherwise in carrying out their responsibilities
as Trustees of the Trust. During the fiscal year ended December 31, 1995, fees
totaling $54,000 were paid by the Trust or accrued to Messrs. Grayson ($18,000),
Young ($18,000), and Vincent ($18,000). During the fiscal year ended December
31, 1995, Messrs. Grayson, Young, and Vincent earned total fees of $20,500,
$20,500, and $20,500, respectfully, from the Trust and Separate Account D. No
officer or Trustee received any other compensation directly from the Trust.
The table below lists each Variable Contract Owner who owns a Variable
Contract that entitles the owner to give voting instructions with respect
to 5% or more of the shares of the Series as of April 15, 1996. The
address for each record owner is c/o Golden American Life Insurance Company,
1001 Jefferson Avenue, Wilmington, DE 19801.
NAME SERIES PERCENTAGE
Darald Libby Charitable Market Manager 6.85%
Remainder Unit Trust
George Berman Charitable Market Manager 6.10%
Remainder Trust
David and Anita Swann Market Manager 10.98%
Charitable Remainder Trust
In addition, as of April 15, 1996 the General Account of Golden American
owned 160.02% of the shares of the Market Manager Series.
THE MANAGEMENT AGREEMENT
Directed Services, Inc. ("DSI" or the "Manager") serves as Manager to the
Series pursuant to a Management Agreement (the "Management Agreement") between
the Manager and the Trust. DSI's address is 1001 Jefferson Street, Suite 400,
Wilmington, Delaware 19801. DSI is a New York corporation that is a wholly
owned subsidiary of BT Variable, Inc. which, in turn, is an indirect subsidiary
of Bankers Trust Company. DSI is registered with the Securities and Exchange
Commission as an investment adviser and a broker-dealer. The Trust currently
offers the shares of its operating Series to, among others, separate accounts of
Golden American Life Insurance Company ("Golden American") to serve as the
investment medium for Variable Contracts issued by Golden American. DSI is the
principal underwriter and distributor of the Variable Contracts issued by Golden
American. Golden American is a stock life insurance company organized under
28
<PAGE>
the laws of the State of Delaware. Prior to December 30, 1993, Golden American
was a Minnesota corporation. Golden American is an indirect wholly owned
subsidiary of Bankers Trust Company.
Pursuant to the Management Agreement, the Manager, subject to the direction
of the Board of Trustees, is responsible for providing all supervisory,
management, and administrative services reasonably necessary for the operation
of the Trust and its Series other than the investment advisory services
performed by the Portfolio Managers. These services include, but are not
limited to, (i) coordinating all matters relating to the operation of the
Series, including any necessary coordination among the Series' Portfolio
Managers, Custodian, Dividend Disbursing Agent, Portfolio Accounting Agent
(including pricing and valuation of the Series' portfolios), accountants,
attorneys, and other parties performing services or operational functions for
the Trust; (ii) providing the Trust and the Series, at the Manager's expense,
with the services of a sufficient number of persons competent to perform such
administrative and clerical functions as are necessary to ensure compliance with
federal securities laws and to provide effective supervision and administration
of the Trust; (iii) maintaining or supervising the maintenance by third parties
selected by the Manager of such books and records of the Trust and the Series as
may be required by applicable federal or state law; (iv) preparing or
supervising the preparation by third parties selected by the Manager of all
federal, state, and local tax returns and reports of the Trust relating to the
Series required by applicable law; (v) preparing and filing and arranging for
the distribution of proxy materials and periodic reports to shareholders of the
Series as required by applicable law in connection with the Series; (vi)
preparing and arranging for the filing of such registration statements and other
documents with the Securities and Exchange Commission and other federal and
state regulatory authorities as may be required by applicable law in connection
with the Series; (vii) taking such other action with respect to the Trust, as
may be required by applicable law, including without limitation the rules and
regulations of the SEC and other regulatory agencies; and (viii) providing the
Trust at the Manager's expense, with adequate personnel, office space,
communications facilities, and other facilities necessary for operation of the
Series contemplated in the Management Agreement. Other responsibilities of the
Manager are described in the Prospectus.
The Manager shall make its officers and employees available to the Board of
Trustees and Officers of the Trust for consultation and discussions regarding
the supervision and administration of the Series.
Pursuant to the Management Agreement, the Manager is authorized to exercise
full investment discretion and make all determinations with respect to the
investment of a Series' assets and the purchase and sale of portfolio securities
for one or more Series in the event that at any time no Portfolio Manager is
engaged to manage the assets of such Series.
The Management Agreement shall continue in effect until October 1, 1996,
and from year to year thereafter, provided such continuance after October 1,
1996 is approved annually by (i) the holders of a majority of the outstanding
voting securities of the Trust or by the Board of Trustees, and (ii) a majority
of the Trustees who are not parties to such Management Agreement or "interested
persons" (as defined in the Investment Company Act of 1940 (the "1940 Act")) of
any such party. The Management Agreement, dated October 1, 1993, was approved
by shareholders at a meeting held on August 31, 1993, and was last continued by
the Board of Trustees, including the Trustees who are not parties to the
Management Agreement or interested persons of such parties, at a meeting held on
September 21, 1995. The Management Agreement may be terminated without penalty
by vote of the Trustees or the shareholders of the Series or by the Manager, on
60 days'
29
<PAGE>
written notice by either party to the Management Agreement, and will terminate
automatically if assigned as that term is described in the 1940 Act.
Prior to October 1, 1993, DSI served as manager to the then operational
Series pursuant to a management agreement that was effective as of September 30,
1992. The Manager's fees for supervisory and management services under the
prior management agreement were 0.20% of the average daily net assets of each of
the Series, computed and accrued daily and paid monthly. Under the prior
management agreement, the Manager was not responsible, as it is under the
current Management Agreement, for providing or procuring services necessary for
the ordinary operation of the Series, including portfolio management, custodial,
administrative, transfer agency, portfolio accounting, dividend disbursing,
auditing and ordinary legal expenses.
Gross fees paid to the Manager under the current Management Agreement
(pursuant to which the Manager provides all services reasonably necessary for
the operation of the Trust) for the fiscal year ended December 31, 1995 were as
follows: Multiple Allocation Series -- $3,056,095; Strategic Equity Series
(commencement of operation October 2, 1995) -- $11,085; Fully Managed Series --
$1,102,160; Limited Maturity Bond Series -- $516,872; Natural Resources Series -
- - - $291,869; Real Estate Series -- $347,823; All-Growth Series -- $832,889;
Capital Appreciation Series -- $1,055,352; Rising Dividends Series -- $641,200;
Emerging Markets Series -- $817,859; Liquid Asset Series -- $254,546; and Value
Equity Series -- $108,140. The management fee payable to the Manager for the
Market Manager Series for the fiscal period ending December 31, 1995 was waived
in part ($6,748) and paid in part ($51,724) by the Manager. Gross fees paid to
the Manager under the current Management Agreement (pursuant to which the
Manager provides all services reasonably necessary for the operation of the
Trust) for the fiscal year ended December 31, 1994 were as follows: Multiple
Allocation Series -- $3,008,912; Fully Managed Series -- $1,093,894;
Limited Maturity Bond Series -- $447,478; Natural Resources Series --
$292,787; Real Estate Series -- $354,228; All-Growth Series -- $624,518;
Capital Appreciation Series -- $912,861; Rising Dividends Series --
$367,866; Emerging Markets Series -- $892,888; and Liquid Asset Series --
$226,289. The management fee payable to the Manager for the Market Manager
Series for the fiscal period November 14, 1994 to December 31, 1994 was
waived by the Manager. Gross fees paid to the Manager for the period October
1, 1993 to December 31, 1993 were as follows: Multiple Allocation Series --
$641,069, Fully Managed Series -- $257,788, Limited Maturity Bond Series --
$102,389, Natural Resources Series -- $43,426, Real Estate Series -- $72,064,
All-Growth Series -- $133,480, Capital Appreciation Series -- $204,545, Rising
Dividends Series -- $13,784, Emerging Markets Series -- $35,514, and Liquid
Asset Series -- $26,882. Gross fees paid to the Manager for the period January
1, 1993 to September 30, 1993 under the prior management agreement (pursuant to
which the Manager provided supervisory and management services) were as follows:
Multiple Allocation Series -- $249,845, Fully Managed Series -- $96,568,
Limited Maturity Bond Series -- $49,996, Natural Resources Series -- $11,528,
Real Estate Series -- $20,379, All-Growth Series -- $51,416, Capital
Appreciation Series -- $70,127, and Liquid Asset Series -- $6,695.
Pursuant to an agreement to limit certain expenses of the Series, the
Series received from DSI for the period January 1, 1993 to September 30, 1993
the following amounts: Multiple Allocation Series -- $51,197, Fully Managed
Series -- $27,633, Limited Maturity Bond Series -- $22,467, Natural Resources
Series -- $8,504, Real Estate Series -- $18,209, All-Growth Series -- $2,517,
Capital Appreciation Series -- $19,889, and Liquid Asset Series -- $12,035.
30
<PAGE>
The Trust, DSI and several Portfolio Managers -- Zweig Advisors Inc.;
Bankers Trust Company; Van Eck Associates Corporation; and Chancellor Trust
Company -- entered into Portfolio Management Agreements dated and effective as
of September 30, 1992, as amended by an addendum to each Portfolio Management
Agreement dated and effective as of October 1, 1993 and (with the exception of
Bankers Trust Company) as further amended by an addendum to each Portfolio
Management Agreement dated and effective as of April 30, 1995. The Portfolio
Management Agreements were approved by the shareholders of each of the
respective operational series of the Trust other than the Capital Appreciation
Series at a meeting held on June 29, 1992. The shareholders of the Capital
Appreciation Series approved the Portfolio Management Agreement for that Series
at a meeting held on August 31, 1993. The first addenda to the Portfolio
Management Agreements were approved by shareholders of each operational Series
of the Trust at a meeting held on August 31, 1993. Under the addenda to the
Portfolio Management Agreements, the Manager (and not the Trust) pays each
Portfolio Manager a monthly fee based on an annual percentage of average daily
net assets of the Series managed by that Portfolio Manager. The second addenda
to the Portfolio Management Agreements was approved by the Board of Trustees
at a meeting held on March 29, 1995 and by shareholders at a meeting held on
April 28, 1995. The Portfolio Management Agreement with Zweig Advisors Inc. was
amended by an addendum dated September 29, 1995, for the purpose of adding the
Strategic Equity Series. The addendum to that Portfolio Management Agreement
was approved by the Board of Trustees at a meeting held on September 21, 1995,
and was approved by the sole shareholder of the Series at a meeting held on
September 29, 1995. With the exception of the Portfolio Management Agreements
for the Fully Managed Series and Real Estate Series, each of the Portfolio
Management Agreements was last continued by the Board of Trustees of the Trust,
including the Trustees who are not parties to the Portfolio Management
Agreements or interested persons of such parties, at a meeting held on
September 21, 1995. The Portfolio Management Agreements with Weiss, Peck &
Greer Advisers, Inc. for the Fully Managed Series and Chancellor Trust Company
for the Real Estate Series terminated on December 31, 1994.
The Trust, DSI, and Warburg, Pincus Counsellors, Inc. entered into a
Portfolio Management Agreement dated as of June 9, 1994 on behalf of the All-
Growth Series. The Portfolio Management Agreement with Warburg, Pincus
Counsellors, Inc. was approved by shareholders of that Series at a meeting held
on September 15, 1994 and was last continued by the Board of Trustees at a
meeting held on September 21, 1995
The Trust, DSI, and Kayne, Anderson Investment Management, Inc. entered
into a Portfolio Management Agreement dated as of October 1, 1993, as amended by
an addendum dated April 30, 1995, on behalf of the Rising Dividends Series. The
Portfolio Management Agreement with Kayne, Anderson Investment Management, Inc.
was approved by the sole shareholder of that Series at a meeting held on
September 30, 1993 and was last continued by the Board of Trustees at a meeting
held on September 21, 1995. On January 1, 1995, Kayne, Anderson Investment
Management, L.P. became Portfolio Manager pursuant to a Substitution Agreement.
The addendum to the Portfolio Management Agreement was approved by the Board of
Trustees at a meeting held on March 29, 1995 and by shareholders at a meeting
held on April 28, 1995.
The Trust, DSI, and Bankers Trust Company entered into an Addendum dated
October 1, 1993 to the Portfolio Management Agreement dated September 30, 1992
on behalf of the Emerging Markets Series. The Portfolio Management Agreement
was approved by the sole shareholder of that Series at a meeting held on
September 30, 1993 and was last continued by the Board of Trustees at a meeting
held on September 21, 1995. The Trust, DSI, and Bankers Trust
31
<PAGE>
Company entered into a second Addendum dated October 4, 1994 to the Portfolio
Management Agreement on behalf of the Market Manager Series. The Addendum was
approved by the Board of Trustees at a meeting held on September 27, 1994, and
the Portfolio Management Agreement was approved by the sole shareholder of that
Series at a meeting held on November 7, 1994.
The Trust, DSI, and Eagle Asset Management, Inc. entered into a Portfolio
Management Agreement dated as of January 1, 1995 on behalf of the Value Equity
Series. The Portfolio Management Agreement with Eagle Asset Management, Inc.
was approved by the Board of Trustees at a meeting held on September 27, 1994,
and was approved by the sole shareholder of that Series at a meeting held on
December 30, 1994.
The Trust, DSI, and T. Rowe Price Associates, Inc. entered into a Portfolio
Management Agreement dated as of January 1, 1995 on behalf of the Fully Managed
Series. The Portfolio Management Agreement with T. Rowe Price Associates, Inc.
was approved by the Board of Trustees at a meeting held on December 20, 1994,
and was approved by the shareholders of that Series at a meeting held on
April 28, 1995.
The Trust, DSI, and E.I.I. Realty Securities, Inc. entered into a Portfolio
Management Agreement dated as of January 1, 1995 on behalf of the Real Estate
Series. The Portfolio Management Agreement with E.I.I. Realty Securities, Inc.
was approved by the Board of Trustees at a meeting held on December 20, 1994,
and was approved by the shareholders of that Series at a meeting held on
April 28, 1995.
The Trust, DSI, and Fred Alger Management, Inc. entered into a Portfolio
Management Agreement dated as of January 1, 1996 on behalf of the Small Cap
Series. The Portfolio Management Agreement with Fred Alger Management, Inc. was
approved by the Board of Trustees at a meeting held on December 5, 1995, and was
approved by the sole shareholder of that Series at a meeting held on
December 29, 1995.
As discussed in the section entitled "The Manager" in the Prospectus, prior
to October 1, 1993, the Trust bore the expenses of portfolio management fees.
Pursuant to the addenda to the Portfolio Management Agreements, the Manager (and
not the Trust) pays each Portfolio Manager for its services a monthly fee at
annual rates which are expressed as percentages of the average daily net assets
of each Series. For the fiscal year ended December 31, 1995, the Manager (and
not the Trust) paid the Portfolio Managers the following amounts: Zweig
Advisors Inc. -- $1,623,170 for the Multiple Allocation Series and $5,543
for the Strategic Equity Series (operation commencement from October 2, 1995);
T. Rowe Price Associates, Inc. -- $552,676 for the Fully Managed Series; Bankers
Trust Company -- $222,697 for the Limited Maturity Bond Series, $410,190 for
the Emerging Markets Series, $76,360 for the Liquid Asset Series and
$22,410 for the Market Manager Series; Van Eck Associates Corp. -- $150,474
for the Natural Resources Series; Chancellor Trust Company -- $559,368 for
the Capital Appreciation Series; Kayne, Anderson Investment Management, L.P. -
- - - $325,429 for the Rising Dividends Series; E.I.I. Realty Securities, L.P. --
$174,495 for the Real Estate Series; Eagle Asset Management, Inc. -- $54,070
for the Value Equity Series; and Warburg, Pincus Counsellors, Inc. -- $417,408
for the All-Growth Series. For the fiscal year ended December 31, 1994, the
Manager (and not the Trust) paid the Portfolio Managers the following
amounts: Zweig Advisors Inc. -- $1,656,915 for the Multiple Allocation
Series; Weiss, Peck & Greer Advisers, Inc. -- $734,134 for the Fully Managed
Series; Bankers Trust Company -- $198,421 for the Limited Maturity Bond
Series, $445,183 for the Emerging Markets Series, and $81,751 for the
Liquid Asset Series; Van
32
<PAGE>
Eck Associates Corp. -- $158,413 for the Natural Resources Series;
Chancellor Trust Company -- $250,164 for the Real Estate Series and $546,256
for the Capital Appreciation Series; Kayne, Anderson Investment Management,
Inc. -- $195,541 for the Rising Dividends Series. For the fiscal period
from November 14, 1994 (commencement of operations) to December 31, 1994,
the Manager (and not the Trust) paid Bankers Trust Company $0 for the Market
Manager Series. The Manager paid J.M. Hartwell & Company, Inc. $160,575 for
the All-Growth Series for the period of January 1, 1994 through June 30,
1994, and Warburg, Pincus Counsellors, Inc. $165,317 for the All-Growth Series
for the period of July 1, 1994 to December 31, 1994. For the period of
October 1, 1993 through December 31, 1993, the Manager (and not the Trust) paid
the Portfolio Managers the following amounts: Zweig Advisors Inc. -- $384,642
for the Multiple Allocation Series; Weiss, Peck & Greer Advisers, Inc. --
$154,673 for the Fully Managed Series; Bankers Trust Company -- $45,813 for the
Limited Maturity Bond Series; Van Eck Associates Corporation -- $23,884 for the
Natural Resources Series; Chancellor Trust Company -- $43,234 for the Real
Estate Series; J.M. Hartwell & Company, Inc. -- $73,414 for the All-Growth
Series; Chancellor Trust Company -- $122,727 for the Capital Appreciation
Series; and Bankers Trust Company -- $8,822 for the Liquid Asset Series. For
the period of October 4, 1993 (commencement of operations) through December 31,
1993, the Manager (and not the Trust) paid the Portfolio Managers of the Rising
Dividends Series and Emerging Markets Series, pursuant to the Portfolio
Management Agreements, the following amounts: Kayne, Anderson Investment
Management, Inc. -- $7,582 for the Rising Dividends Series and Bankers Trust
Company -- $17,117 for the Emerging Markets Series. Prior to October 1, 1993,
pursuant to the Portfolio Management Agreements or the prior portfolio
management agreements, the Trust (and not the Manager) paid each Portfolio
Manager for its services. Fees paid to the Portfolio Managers for the period of
January 1, 1993 through September 30, 1993 were as follows: Zweig Advisors Inc.
- - -- $749,534 for the Multiple Allocation Series; Weiss, Peck & Greer Advisers,
Inc. -- $289,704 for the Fully Managed Series; Bankers Trust Company -- $108,259
for the Limited Maturity Bond Series; Van Eck Associates Corporation -- $31,701
for the Natural Resources Series; Chancellor Trust Company -- $61,138 for the
Real Estate Series; J.M. Hartwell & Company, Inc. -- $141,676 for the All-Growth
Series; Chancellor Trust Company -- $210,811 for the Capital Appreciation
Series; and Bankers Trust Company -- $26,178 for the Liquid Asset Series.
DISTRIBUTION OF TRUST SHARES
Directed Services, Inc. ("DSI") serves as the Series' Distributor. DSI is
not obligated to sell a specific amount of the Series' shares. DSI bears all
expenses of providing distribution services including the costs of sales
presentations, mailings, advertising, and any other marketing efforts by DSI in
connection with the distribution or sale of the shares.
PURCHASES AND REDEMPTIONS
For information on purchase and redemption of shares, see "Purchase of
Shares" and "Redemption of Shares" in the Prospectuses. The Trust may suspend
the right of redemption of shares of any Series and may postpone payment beyond
seven days for any period: (i) during which the New York Stock Exchange is
closed other than customary weekend and holiday closing or during which trading
on the New York Stock Exchange is restricted; (ii) when the Securities and
Exchange Commission determines that a state of emergency exists which may make
payment or transfer not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any other time when the Trust may, under
applicable laws and regulations, suspend payment on the redemption of its
33
<PAGE>
shares. If the Board of Trustees should determine that it would be detrimental
to the best interests of the remaining shareholders of a Series to make payment
wholly or partly in cash, the Series may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with applicable rules of the Securities and
Exchange Commission. If shares are redeemed in kind, the redeeming shareholder
might incur brokerage costs in converting the assets into cash.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Series are made by the Portfolio Manager of
each Series. Each Portfolio Manager has investment advisory clients other than
the Series. A particular security may be bought or sold by a Portfolio Manager
for certain clients even though it could have been bought or sold for other
clients at the same time. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, allocated between such
clients in a manner deemed fair and reasonable by the Portfolio Manager.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Portfolio Manager, and the results of
such allocations, are subject to periodic review by the Trust's Manager and
Board of Trustees. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.
The Portfolio Manager for a Series may receive research services from many
broker-dealers with which the Portfolio Manager places the Series' portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Portfolio Manager and its affiliates in advising its various clients
(including the Series), although not all of these services are necessarily
useful and of value in managing a Series.
BROKERAGE AND RESEARCH SERVICES
The Portfolio Manager for a Series places all orders for the purchase and
sale of portfolio securities, options, and futures contracts for a Series
through a substantial number of brokers and dealers or futures commission
merchants. In executing transactions, the Portfolio Manager will attempt to
obtain the best execution for a Series taking into account such factors as price
(including the applicable brokerage commission or dollar spread), size of order,
the nature of the market for the security, the timing of the transaction, the
reputation, experience and financial stability of the broker-dealer involved,
the quality of the service, the difficulty of execution and operational
facilities of the firms involved, and the firm's risk in positioning a block of
securities. In transactions on stock exchanges in the United States, payments
of brokerage commissions are negotiated. In effecting purchases and sales of
portfolio securities in transactions on United States stock exchanges for the
account of the Trust, the Portfolio Manager may pay higher commission rates than
the lowest available when the Portfolio Manager believes it is reasonable to do
so in light of the value of the brokerage and research services provided by the
broker effecting the transaction, as described below. In the case of securities
traded on some foreign stock exchanges, brokerage commissions may be fixed and
the Portfolio Manager may be unable to negotiate commission rates for these
transactions. In the case of securities traded on the over-the-counter
34
<PAGE>
markets, there is generally no stated commission, but the price includes an
undisclosed commission or markup.
There is generally no stated commission in the case of fixed-income
securities, which are generally traded in the over-the-counter markets, but the
price paid by the Series usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Series includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Series of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Portfolio Manager for a Series may receive research services from many
broker-dealers with which the Portfolio Manager places the Series' portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Portfolio Manager and its affiliates in advising its various clients
(including the Series), although not all of these services are necessarily
useful and of value in managing a Series. The advisory fee paid by the Series
to the Portfolio Manager is not reduced because the Portfolio Manager and its
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Portfolio Manager may cause a Series to pay a broker-dealer, which provides
"brokerage and research services" (as defined in the Act) to the Portfolio
Manager, a disclosed commission for effecting a securities transaction for the
Series in excess of the commission which another broker-dealer would have
charged for effecting that transaction.
A Portfolio Manager may place orders for the purchase and sale of exchange-
listed portfolio securities with a broker-dealer that is an affiliate of the
Portfolio Manager where, in the judgment of the Portfolio Manager, such firm
will be able to obtain a price and execution at least as favorable as other
qualified brokers.
Pursuant to rules of the Securities and Exchange Commission, a broker-
dealer that is an affiliate of the Manager or a Portfolio Manager or, if it is
also a broker-dealer, the Portfolio Manager may receive and retain compensation
for effecting portfolio transactions for a Series on a national securities
exchange of which the broker-dealer is a member if the transaction is "executed"
on the floor of the exchange by another broker which is not an "associated
person" of the affiliated broker-dealer or Portfolio Manager, and if there is in
effect a written contract between the Portfolio Manager and the Trust expressly
permitting the affiliated broker-dealer or Portfolio Manager to receive and
retain such compensation. The Portfolio Management Agreements provide that each
Portfolio Manager may retain compensation on transactions effected for a Series
in accordance with the terms of these rules. The Fully Managed Series and
Rising Dividends Series currently intend to use a broker-dealer that is an
affiliate of the Portfolio Manager.
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Securities and Exchange Commission rules further require that commissions
paid to such an affiliated broker-dealer or Portfolio Manager by a Series on
exchange transactions not exceed "usual and customary brokerage commissions."
The rules define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Board of Trustees
has adopted procedures for evaluating the reasonableness of commissions paid to
broker-dealers that are affiliated with Portfolio Managers or to Portfolio
Managers that are broker-dealers and will review these procedures periodically.
BT Brokerage Corporation, Watermark Securities, Inc., Zweig Securities Corp., KA
Associates, Inc., Counsellors Securities Inc., Raymond James & Associates, Inc.,
and Fred Alger & Company, Incorporated are registered broker-dealers, and each
is an affiliate of a Portfolio Manager. Certain affiliates of Robert Fleming
Holdings Limited and Jardine Fleming Group Limited are broker-dealers affiliated
with T. Rowe Price Associates, Inc. Any of the above firms may retain
compensation on transactions effected for a Series in accordance with these
rules and procedures.
For the fiscal year ended December 31, 1995, the Multiple Allocation
Series, Strategic Equity Series (operation commencement from October 2, 1995),
Fully Managed Series, Limited Maturity Bond Series, Emerging Markets Series,
Liquid Asset Series, Market Manager Series, Natural Resources Series, Real
Estate Series, Capital Appreciation Series, Rising Dividends Series, Value
Equity Series and All-Growth Series paid brokerage commissions of $519,963,
$10,355, $321,876, $0, $600,724, $0, $1,575, $40,242, $113,534, $235,075,
$82,924, $59,789 and $193,100, respectively. The Multiple Allocation Series
paid brokerage commissions of $86,365 (16.61% of its total brokerage
commissions) to Watermark Securities, Inc. The Market Manager Series paid
brokerage commissions of $1,425 (90.48% of its total brokerage commissions) to
BT Brokerage Corporation. The Value Equity Series paid brokerage commissions of
$240 (0.40% of its total brokerage commissions) to Raymond James & Associates,
Inc. During the fiscal year ended December 31, 1994, the Multiple Allocation
Series, Fully Managed Series, Natural Resources Series, Real Estate Series,
All-Growth Series, Capital Appreciation Series, Rising Dividends Series,
Emerging Markets Series, and Market Manager Series paid brokerage commissions of
$301,480, $157,580, $69,954, $69,376, $260,691, $183,029, $106,828, $589,210,
and $975, respectively. During the fiscal year ended December 31, 1993, the
Multiple Allocation Series, Fully Managed Series, Natural Resources Series, Real
Estate Series, All-Growth Series, and Capital Appreciation Series paid brokerage
commissions of $265,151, $119,201, $42,006, $54,079, $30,669, and $157,757,
respectively. During the fiscal period from October 4, 1993 (commencement of
operations) to December 31, 1993, the Rising Dividends Series and Emerging
Markets Series paid brokerage commissions of $29,028 and $77,618, respectively.
The Fully Managed Series paid brokerage commissions of $68,311 (57.3% of its
total brokerage commissions) to Weiss, Peck & Greer Advisers, Inc. The Multiple
Allocation Series paid brokerage commissions of $49,242 (18.6% of its total
brokerage commissions) to Watermark Securities, Inc. The Rising Dividends
Series paid brokerage commissions of $20,641 (71.1% of its total brokerage
commissions) to KA Associates, Inc.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectuses, the Series' net
asset value per share for the purpose of pricing purchase and redemption orders
is determined at or about 4:00 P.M., New York City time, on each day the New
York Stock Exchange is open for trading, exclusive of federal holidays.
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The Liquid Asset Series' portfolio securities are valued using the
amortized cost method of valuation. This involves valuing a security at cost on
the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Series would receive if it sold the instrument. During such periods the yield
to investors in the Series may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities.
The Securities and Exchange Commission's regulations require the Liquid
Asset Series to adhere to certain conditions. The Trustees, as part of their
responsibility within the overall duty of care owed to the shareholders, are
required to establish procedures reasonably designed, taking into account
current market conditions and the Series' investment objectives, to stabilize
the net asset value per share as computed for the purpose of distribution and
redemption at $1.00 per share. The Trustees' procedures include a requirement
to periodically monitor, as appropriate and at such intervals as are reasonable
in light of current market conditions, the relationship between the amortized
cost value per share and the net asset value per share based upon available
indications of market value. The Trustees will consider what steps should be
taken, if any, in the event of a difference of more than 1/2 of 1% between the
two. The Trustees will take such steps as they consider appropriate (e.g.,
selling securities to shorten the average portfolio maturity) to minimize any
material dilution or other unfair results which might arise from differences
between the two. The Series also is required to maintain a dollar-weighted
average portfolio maturity of 90 days or less, to limit its investments to
instruments having remaining maturities of 13 months or less (except securities
held subject to repurchase agreements having 13 months or less to maturity) and
to invest only in securities determined by the Portfolio Manager under
procedures established by the Board of Trustees to be of high quality with
minimal credit risks.
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PERFORMANCE INFORMATION
The Trust may, from time to time, include the current yield and effective
yield of its Liquid Asset Series, the yield of the remaining Series, and the
total return of all Series in advertisements or sales literature. In the case
of Variable Contracts, performance information for the Series will not be
advertised or included in sales literature unless accompanied by comparable
performance information for a separate account to which the Series offer their
shares.
Current yield for Liquid Asset Series will be based on the change in the
value of a hypothetical investment (exclusive of capital charges) over a
particular seven-day period, less a pro-rata share of Series expenses accrued
over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The base
period return is then annualized by multiplying by 365/7, with the resulting
yield figure carried to at least the nearest hundredth of one percent.
"Effective yield" for the Liquid Asset Series assumes that all dividends
received during an annual period have been reinvested. Calculation of
"effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Yield = [ ( (Base Period Return) + 1 )365/7 ] - 1
Quotations of yield for the remaining Series will be based on all
investment income per share earned during a particular 30-day period (including
dividends and interest and calculated in accordance with a standardized yield
formula adopted by the Securities and Exchange Commission), less expenses
accrued during the period ("net investment income"), and are computed by
dividing net investment income by the maximum offering price per share on the
last day of the period, according to the following formula:
a-b 6
YIELD = 2 [ ( ----- + 1 ) - 1 ]
cd
where,
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
Quotations of average annual total return for a Series will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Series over certain periods that will include periods of one,
five, and ten years (or, if less, up to the life of the Series), calculated
pursuant to the following formula: P (1 + T)n = ERV (where P = a hypothetical
initial payment of $1,000, T = the average annual total return, n = the number
of years, and ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period). Quotations of total return may also be
shown for other periods. All total return figures reflect the deduction of a
proportional share of Series expenses on an annual basis, and assume that all
dividends and distributions are reinvested when paid.
For the period of January 3, 1989 (inception of the Trust) to December
31, 1995 and for the five- and one-year periods ended December 31, 1995,
the average annual total return
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for each Series was as follows: 9.03%, 9.81%, and 18.93% for the Multiple
Allocation Series; 7.57%, 10.52%, and 20.71% for the Fully Managed Series;
7.17%, 6.46%, and 11.72% for the Limited Maturity Bond Series; 6.39%,
9.12%, and 22.42% for the All-Growth Series; 8.29%, 17.29%, and 16.59% for
the Real Estate Series; 7.46%, 9.95%, and 10.69% for the Natural Resources
Series; and 5.19%, 4.13%, and 5.51% for the Liquid Asset Series. For the
period of May 4, 1992 (inception of the Capital Appreciation Series) to
December 31, 1995 and the one-year period ended December 31, 1995, the average
total return for the Capital Appreciation Series was 12.50% and 31.06%. For
the period of October 1, 1993 (inception of the Rising Dividends and
Emerging Markets Series) to December 31, 1995 and for the one-year period
ended December 31, 1995, the average total return for the Rising Dividends
Series was 14.66% and 31.06% and the average annual total return for the
Emerging Markets Series was -2.32% and -10.11%. For the period of November
14, 1994 (inception of the Market Manager Series) to December 31, 1995 and for
the one-year period ended December 31, 1995, the average total return for the
Market Manager Series was 21.52% and 24.33%. For the period of January 1,
1995 (inception of the Value Equity Series) to December 31, 1995, the
average total return for the Value Equity Series was 35.21%. For the period
of October 2, 1995 (inception of the Strategic Equity Series) to December 31,
1995, the average total return for the Strategic Equity Series was 1.33%.
Performance information for a Series may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's 500
Stock Index ("S&P 500"), the Dow Jones Industrial Average ("DJIA"), the Lehman
Brothers Government Bond Index, the Donoghue Money Market Institutional
Averages, the Lehman Brothers Government Corporate Index, the Salomon High Yield
Index, or other indices that measure performance of a pertinent group of
securities, (ii) other groups of mutual funds tracked by Lipper Analytical
Services, Inc., a widely used independent research firm which ranks mutual funds
by overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Series.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
Reports and promotional literature may also contain other information
including (i) the ranking of any Series derived from rankings of mutual funds or
other investment products tracked by Lipper Analytical Services, Inc. or by
other rating services, companies, publications, or other persons who rank mutual
funds or other investment products on overall performance or other criteria, and
(ii) the effect of tax deferred compounding on a Series' investment returns, or
returns in general, which may be illustrated by graphs, charts, or otherwise,
and which may include a comparison, at various points in time, of the return
from an investment in a Series (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis.
In addition, reports and promotional literature may contain information
concerning the Manager, the Portfolio Managers, or affiliates of the Trust, the
Manager, or the Portfolio Managers, including (i) performance rankings of other
mutual funds managed by a Portfolio Manager, or the individuals employed by a
Portfolio Manager who exercise responsibility for the day-to-day management of a
Series, including rankings of mutual funds published by Morningstar, Inc., Value
Line Mutual Fund Survey, or other rating services, companies, publications, or
other persons who rank mutual funds or other investment products on overall
performance or other criteria; (ii) lists of clients, the number of clients, or
assets under management; and (iii)
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information regarding services rendered by the Manager to the Trust, including
information related to the selection and monitoring of the Portfolio Managers.
Reports and promotional literature may also contain a description of the type of
investor for whom it could be suggested that a Series is intended, based upon
each Series' investment objectives.
In the case of Variable Contracts, quotations of yield or total return for
a Series will not take into account charges and deductions against any Separate
Accounts to which the Series shares are sold or charges and deductions against
the life insurance policies or annuity contracts issued by Golden American,
although comparable performance information for the Separate Account will take
such charges into account. Performance information for any Series reflects only
the performance of a hypothetical investment in the Series during the particular
time period on which the calculations are based. Performance information should
be considered in light of the Series' investment objective or objectives and
investment policies, the characteristics and quality of the portfolios, and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
TAXATION
The following discussion summarizes certain U.S. federal tax considerations
incident to an investment in a Series.
Each Series intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify as a regulated investment company, each Series generally must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities, or currencies (to satisfy this requirement, it is
intended that the Series investing in gold and other commodities will be managed
so that the gross income derived from its investments in gold and other
commodities and future contracts on gold and other commodities, when combined
with any other gross income of the Series which is not derived from qualifying
sources, will not exceed 10% of the Series' gross income during any fiscal
year); (ii) derive in each taxable year less than 30% of its gross income from
the sale or other disposition of certain assets held less than three months
(namely (a) stock or securities, (b) options, futures, and forward contracts
(other than those on foreign currencies), and (c) foreign currencies (including
options, futures, and forward contracts on such currencies) not directly related
to a Series' principal business of investing in stocks or securities (or options
and futures with respect to stocks and securities)); (iii) diversify its
holdings so that, at the end of each quarter of the taxable year, (a) at least
50% of the market value of the Series' assets is represented by cash, cash
items, U.S. Government securities, the securities of other regulated investment
companies, and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Series' total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Series controls (as that term is
defined in the relevant provisions of the Code) and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses; and (iv) distribute at least 90% of its investment company taxable
income (which includes, among other items,
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dividends, interest, and net short-term capital gains in excess of any net long-
term capital losses) each taxable year.
A Series qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net short-
term capital losses), if any, that it distributes to shareholders. Each Series
intends to distribute to its shareholders, at least annually, substantially all
of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Series, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to
avoid the tax, a regulated investment company must distribute during each
calendar year, an amount at least equal to the sum of (i) 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (ii) 98% of its capital gains in excess of its capital losses (adjusted
for certain ordinary losses) for the twelve-month period ending on October 31 of
the calendar year, and (iii) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, each Series intends to make its distributions in accordance with the
calendar year distribution requirement. A distribution is treated as paid on
December 31 of the calendar year if it is declared by a Series in October,
November, or December of that year to shareholders of record on a date in such a
month and paid by the Series during January of the following calendar year. Such
distributions are taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. The excise tax provisions described above do not
apply to a regulated investment company, like a Series, all of whose
shareholders at all times during the calendar year are (i) segregated asset
accounts of life insurance companies where the shares are held in connection
with variable contracts or (ii) tax-exempt retirement trusts described in Code
Section 401(a). (For this purpose, any shares of a Series attributable to an
investment in the Series not exceeding $250,000 made in connection with the
organization of the Series shall not be taken into account.) Accordingly, if
this condition regarding the ownership of shares of a Series is met, the excise
tax will be inapplicable to that Series.
Some of the Series may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC if at least one-half of its
assets constitutes investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which a Series held the PFIC stock. A Series itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to a Series' holding period in prior taxable years (an interest factor
will be added to the tax, as if the tax had actually been payable in such prior
taxable years) even though a Series distributes the corresponding income to
shareholders. Excess distributions include any gain from the sale of PFIC stock
as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
A Series may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Series
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another
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election may be available that would involve marking to market a Series' PFIC
stock at the end of each taxable year (and on certain other dates prescribed in
the Code), with the result that unrealized gains are treated as though they were
realized. If this election were made, tax at the Series level under the PFIC
rules would be eliminated, but a Series could, in limited circumstances, incur
nondeductible interest charges. A Series' intention to qualify annually as a
regulated investment company may limit a Series' elections with respect to PFIC
stock.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Series
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
Certain options, futures contracts, and forward contracts in which a Series
may invest are "Section 1256 contracts." Gains or losses on Section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses; however, foreign currency gains or losses arising from certain
Section 1256 contracts may be treated as ordinary income or loss. Also, Section
1256 contracts held by a Series at the end of each taxable year (and at certain
other times as prescribed pursuant to the Code) are "marked to market" with the
result that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Series may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Series. In addition, losses
realized by a Series on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Series of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Series which is taxed as ordinary income when
distributed to shareholders.
A Series may make one or more of the elections available under the Code
which are applicable to straddles. If a Series makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Income received by a Series from sources within a foreign country may be
subject to withholding and other taxes imposed by that country. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
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Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Series of the Trust accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Series actually collects such receivables or pays
such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain futures contracts, forward contracts and options,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of a Series' investment company taxable income to be
distributed to its shareholders as ordinary income.
To comply with regulations under Section 817(h) of the Code, each Series of
the Trust generally will be required to diversify its investments so that on the
last day of each quarter of a calendar year, no more than 55% of the value of
its assets is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three
investments, and no more than 90% is represented by any four investments. For
additional information on the application of the asset diversification
requirements under Code Section 817(h), and the asset diversification
requirements applicable to regulated investment companies, potential investors
in the Market Manager Series should see "Federal Income Tax Status" in the
Market Manager Series' Prospectus.
Generally, securities of a single issuer are treated as one investment and
obligations of each U.S. Government agency and instrumentality (such as the
Government National Mortgage Association) are treated for purposes of Section
817(h) as issued by separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income.
Among the areas in which Treasury has indicated informally that it is concerned
that there may be too much contract owner control is where a mutual fund (or
series) underlying a separate account invests solely in securities issued by
companies in a specific industry.
These future rules and regulations proscribing investment control may
adversely affect the ability of certain Series of the Trust to operate as
described in this Prospectus. There is, however, no certainty as to what
standards, if any, Treasury will ultimately adopt.
In the event that unfavorable rules, regulations or positions are adopted,
there can be no assurance that the Series will be able to operate as currently
described in the Prospectus, or that a Series will not have to change its
investment objective or objectives, investment policies, or investment
restrictions. While a Series' investment objective is fundamental and may be
changed only by a vote of a majority of its outstanding shares, the Trustees
have reserved the right to modify the investment policies of a Series as
necessary to prevent any such prospective rules, regulations and positions from
causing the Variable Contract Owners to be considered the owners of the assets
underlying the Separate Accounts.
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The requirements applicable to a Series' qualification as a regulated
investment company and its compliance with the diversification test under Code
Section 817(h) may limit the extent to which a Series will be able to engage in
transactions in options, futures contracts or forward contracts, investments in
precious metals, and in short sales.
Debt securities purchased by the Series (such as zero coupon bonds) may be
treated for U.S. Federal income tax purposes as having original issue discount.
Original issue discount is treated as interest for Federal income tax purposes
and can generally be defined as the excess of the stated redemption price at
maturity over the issue price. Original issue discount, whether or not cash
payments actually are received by the Series, is treated for Federal income tax
purposes as income earned by the Series, and therefore is subject to the
distribution requirements of the Code. Generally, the amount of original issue
discount included in the income of the Series each year is determined on the
basis of a constant yield to maturity which takes into account the compounding
of accrued interest.
In addition, debt securities may be purchased by the Series at a discount
which exceeds the original issue discount remaining on the securities, if any,
at the time the Series purchased the securities. This additional discount
represents market discount for income tax purposes. Treatment of market
discount varies depending upon the maturity of the debt security. Generally, in
the case of any debt security having a fixed maturity date of more than one year
from the date of issue and having market discount, the gain realized on
disposition will be treated as ordinary income to the extent it does not exceed
the accrued market discount on the security (unless the Series elects for all
its debt securities having a fixed maturity date of more than one year from the
date of issue to include market discount in income in tax years to which it is
attributable). Generally, market discount accrues on a daily basis. For any
debt security having a fixed maturity date of not more than one year from the
date of issue, special rules apply which may require in some circumstances the
ratable inclusion of income attributable to discount at which the bond was
acquired as calculated under the Code. The Series may be required to
capitalize, rather than deduct currently, part or all of any net direct interest
expense on indebtedness incurred or continued to purchase or carry any debt
security having market discount (unless the Series makes the election to include
market discount currently).
DISTRIBUTIONS
Distributions of investment company taxable income (which includes among
other items, interest, dividends, and net realized short-term capital gains in
excess of net realized long-term capital losses) and of net realized capital
gains, whether received in cash or additional shares are includable in the gross
income of the shareholder. Distributions of investment company taxable income
are treated as ordinary income for tax purposes. Net capital gains designated
as capital gains dividends by a Series will, to the extent distributed, be
treated as long-term capital gains regardless of the length of time a
shareholder may have held the shares. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by a Series in October,
November, or December of that year to shareholders of record on a date in such a
month and paid by the Series during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which they
are declared, rather than the calendar year in which they are received.
Distributions received by tax-exempt shareholders will not be subject to federal
income tax to the extent permitted under the applicable tax exemption.
OTHER TAXES
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Distributions may also be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Shareholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in a Series. Depending upon the nature
and extent of a Series' contacts with a state or local jurisdiction, the Series
may be subject to the tax laws of such jurisdiction if it is regarded under
applicable law as doing business in, or as having income derived from, the
jurisdiction.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an Agreement
and Declaration of Trust dated August 3, 1988 and currently consists of twenty-
six Series. The fourteen Series that are discussed in this Statement of
Additional Information and accompanying prospectuses and a Series that is
described in an additional prospectus and statement of additional information
are operational. The capitalization of the Trust consists of an unlimited
number of shares of beneficial interest with a par value of $0.001 each. The
Board of Trustees may establish additional Series (with different investment
objectives and fundamental policies) at any time in the future. Establishment
and offering of additional Series will not alter the rights of the Trust's
shareholders, the Separate Accounts. When issued in accordance with the terms
of the Agreement and Declaration of Trust, shares are fully paid, redeemable,
freely transferable, and non-assessable by the Trust. Shares do not have
preemptive rights or subscription rights. In liquidation of a Series of the
Trust, each shareholder is entitled to receive his or her pro rata share of the
net assets of that Series.
On January 31, 1992, the name of the Trust was changed to The GCG Trust.
Prior to that change, the name of the Trust was The Specialty Managers Trust.
VOTING RIGHTS
Shareholders of the Series are given certain voting rights. Each share of
each Series will be given one vote, unless a different allocation of voting
rights is required under applicable law for a mutual fund that is an investment
medium for variable insurance products.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
Series, or for the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies, or approving a contract for investment
advisory services. The Trust will be required to hold a meeting to elect
Trustees to fill any existing vacancies on the Board if, at any time, fewer than
a majority of the Trustees have been elected by the shareholders of the Trust.
In addition, the Agreement and Declaration of Trust provides that the holders of
not less than two-thirds of the outstanding shares or other voting interests of
the Trust may remove a person serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trust's shares do not have
cumulative voting rights. The Trustees are required to call a meeting for the
purpose of considering the removal of a person serving as Trustee, if requested
in writing to do so by the holders of not less than 10% of the outstanding
shares of the Trust. The Trust is required to assist in shareholders'
communications.
45
<PAGE>
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Series is Bankers Trust Company, 280 Park Avenue, New
York, New York 10017. FirstData Investors Services Group of FirstData
Corporation, One Exchange Place, 4th Floor, Boston, MA 02109, provides
administrative and portfolio accounting services for all Series.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as
independent auditors for the Trust.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005, has
passed upon certain legal matters in connection with the shares offered by the
Trust and acts as outside counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectuses do not
contain all the information included in the Trust's Registration Statement filed
with the Securities and Exchange Commission under the Securities Act of 1933
with respect to the securities offered by the Prospectus. Certain portions of
the Registration Statement have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Registration
Statement, including the exhibits filed therewith, may be examined at the
offices of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements for the Series dated as of December 31,
1995, including notes thereto, are incorporated by reference in this Statement
of Additional Information from the Trust's Annual Report dated as of
December 31, 1995.
46
<PAGE>
APPENDIX 1: DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc.'s ("Moody's") description of its
bond ratings:
Aaa - judged to be the best quality; they carry the smallest degree of
investment risk. Aa - judged to be of high quality by all standards; together
with the Aaa group, they comprise what are generally known as high grade bonds.
A - possess many favorable investment attributes and are to be considered as
"upper medium grade obligations." Baa - considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured; interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Ba - judged to have speculative elements; their future cannot
be considered as well assured. B - generally lack characteristics of the
desirable investment. Caa - are of poor standing; such issues may be in default
or there may be present elements of danger with respect to principal or
interest. Ca - speculative in a high degree; often in default. C - lowest rate
class of bonds; regarded as having extremely poor prospects.
Moody's also applies numerical indicators 1, 2, and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; 2 indicates a mid-range ranking; and 3 indicates a ranking toward the
lower end of the category.
Excerpts from Standard & Poor's Rating Group ("S&P") description of its
bond ratings:
AAA - highest grade obligations; capacity to pay interest and repay
principal is extremely strong. AA - also qualify as high grade obligations; a
very strong capacity to pay interest and repay principal and differs from AAA
issues only in small degree. A - regarded as upper medium grade; they have a
strong capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. BBB - regarded as having an
adequate capacity to pay interest and repay principal; whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity than in higher
rated categories - this group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C- predominately speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligation: BB indicates the lowest degree of speculation and C the highest.
S&P applies indicators "+", no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
A-1
<PAGE>
THE GCG TRUST
CROSS-REFERENCE SHEET
MARKET MANAGER SERIES
PART A -- PROSPECTUS
ITEM HEADING
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Not Applicable
4. General Description of Registrant Investment Objectives and
Policies; Description of
Securities and Investment
Techniques
5. Management of the Fund Management of the Trust
5A. Management's Discussion of Not Applicable
Fund Performance
6. Capital Stock and Other Securities Other Information; Federal
Income Tax Status; Portfolio
Transactions; Dividends and
Distributions
7. Purchase of Securities Purchase of Shares;
Being Offered Exchanges
8. Redemption or Repurchase Redemption of Shares
9. Legal Proceedings Not Applicable
<PAGE>
PROSPECTUS
MARKET MANAGER SERIES
1001 JEFFERSON STREET, SUITE 400
WILMINGTON, DELAWARE 19801
(800) 366-0066
The Market Manager Series is a non-diversified portfolio of an open-end
management investment company, The GCG Trust (the "Trust"). The investment
objective of the Market Manager Series is to seek favorable equity market
performance and at the same time preserve capital (without taking into account
expenses) for investments in the Series held until the Target Maturity Date of
March 6, 2001. The Series will seek this objective by attempting to return on
the Target Maturity Date (1) the principal amount invested in the Series
(without regard to expenses), plus (2) a percentage of the price appreciation
from the Series' Investment Start Date through the Target Maturity Date on
common stocks that are publicly traded in the United States, as represented by
the Standard & Poor's 500 Composite Stock Price Index ("S&P 500") and other
indexes of publicly traded common stocks of large and mid-cap companies. There
can be no assurance that the Series' investment objective will be achieved.
The Manager to the Series is Directed Services, Inc. ("DSI"), which is an
indirect, wholly owned subsidiary of Bankers Trust Company. DSI and the Trust
have retained Bankers Trust Company to provide investment advisory services to
the Series. For more information regarding DSI and Bankers Trust Company, see
"The Manager."
Information about the investment objectives, investment policies, and
restrictions of the Series, along with a detailed description of the type of
securities and other assets in which the Series may invest, are set forth in
this Prospectus.
Shares of the Series are available only to separate accounts (the "Separate
Accounts") of Golden American Life Insurance Company ("Golden American") to
serve as the investment medium for variable annuity contracts (the "Variable
Contracts") issued by Golden American.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Series. A Statement of Additional
Information dated May 1, 1996, containing additional and more detailed
information about the Series has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. The
Statement of Additional Information is available without charge and can be
obtained by writing or calling the Trust at the address and telephone number
printed above.
------------------------
THIS IS A LIMITED OFFERING. THE TRUST WILL ACCEPT INVESTMENTS IN THE SERIES
ONLY UNTIL MARCH 3, 1995.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE
SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
The Series' shares are not insured by the FDIC or any other agency. They are
not deposits or other obligations of any bank and are not bank guaranteed. They
are subject to market fluctuation, reinvestment risk, and possible loss of
principal invested.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL HIGHLIGHTS....................................................................................... 1
THE MANAGER AND THE PORTFOLIO MANAGER...................................................................... 1
INVESTMENT OBJECTIVE AND POLICIES.......................................................................... 1
Risks of the Series...................................................................................... 4
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES........................................................ 5
Over-the-Counter Options................................................................................. 5
Zero Coupon Securities................................................................................... 6
Options on Securities.................................................................................... 8
Futures Contracts........................................................................................ 9
Other Investment Companies............................................................................... 9
MANAGEMENT OF THE TRUST.................................................................................... 10
The Manager.............................................................................................. 10
The Portfolio Manager.................................................................................... 11
Other Expenses........................................................................................... 12
Distributor.............................................................................................. 12
Custodian................................................................................................ 12
PURCHASE OF SHARES......................................................................................... 12
NET ASSET VALUE............................................................................................ 13
REDEMPTION OF SHARES....................................................................................... 13
EXCHANGES.................................................................................................. 13
DIVIDENDS AND DISTRIBUTIONS................................................................................ 14
FEDERAL INCOME TAX STATUS.................................................................................. 14
OTHER INFORMATION.......................................................................................... 16
Capitalization........................................................................................... 16
Voting Rights............................................................................................ 16
LEGAL COUNSEL.............................................................................................. 16
INDEPENDENT AUDITORS....................................................................................... 16
FINANCIAL STATEMENTS....................................................................................... 16
</TABLE>
I
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents financial information with respect to the
Series. Information in the table is included in the Trust's financial
statements for the Series that have been audited by Ernst & Young LLP. The
condensed financial information below does not include deductions at the
Separate Account level or contract specific deductions that may be incurred
under a Variable Contract for which the Trust serves as an underlying
investment vehicle. These charges would reduce the total return to any owner
of a Variable Contract. The following table should be read in conjunction
with the financial statements, which are incorporated by reference in the
Statement of Additional Information from the Trust's Annual Report dated as
of December 31, 1995. The Trust's Annual Report, which contains further
information about the Series' performance, is available to Shareholders upon
request and without charge.
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Per Share Operating Performance
Net Asset Value, beginning of period.............................................................. $10.02 $10.00
------ ------
Net investment income............................................................................. 0.37 0.02
Net gain (loss) on securities -- realized and unrealized.......................................... 2.06 0.02
------ ------
Total from investment operations.................................................................. 2.43 0.04
------ ------
Less distributions:
Dividends from investment income................................................................ (0.37) (0.02)
Distributions from capital gains................................................................ (0.05) 0.00
------ ------
Total Distributions............................................................................... (0.42) (0.02)
------ ------
Net asset value, end of period.................................................................... $12.03 $10.02
------ ------
------ ------
Total Investment Return............................................................................. 24.33% 0.44%*
RATIOS AND SUPPLEMENTAL DATA
Total net assets, end of period (000's omitted)..................................................... $5,952 $2,754
Ratio of expenses to average net assets............................................................. 0.89% 0.00%*
Decrease reflected in above expense ratio die to expense limitations................................ 0.13% 0.13%*
Ratio of net investment income to average net assets................................................ 3.42% 0.65%*
Portfolio turnover rate............................................................................. 5% --
</TABLE>
THE MANAGER AND THE PORTFOLIO MANAGER
The Manager of the Series is Directed Services, Inc. (the "Manager"),
which is an indirect subsidiary of Bankers Trust Company. The Manager and the
Trust have retained Bankers Trust Company (the "Portfolio Manager") to manage
the assets of the Series. The Trust pays the Manager for its services a
quarterly fee at the annual rate of 1.0% of the value of the average daily
net assets of the Series. The Portfolio Manager makes all determinations with
respect to the investment of the Series' assets consistent with the
investment objectives, policies, and restrictions of the Series. The
Portfolio Manager is compensated by the Manager.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Market Manager Series is to seek
favorable equity market performance and at the same time preserve capital
(without taking into account expenses) for investments in the Series held
until the Target Maturity Date of March 6, 2001. The Series will seek this
objective by attempting to return on the Target Maturity Date (1) the
principal amount invested in the Series (without regard to expenses), plus
(2) a percentage of the price appreciation from the Series' Investment Start
Date through the Target Maturity Date on common stocks that are publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite
1
<PAGE>
Stock Price Index ("S&P 500") and other indexes of publicly traded common
stocks of large and mid-cap companies. There can be no assurance that the
Series will achieve its investment objective.
There are two components of the Series' investment objective: seeking
favorable equity market performance and seeking preservation of capital. The
Portfolio Manager will allocate the assets of the Series among the
investments described below to attempt to achieve the investment objective of
the Series.
FAVORABLE EQUITY PERFORMANCE. The Series will seek favorable equity
market performance by purchasing over-the-counter call options on the S&P 500
and other indexes of publicly traded common stocks of large and mid-cap
companies. For these purposes, an index of publicly traded common stock will
be considered an index of large and mid-cap companies if the companies
represented in the index have a median market capitalization of at least $300
million, although some of the companies represented on such an index could
have a market capitalization of less than this amount. The call options into
which the Series will enter will be negotiated on behalf of the Series by the
Portfolio Manager in an attempt to provide the Series with the right to
receive a percentage of the price appreciation on the stocks included in the
indexes for all or a portion of the period from the Investment Start Date
through the Target Maturity Date. The price appreciation on the S&P 500 and
other indexes does not include the value of dividends paid by companies in
the indexes. The Portfolio Manager has advised the Trust that it initially
intends to invest as of the Investment Start Date in call options on the S&P
500 and in call options on up to two other equity indexes, and that these
options would give the Series the right to receive approximately 110%-118% of
the price appreciation of a composite of these indexes from the Investment
Start Date through the Target Maturity Date, based upon the expected
weighting of the Series' relative positions in call options on these indexes.
It is anticipated that the Series will initially invest on or about the
Investment Start Date between 25% and 45% of the Series' assets in call
options on equity indexes. If at the option's maturity or when the Series
seeks to close out the option there is no price appreciation on the S&P 500
or another index with respect to which the Series holds a call option, the
Series will not benefit from the investment and will lose its investment in
the option. The Series will seek to enter into call options that provide an
absolute right for the Series to cause the issuing dealer to repurchase the
call at any time.
PRESERVATION OF CAPITAL. The Series will seek to preserve capital
(without regard to expenses) by investing a portion of its assets in zero
coupon bonds issued by the U.S. Government and its agencies and
instrumentalities and by private issuers which, at the time of investment,
are rated A or better by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"), or, if not rated, are of a comparable
quality as determined by the Portfolio Manager. The Series will usually
invest in zero coupon bonds with a maturity date on or close to the Target
Maturity Date, so the length to maturity of the fixed income securities held
by the Series can be expected to decrease as the Series nears its Target
Maturity Date. The Series may hold any or all of the zero coupon bonds in
which it invests until their maturity date or until or close to the Series'
Target Maturity Date, although, alternatively, the Series may dispose of one
or more of such bonds prior to this time if deemed by the Portfolio Manager
in its sole discretion to be in the Series' best interests or to be necessary
or appropriate under applicable law.
This strategy for pursuit of preservation of capital does not take into
account expenses of the Series so that if the Portfolio Manager is successful
in its strategy, an investor in the Series cannot be assured that the value
of his or her investment as of the Target Maturity Date will equal the value
of the investment as of the Investment Start Date. Similarly, the strategy
for pursuit of preservation of capital does not take into account any
expenses of the Variable Contracts whose proceeds are invested in the Series.
The purchaser of a Variable Contract would pay the expenses
2
<PAGE>
of the Variable Contract, which could further detract from the value of a
Variable Contract Owner's investment as of the Target Maturity Date. For more
information on expenses under the Variable Contract, see the Variable
Contract prospectuses.
OFFERING PERIOD. The Commencement Date is November 14, 1994. The Series
will be offered from the Commencement Date through March 3, 1995. This period
is referred to as the Offering Period. The Investment Start Date is March 6,
1995.
The Series will cease issuing new shares at the end of the Offering
Period (other than shares of the Series issued in connection with
reinvestment of the Series' dividends and distributions). However, it is
anticipated that other series with substantially similar investment
objectives and policies may be offered in the future.
TARGET MATURITY DATE. The Target Maturity Date of the Series is March 6,
2001. On or about this date, the Series will be converted to cash (after
deduction of any unpaid Series expenses). The proceeds will be available for
reinvestment in other investment options available for annuity contracts,
according to the allocation instructions received from Golden American. It is
anticipated that Golden American will ask owners of the annuity contracts
whose proceeds are invested In the Series to choose their desired allocation.
If no instructions are given, liquidation proceeds will be invested
automatically in a series substantially similar to the Series, if any is
being offered at the time, and if not, to the Liquid Asset Series of the
Trust or any successor thereto.
OTHER STRATEGIES. The Series intends to invest in commercial paper and
other money market instruments during the Offering Period until the
Investment Start Date. The Series may purchase only commercial paper and
other money market instruments rated at the time of investment Prime-1 or
Prime-2 by Moody's or A-1 or A-2 by S&P, or, if not rated by Moody's or S&P,
of comparable quality as determined by the Portfolio Manager. The Series also
reserves the right to invest in money market instruments at other times.
It is not initially intended that the Series will invest in
interest-bearing debt securities other than money market instruments as
described above or invest directly in equity securities. However, if at any
time the Portfolio Manager believes that investment in such securities is
appropriate in furtherance of the Series' investment objectives or to be
necessary or appropriate under applicable law, the Series may invest in such
securities. The Series also reserves the right to invest in exchange-traded
options and in futures contracts.
The interest-bearing debt securities in which the Series may invest are
those issued by the U.S. Government and its agencies and instrumentalities,
in repurchase agreements on such securities, and in debt instruments of
private issuers rated, at the time of investment, A or better by Moody's or
S&P, if not rated by such rating agencies, of comparable quality as
determined by the Portfolio Manager. The Series may only invest in U.S.
dollar-denominated debt securities of domestic issuers.
The Series may also seek favorable equity market performance by investing
directly or indirectly in equity securities included in the S&P 500 or other
index of large and mid-cap companies that are publicly traded in the United
States. The Series would purchase the common stock of those companies
included in the S&P 500 or another index that the Portfolio Manager believes,
based on statistical data, will represent the industry diversification of the
entire index. The Series may also invest in investment companies or other
vehicles that invest in equity securities that are included in an index.
These may include, but are not limited to, Standard & Poor's Depositary
Receipts, which are publicly traded interests in a unit investment trust that
invests in substantially all of the common stocks in the S&P 500.
The Series may purchase put and call options on securities and on stock
indexes in furtherance of the Series' investment objectives. The Series may
also purchase and sell futures contracts and stock index futures contracts,
and purchase options on such contracts.
3
<PAGE>
WHO SHOULD INVEST? The Series will be managed to achieve its investment
objective as of the Target Maturity Date. It is not intended for shareholders
seeking short-term profits. It is intended for investors who desire to
maintain their holding in the Series for the duration of the Series through
the Target Maturity Date. Those withdrawing their interests earlier may be
subject to the risk that the assets in which the Series will invest have not
yet reached their full potential return and the risk of redeeming when such
assets are more volatile than if held longer. Accordingly, redeeming earlier
than the Target Maturity Date may involve greater investment risk than
remaining invested through the Target Maturity Date.
RISKS OF THE SERIES
Investing in the Series involves certain risks. There can be no assurance
that the Series will achieve its investment objective. The Series is subject
to financial, market, and credit risks. As with any security, a risk of loss
is inherent in investment in shares of the Series.
The types of securities and investment techniques used by the Series have
attendant risks of varying degrees. For example, with respect to equity
securities in which the Series may invest directly or indirectly, there can
be no assurance of capital appreciation and there is a substantial risk of
decline.
The Series may acquire zero coupon bonds from governmental and private
issuers. As is the case of all fixed-income securities, there exists the risk
that the issuer of a security may not be able to meet its obligations on
interest or principal payments at the time called for by the instrument. In
addition, the value of debt instruments generally rises and falls inversely
with interest rates, and changes in value in response to changing interest
rates may be more pronounced in zero coupon bonds than in interest-bearing
bonds having the same maturity. The Series may acquire debt securities that
are not registered with the Securities and Exchange Commission. Generally,
such securities may only be sold if registered or in transactions that are
exempt from registration. The Series will only acquire unregistered bonds
that have rights under which the Series may require the issuer to repurchase
all or a portion of the bond. Any such repurchase right, as well as payment
of amounts representing principal and interest upon maturity of the bond,
will subject the Series to the risk of the creditworthiness of the issuer of
the bond.
The Series is classified as non-diversified under the Investment Company
Act of 1940, as amended (the "1940 Act"), which means that the Series is not
limited by the 1940 Act in the amount of its assets that it may invest in the
securities of a single issuer. Because the Series may invest in a smaller
number of individual issuers than a diversified investment company, and
investment in the Series may, under certain circumstances, present greater
risk to an investor than an investment in a diversified company. This risk
may include greater exposure to the risk of poor earnings or default of one
issuer than would be the case for a more diversified fund.
Under the terms of the over-the-counter call options that will be
acquired by the Series, the Series must look to the issuing dealer to
repurchase the option and for payment upon exercise. Thus, it is likely that
the Series will be subject to the creditworthiness of the dealers through the
Target maturity Date. The Series may invest up to 20% of its assets in call
options from one dealer, and nonperformance by any such dealer as a result of
insolvency or otherwise may result in material losses to the Series.
Over-the-counter options are included in the group of instruments that have
been characterized in recent media and other reports as derivatives. For a
discussion of the risks associated with over-the-counter options, see
"Description of Securities and Investment Techniques -- Over-the-Counter
Options."
It is anticipated that in excess of 25% of the Series will be invested in
over-the-counter call options. Thus, the Series might be deemed to have
concentrated its investments in issuers in the securities industry. The
concentration of the Series' assets in firms in the securities industry will
cause the Series to have greater exposure to certain risks associated with
the securities industry. Securities firms are subject to risks associated
with underwriting activities and to fluctuations in the value of their
securities and other investments that may, in turn, affect their financial
strength and their ability to comply with regulations governing capital
requirements. Securities
4
<PAGE>
firms may also be affected by a deterioration in the general conditions of
the securities markets, which may adversely affect assets and revenues.
Securities firms may be subject to risks associated with exposure to
derivatives, currencies, and other financial instruments. In addition, the
securities industry is labor intensive, which may result in high operational
expenses, and is subject to regulation, which can be costly. In addition,
securities firms face competition from different types of financial
institutions.
It is intended that the Series will comply with certain asset
diversification requirements applicable to mutual funds that serve as
investment vehicles for Variable Contracts. These requirements may inhibit
the ability of the Series to acquire securities or other assets. Thus, the
ability of the Series to adjust to the changes in the creditworthiness of
issuers to which it is exposed or to make changes in its portfolio may be
limited. Under other circumstances, compliance with the diversification
requirements may cause the Series to make adjustments in its portfolio that
would not otherwise be made. These circumstances may impede the ability of
the Series to attain its investment objectives. The Manager and Portfolio
Manager intend to apply the asset diversification requirements, which are
ambiguous in certain respects, to the Series in a manner consistent with an
Internal Revenue Service ("IRS") ruling that the Series and Golden American
intend to request, or, in the absence of such ruling, in a manner that the
Manager and Portfolio Manager deem appropriate. The Series' satisfaction of
the diversification requirements is an important element underlying the tax
status of the Variable Contracts with premiums allocated to the Series. For
more information, see "Federal Income Tax Status" in this Prospectus.
ABOUT THE S&P 500 INDEX. The S&P 500 is a well-known stock market index
that includes common stocks of companies that represent a significant portion
of the market value of all common stocks publicly traded in the United
States. Stocks in the S&P 500 are weighted according to their market
capitalization (i.e., the number of shares outstanding multiplied by the
stock's current price). The Portfolio Manager believes that the performance
of the S&P 500 is representative of the performance of publicly traded common
stocks in general. The composition of the S&P 500 is determined by Standard &
Poor's Rating Group and is based on such factors as the market capitalization
and trading activity of each stock, and its adequacy as a representation of
stocks in a particular industry group. Standard & Poor's Rating Group may
change the S&P 500 from time to time. "Standard &
Poor's-Registered Trademark-", "S&P-Registered Trademark-", "S&P
500-Registered Trademark-", "Standard & Poor's 500" and "500" are trademarks
of McGraw-Hill, Inc. and have been licensed for use by Bankers Trust Company.
The Series is not sponsored, endorsed, sold or promoted by Standard & Poor's
Rating Group and Standard & Poor's Rating Group makes no representation
regarding the advisability of investing in the Series.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes potential risks associated with
different types of securities and investment techniques used by the Series,
as described in "Investment Objectives and Policies." For more detailed
information on these investment techniques, as well as information on some
types of securities in which the Series may invest, see the Statement of
Additional Information.
OVER-THE-COUNTER OPTIONS
The Series intends to purchase over-the-counter ("OTC") call options on
the S&P 500 Composite Stock Price Index and other stock indexes representing
large and mid-cap companies. These call options are included in the group of
instruments that can be characterized as derivatives. A call option on a
stock index gives the purchaser of the option, in return for the premium
paid, the right to receive, upon exercise of the option, an amount of cash if
the closing level of the securities index upon which the option is based is
greater than the exercise price of the option. This amount of cash is equal
to the difference between the closing price of the index and the exercise
price of the option.
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The terms of any over-the-counter call options that the Series acquires
will be negotiated for the Series. It is intended that the option period will
be through the Target Maturity Date. Engaging in options transactions
involves certain risks. The Series will pay a premium to purchase the option.
If a call option purchased by the Series is not sold or exercised when it has
remaining value, and if the market price of the underlying securities index
remains less than or equal to the exercise price of the call, the Series will
lose its entire investment in the option. Also, the Series will remain
subject to the creditworthiness of the dealer for the option period.
OTC options differ from exchange traded options in several respects. OTC
options are available for a greater variety of securities, and a wider range
of expiration dates and exercise prices, than exchange traded options.
Options with a maturity date of those in which the Series will initially
invest (approximately six years) may be more volatile than shorter-term
exchange-traded options (that generally have a maturity of three, six, or
nine months). OTC options are transacted directly with dealers and not with a
clearing corporation, and there is a risk of non-performance by the dealer as
a result of the insolvency of the dealer or otherwise, in which event the
Series may experience material losses. The Series will engage in OTC stock
index options only with broker-dealers and banks ("Eligible Dealers") that
have been specifically approved by the Manager or the Portfolio Manager
pursuant to procedures adopted by the Board of Trustees of the Trust.
Eligible Dealers must have outstanding securities rated, at the time of
investment, A or better by Moody's or S&P and have shareholders' equity in
excess of $200 million. In addition, the manager or Portfolio Manager must
believe that the firm has capabilities for strong institutional trading depth
in OTC options and that the firm has the financial strength necessary to meet
the obligations under the OTC options. The Portfolio Manager will monitor the
creditworthiness of all Eligible Dealers from whom the Series has purchased
options on an ongoing basis.
Generally, many OTC options are considered illiquid. However, pursuant to
procedures adopted by the Trust's Board of Trustees, the Series will seek to
enter into OTC options that have contractual provisions that are designed to
provide liquidity. Generally, the Series will seek OTC options under the
terms of which the dealer of the option agrees to repurchase at any time the
option from the Series, in whole or in part, at a closing price that is based
upon the market price of the option, or under which the Series could transfer
or assign the OTC option. A closing price based on a market price would be
determined by agreement between the dealer and the Portfolio Manager on
behalf of the Series. In the event that the dealer and the Portfolio Manager
on behalf of the Series are unable to agree on a closing price, the closing
price shall be determined with reference to objective indicia of value, such
as bid quotations received from other Eligible Dealers. The Portfolio Manager
believes that these OTC options will, under their terms and the procedures
adopted by the Board of Trustees, be liquid, subject to the creditworthiness
of the issuing dealer. The Series will not acquire any call option that is
illiquid, if after such acquisition, more than 15% of the Series' assets are
invested in illiquid securities.
For more information on OTC options on stock indexes, see "Options on
Securities and Securities Indexes" in the Statement of Additional
Information.
ZERO COUPON SECURITIES
With respect to its investments in fixed-income securities, the Series
may invest in zero coupon securities issued by the United States and its
agencies and instrumentalities. These securities include the following: U.S.
Treasury notes and bonds and securities issued by U.S. Government agencies
and instrumentalities that have no coupons or have been stripped of their
unmatured interest coupons, individual interest coupons from such securities
that trade separately, evidences of such securities, and U.S. Treasury bills.
The Series may also invest in zero coupon securities issued by domestic
corporations which, at the time of investment, are rated A or better by
Moody's or by S&P, or, if not rated, are of a comparable quality as
determined by the Portfolio Manager.
Zero coupon securities pay no cash income but are sold at substantial
discounts from their value at maturity. Because zero coupon securities have
no coupons, the holder is not entitled to
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periodic payments of interest. When held to maturity, the entire return from
zero coupon securities, which consists of the accretion of discount, comes
from the difference between their purchase price and their maturity value.
This difference is known at the time of the purchase, so investors holding
zero coupon securities until maturity know the amount of their investment
return at the time of their investment. However, the zero coupon securities
represent only one component of the Series' assets, and the investment return
of the Series is not determinable in advance.
REINVESTMENT RISK. A portion of the total realized return from
conventional interest-paying bonds comes from the reinvestment of periodic
interest payments. Since the rate to be earned on these reinvestments may be
higher or lower than the yield to maturity at the time of purchase, the
investment's total return is uncertain even for investors holding the
security to its maturity. This uncertainty is commonly referred to as
"reinvestment risk" and can have a significant effect on total realized
investment return over a long holding period. One of the attractive features
of zero coupon securities is that, as they provide no interim interest
payments, reinvestment risk is absent. The total value of the security at
maturity is known precisely at the time of purchase. By investing primarily
in zero coupon securities, the Series will be managed to attempt to minimize
reinvestment risk. However, the total value of the Series at the Target
Maturity Date cannot be known in advance.
MARKET RISK. Because interest on zero coupon securities is not
distributed on a current basis but is, in effect, compounded, zero coupon
securities tend to be subject to greater market risk -- i.e., fluctuations in
market value due to changes in interest rates -- than interest-paying
securities of similar maturities. The market value of debt securities
generally rises and falls inversely with fluctuations in interest rates.
Therefore, investors can expect more appreciation from the Series during
periods of declining interest rates than from portfolios consisting of
interest-paying securities of similar maturity; conversely, when interest
rates rise, the Series normally will decline more in price than portfolios
consisting of interest-paying securities of similar maturity. Redemptions
made prior to maturity may result in a different investment return, which may
include a loss, than the return anticipated on the date of the original
investment.
INSURANCE ON PRIVATE ZERO COUPON SECURITIES. Financial guarantee
insurance has been obtained by the Manager of the Series from Financial
Security Assurance Inc. ("FSA") with respect to the privately issued zero
coupon securities held by the Series. It is anticipated that the privately
issued zero coupon securities will comprise approximately 10%-15% of the
Series' portfolio.
In general, financial guarantee insurance consists of the issuance of a
guarantee of scheduled payments of an issuer's securities, when due, or the
payment of the accreted value of a bond if the issuer of the bond becomes
insolvent, in consideration for the payment of a premium to the insurer. The
insurance does not guarantee the market value of the zero coupon securities
or the value of shares of the Series. In the event of a sale of certain zero
coupon securities, the insurance terminates as to such securities as of the
date of the sale. The continuation of the insurance policy is contingent upon
the Manager's continuing to pay the premiums.
Except as indicated below, the insurance obtained by the Manager will
have no effect on the net asset value of the shares of the Series. It is the
present intention of the Trust's Board of Trustees to attribute a value for
such insurance for the purpose of computing the net asset value of the
Series' shares only if the bonds covered by such insurance are in default or
if the issuer is insolvent. The value of the insurance likely will be the
difference between the market value of a bond that is covered by insurance
upon default or the issuer's insolvency and the accreted value of that bond.
Determinations of the value, if any, attributed to the insurance will be
subject to the oversight of the Trust's Board of Trustees. For information
regarding the tax considerations relating to the financial guarantee
insurance, see "Taxation" in the Statement of Additional Information.
FSA has advised the Trust that it is a monoline insurance company
incorporated on March 16, 1984 under the laws of the State of New York. FSA
received its New York State
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insurance license and commenced operations on September 25, 1985. FSA is
licensed, directly or indirectly through its subsidiaries, to engage in
financial guarantee insurance business in all fifty states, the District of
Columbia, Puerto Rico and the United Kingdom. FSA and its subsidiaries are in
the business of writing financial guarantee insurance, principally in respect
of securities sold in the primary market and outstanding securities sold in
the secondary market that satisfy FSA's underwriting criteria.
FSA has advised the Trust that it is a wholly owned subsidiary of
Financial Security Assurance Holdings Ltd. ("Holdings"), a New York Stock
Exchange listed company. Holdings is owned approximately 60.5% by U S WEST
Capital Corporation ("U S WEST"), 7.6% by Fund American Enterprises Holdings,
Inc. ("Fund American") and 7.4% by The Tokio Marine and Fire Insurance Co.,
Ltd. ("Tokio Marine"). U S WEST is a subsidiary of U S WEST, Inc. U S WEST
has announced its intention to dispose of its remaining interest in Holdings
as part of its strategic plan to withdraw from businesses not directly
involved in telecommunications. Fund American has certain rights to acquire
additional shares of Holdings from U S WEST and Holdings.
The principal executive offices of FSA are located at 350 Park Avenue,
New York, New York, 10022, and its telephone number at that location is (212)
826-0100. FSA's shareholders' equity as of June 30, 1994 was $530 million.
FSA's claims-paying ability is rated "Aaa" by Moody's and "AAA" by S&P. Such
ratings reflect only the views of the respective ratings agencies, are not
recommendations to buy, sell or hold securities, and are subject to revision
or withdrawal at any time by such rating agencies.
Pursuant to an agreement between FSA and Bankers Trust Company, Bankers
Trust Company will issue to FSA a hedge instrument which will give FSA the
unconditional right to sell to Bankers Trust Company any bonds for which FSA
has received a claim or which FSA has purchased from the Series following the
insolvency of the issuer of the bond. Under this instrument, Bankers Trust
Company will purchase any such bonds for a price equal to the amount paid
under the claim or the amount paid by FSA to purchase the bonds. This hedge
instrument does not alter or limit FSA's obligations under the financial
guarantee insurance policy.
OPTIONS ON SECURITIES
The Series reserves the right to engage in exchange-traded options on
securities and on securities indexes. The Series may purchase put and call
options on securities and on stock indexes in furtherance of the Series'
investment objective. The Series may enter into closing transactions in order
to terminate its position an option prior to the expiration of the option.
For a general description of the purchasing options on securities and
securities indexes, see "Options on Securities and Securities Indexes" in the
Statement of Additional Information.
RISKS OF OPTIONS TRANSACTIONS. Where a put or call option on a
particular security or index of securities is purchased to capture the
appreciation in its underlying security or securities index, the price of the
put or call option may move more or less than the price of the related
security or value of the index.
There can be no assurance that a liquid market will exist when the Series
seeks to close out an option position. Furthermore, if trading restrictions
or suspensions are imposed on the options markets, the Series may be unable
to close out a position. Possible reasons for the absence of a liquid
secondary market on a national securities exchange could include:
insufficient trading interest, restrictions imposed by national securities
exchanges, trading halts or suspensions with respect to call options or their
underlying securities, inadequacy of the facilities of national securities
exchanges or the Options Clearing Corporation due to a high trading volume or
other event, and a decision by one or more national securities exchanges to
discontinue the trading of call options or to impose restrictions on types of
orders.
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Since option premiums paid by the Series, as compared to underlying
investments, are small in relation to the market value of such investments,
buying and selling put and call options offer large amounts of leverage.
Thus, the leverage offered by trading in options could result in the Series'
net asset value being more sensitive to changes in the value of the
underlying securities.
FUTURES CONTRACTS
The Series has reserved the right to engage in futures contracts. The
Series may purchase futures contracts on securities or stock indexes and
purchase options on such contracts. For a general description of these
futures contracts and options thereon, including information on margin
requirements, see the Statement of Additional Information.
The Series may engage in such futures transactions as an adjunct to its
securities activities. The transactions in futures contracts must constitute
bona fide hedging or other strategies under regulations promulgated by the
Commodities Futures Trading Commission (the "CFTC"), under which the Series
engaging in futures transactions would not be a "commodity pool." At the time
the Series purchases a futures contract, an amount of cash, U.S. Government
securities, or high quality debt securities equal to the fair market value
less initial and variation margin of the futures contract will be deposited
in a segregated account with the Trust's custodian to collateralize the
position and thereby ensure that such futures contract is covered.
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several
risks associated with the use of futures and futures options. The value of a
futures contract may decline. There can be no assurance that a liquid market
will exist at a time when the Series seeks to close out a futures contract or
a futures option position. Most futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a
single day; once the daily limit has been reached on a particular contract,
no trades may be made that day at a price beyond that limit. In addition,
certain of these instruments are relatively new and without a significant
trading history. As a result, there is no assurance that an active secondary
market will develop or continue to exist. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses. Lack of a liquid
market for any reason may prevent the Series from liquidating an unfavorable
position and the Series would remain obligated to meet margin requirements
and continue to incur losses until the position is closed.
The Series will only enter into futures contracts or futures options
which are standardized and traded on a U.S. exchange or board of trade, or,
in the case of futures options, for which an established over-the-counter
market exists. The Series will not enter into a futures contact or purchase a
futures option if immediately thereafter the initial margin deposits for
futures contracts held by the Series plus premiums paid by it for open
futures options positions, less the amount by which any such positions are
"in-the-money," would exceed 5% of the Series' total assets.
OTHER INVESTMENT COMPANIES
The Series may invest in shares or other interests issued by other
investment companies. The Series is limited in the degree to which it may
invest in shares of another investment company in that it may not, at the
time of the purchase, (1) acquire more than 3% of the outstanding voting
shares of the investment company, (2) invest more than 5% of the Series'
total assets in the investment company, or (3) invest more than 10% of the
Series' total assets in all investment company holdings. As a shareholder in
any investment company, the Series will bear its ratable share of the
investment company's expenses, including management fees in the case of a
management investment company.
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MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of
the Board of Trustees. The Trustees are Terry L. Kendall, Robert A. Grayson,
John L. Murphy, M. Norvel Young, and Roger B. Vincent. The Executive Officers
of the Trust are Terry L. Kendall, Barnett Chernow, Mary Bea Wilkinson, and
Myles R. Tashman. Additional information about the Trustees and officers of
the Trust may be found in the Statement of Additional Information under the
heading "Management of the Trust."
THE MANAGER
Directed Services, Inc. ("DSI" or the "Manager") serves as the Manager to
the Trust pursuant to a Management Agreement with the Trust. DSI is a New
York corporation that is a wholly owned subsidiary of BT Variable, Inc.
which, in turn, is an indirect subsidiary of Bankers Trust Company. DSI is
registered with the SEC as an investment adviser and a broker-dealer. The
Trust currently offers shares of its operating series to, among other
offerees, separate accounts of Golden American to serve as the investment
medium for Variable Contracts issued by Golden American. DSI is the principal
underwriter and distributor of the Variable Contracts issued by Golden
American. Golden American is a stock life insurance company organized under
the laws of the State of Delaware. Prior to December 30, 1993, Golden
American was a Minnesota corporation. Golden American is an indirect wholly
owned subsidiary of Bankers Trust Company.
Bankers Trust Company is a New York banking corporation with executive
offices at 130 Liberty Street, New York, New York 10006, and is a wholly
owned subsidiary of Bankers Trust New York Corporation. As of December 31,
1995, Bankers Trust New York Corporation was the seventh largest bank holding
company in the U.S. with total assets of approximately $104 billion. Bankers
Trust Company conducts a variety of general banking and trust activities and
is a leading wholesale supplier of financial services to the domestic and
international markets.
United States banking laws and regulations, including the Glass-Steagall
Act as currently interpreted by the Board of Governors of the Federal Reserve
System (the "Board"), prohibit a bank holding company registered under the
Bank Holding Company Act of 1956, or any affiliate thereof, from sponsoring,
organizing, controlling, or distributing the shares of a registered open-end
investment company, such as the Trust, continuously engaged in the issuance
of its shares and, except as otherwise provided by order of the Board,
prohibit banks generally from issuing, underwriting, selling or distributing
securities. The same laws and regulations generally permit a bank or bank
affiliate to act as investment adviser, transfer, dividend disbursing and
shareholder servicing agent and custodian to an investment company and to
purchase such shares as agent for and upon the order of a customer.
DSI performs the activities described above in this Prospectus and below
under the caption "Distributor." On September 30, 1992, a wholly owned
subsidiary of Bankers Trust Company acquired all of the issued and
outstanding stock of Golden American and DSI, and related assets, in a
transaction involving settlement of pre-existing claims of Bankers Trust
Company against the former parent of Golden American and DSI. Under
applicable banking law, stock so acquired is subject to various divestiture
requirements. A divestiture is likely to occur in the future. Also, judicial
or administrative decisions or interpretations, as well as changes in either
U.S. Federal or state banking statutes or regulations, could prevent Bankers
Trust Company from continuing to own stock of DSI or prevent Bankers Trust
Company or DSI from performing certain of the activities contemplated by this
Prospectus. In such event, changes in the operation of the Series might
occur. It is not expected, however, that the Trust would suffer adverse
financial consequences as a result of such occurrence.
Under the Management Agreement, DSI has overall responsibility, subject
to the supervision of the Board of Trustees, for engaging the portfolio
manager and for monitoring and evaluating the management of the assets of the
Series by the Portfolio Manager. The Manager is also responsible for
monitoring and evaluating the Portfolio Manager on a periodic basis, and will
consider its performance record with respect to the investment objectives and
policies of the
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Series. The Manager may, if appropriate, recommend that the Trustees consider
a change in the Portfolio Manager, although the Manager does not expect to
recommend changes in the Portfolio Manager as a matter of operating procedure
for the Series.
As Manager, DSI is responsible, subject to the supervision of the Board
of Trustees, for providing administrative and other services necessary for
the ordinary operation of the series in addition to advisory services. The
Manager provides the overall business management and administrative services
necessary for the Series' operation and provides or procures the services and
information necessary to the proper conduct of the business of the Series.
The Manager is responsible for providing or procuring, at the Manager's
expense, the services reasonably necessary for the ordinary operation of the
Series, including custodial, administrative, transfer agency, portfolio
accounting, dividend disbursing, auditing, and ordinary legal services. The
Manager also acts as liaison among the various services providers to the
Series, including the custodian, portfolio accounting agent, Portfolio
manager, and the insurance company or companies to which the Series offers
its shares. The Manager is also responsible for ensuring that the Series
operates in compliance with applicable legal requirements and for monitoring
the Portfolio manager for compliance with requirements under applicable law
and with the investment policies and restrictions of the Series. DSI does not
bear the expense of brokerage fees and other transactional expenses for
securities or other assets (which are generally considered part of the cost
for the assets), taxes (if any) paid by the Series, interest on borrowing,
fees and expenses of the independent trustees, and extraordinary expenses,
such as litigation or indemnification expenses.
Pursuant to the Management Agreement, the Manager is authorized to
exercise full investment discretion and make all determinations with respect
to the investment of the Series' assets and the purchase and sale of
portfolio securities for the Series in the event that at any time no
Portfolio Manager is engaged to manage the assets of the Series. The
Management Agreement may be terminated without penalty by the vote of the
Board of Trustees or the Shareholders of the Series, or by the Manager, upon
60 days' written notice by the Board or the Manager, and will terminated
automatically if assigned as that term is described in the 1940 Act.
The Trust pays the Manager for its services under the Management
Agreement a quarterly fee equal to an annual rate of 1.0% of the average
daily net assets of the Series. For more information on the Management
Agreement, see the Statement of Additional Information.
The Trust is distinct in that the expense structure of the Series is
simpler and more predictable than most mutual funds. Many of the ordinary
expenses for the Series, including custodial, administrative, transfer
agency, portfolio accounting, auditing, and ordinary legal expenses are paid
by the Manager; whereas, most mutual funds pay for these expenses directly
from their own assets.
THE PORTFOLIO MANAGER
The Trust and the Manager have entered into a Portfolio Management
Agreement with Bankers Trust Company under which Bankers Trust Company serves
as Portfolio Manager to the Series. The individuals in charge of portfolio
management decisions are Jennifer Mitchell and Eric Pai. Jennifer Mitchell is
a Vice President of Bankers Trust Company and is an Investment and Derivative
Product Specialist in the Derivative Investment Strategies Group of Bankers
Trust Company. She has been with Bankers Trust Company since 1986. Prior to
here current position, Ms. Mitchell was head Interest Rate Swap Trader in the
Fixed Income Derivative Products Group. She has also spent three years
marketing Derivative Products in the U.S. Capital Markets Group, and three
years in Mergers and Acquisitions. Eric Pai is a Vice President and is
Manager of the Bankers Trust Market-Linked Deposit-SM- program, a family of
principal-protected assets for individuals, in the Derivative Investment
Strategies Group of Bankers Trust Company. Since joining Bankers Trust
Company in 1987, and prior to his current position, Mr. Pai worked in the
Foreign Exchange and U.S. Capital Markets Departments. Prior to 1987, Mr. Pai
spent two years as a consultant with McKinsey and Company.]
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Under the Agreement, the Portfolio Manager has full investment discretion
and makes all determinations with respect to the investment of the Series'
assets and the purchase and sale of portfolio securities and other
investments. The Portfolio Management Agreement may be terminated without
penalty by the vote of the Board of Trustees or the Shareholders of the
Series, by the Portfolio Manager, or by the Manager, on 60 days' written
notice by any party to the Portfolio Management Agreement, and will
terminated automatically if assigned as that term is described in the 1940
Act.
Pursuant to the Portfolio Management Agreement, the Manager (and not the
Trust) pays Bankers Trust Company a quarterly fee equal to an annual rate of
0.50% based upon the average daily net assets of the Series.
For information about Bankers Trust Company, see "The Manager," above.
Bankers Trust Company managed assets as of December 31, 1995 approximating
$104 billion. As of December 31, 1995, Bankers Trust Company was an
investment advisor to the following registered investment companies:
Short-Intermediate Fixed-Income Portfolio of Accessor Funds, Inc.; Full
Maturity Fixed Income Portfolio of AHA Investment Funds, Inc.; MidCap Index
Fund, Stock Index Fund, and Small Cap Index Fund of American General Series
Portfolio Company (VALIC); Asset Management Portfolio, Asset Management
Portfolio II, and Asset Management Portfolio III; the Bank Fiduciary (Equity)
Fund and the Bank Fiduciary (Fixed Income) Fund of the Bank Fiduciary Funds;
Capital Appreciation Portfolio; Capital Growth Portfolio; Cash Management
Portfolio; Equity 500 Index Portfolio of BT Institutional Funds; Global Bond
Fund; Global High Yield Portfolio; U.S. Dollar Portfolio, British Pound
Sterling Portfolio, and Japanese Yen Portfolio of the Global Settlement Fund,
Inc.; Hercules Latin America Value Fund; Intermediate Tax Free Portfolio;
International Equity Portfolio; Latin American Equity Portfolio; Liquid
Assets Portfolio; Mortgage-Backed Securities Fund; NY Tax Free Money
Portfolio; Pacific Basin Equity Portfolio; Equity Index Series of Pacific
Select Fund; Short/Intermediate Government Securities Portfolio; Short Term
Securities Portfolio; Small Cap Portfolio; Tax Free Money Portfolio; Treasury
Money Portfolio; and Utility Portfolio.
OTHER EXPENSES
The expenses of the ordinary operations of the Series are borne by the
Manager pursuant to the Management Agreement. The Trust bears the expense of
taxes (if any) paid by the Series, the fees and expense of its independent
trustees, any extraordinary expenses, such as any litigation or
indemnification expenses, as well as other expenses as described under "The
Manager." Any such Trust expenses directly attributable to the Series are
charged to the Series; other expenses are allocated among all the series of
the Trust. For the fiscal year ended December 31, 1995, total Series expenses
(net of fee waiver) were 0.89% of the Series' net assets.
DISTRIBUTOR
Directed Services, Inc. acts as distributor ("Distributor") of shares of
the Series, in addition to serving as Manager for the Trust. The
Distributor's address is 1001 Jefferson Street, Suite 400, Wilmington,
Delaware 19801. The Distributor is a registered broker-dealer and a member of
the National Association of Securities Dealers and acts as Distributor
without remuneration from the Trust.
CUSTODIAN
The Custodian for the Series is Bankers Trust Company. DSI provides
portfolio accounting services for the Series.
PURCHASE OF SHARES
Shares of the Series may be offered for purchase by separate accounts of
Golden American to serve as an investment medium for the Variable Contracts
issued by the insurer. Shares of the
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Series will be sold during the Offering Period at the net asset value
(without a sales charge) next computed after receipt of a purchase order by
Golden American. Shares will not be available after the Offering Period
(other than for reinvestment of any dividends and distributions).
NET ASSET VALUE
The Series' net asset value is determined by dividing the value of the
Series' net assets by the number of its shares outstanding. That
determination is made once each business day, Monday through Friday, at or
about 4:00 p.m., New York City time, on each day that the New York Stock
Exchange is open for trading. The Board of Trustees has established
procedures to value the Series' assets to determine net asset value. In
general, these valuations are based on actual or estimated market value, with
special provisions for assets not having readily available market quotations.
The net asset value per share of the Series will fluctuate in response to
changes in market conditions and other factors.
Portfolio securities for which market quotations are readily available
are stated at market value. Market value for securities other than options is
determined on the basis of last reported sales price, or, if no sales are
reported, the mean between representative bid and asked quotations obtained
from a quotation reporting system or from established market makers. Market
value for OTC options that the Series will purchase is determined on the
basis of representative bid quotations obtained from the dealers that have
issued the options and possibly other dealers, as monitored by the Portfolio
Manager under procedures adopted by the Board of Trustees. In other cases,
securities are valued at their fair value as determined in good faith by the
Board of Trustees, although the actual calculations will be made by persons
acting under the direction of the Board and subject to the Board's review.
Under these procedures, debt securities of corporations for which market
quotations are not readily available and that have provisions under which the
issuer will repurchase all or a portion of the debt security will be valued
with reference to the repurchase price provided in the purchase agreement.
REDEMPTION OF SHARES
Shares of the Series may be redeemed on any business day. Redemptions are
effected at the per share net asset value next determined after receipt of
the redemption request by an insurance company whose separate account invests
in the Series. Redemption proceeds normally will be paid within seven days
following receipt of instructions in proper form. The right of redemption may
be suspended by the Trust or the payment date postponed beyond seven days
when the New York Stock Exchange is closed (other than customary weekend and
holiday closings) or for any period during which trading thereon is
restricted because an emergency exists, as determined by the Securities and
Exchange Commission, making disposal of portfolio securities or valuation of
net assets not reasonably practicable, and whenever the Securities and
Exchange Commission has by order permitted such suspension or postponement
for the protection of shareholders.
EXCHANGES
Shares of the Series may be exchanged for shares of any other series of
the Trust, other than The Fund For Life, at any time. Exchanges of shares of
other series of the Trust into the Series will only be permitted during the
Offering Period. Exchanges are treated as a redemption of shares of one
series and a purchase of shares of one or more of the other series and are
effected at the respective net asset values per share of each series on the
date of the exchange. The Trust reserves the right to modify or discontinue
its exchange privilege at any time without notice.
Variable Contract Owners do not deal directly with the Trust with respect
to the purchase, redemption, or exchange of shares of the Series, and should
refer to the prospectus for the applicable Variable Contract for information
on allocation of premiums and on transfers of account value among division of
the pertinent insurance company separate account that invest in the series.
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The Series will be managed to achieve its investment objectives as of the
Target Maturity Date, and is intended for investors who desire to maintain
their holding in the Series for the duration of the Series through the Target
Maturity Date. Variable Contract Owners who withdraw their interests earlier
may be subject to a greater risk that the Series will not achieve its
investment objectives and to the risk that the assets in which the Series
will invest have not yet reached their full potential return.
DIVIDENDS AND DISTRIBUTIONS
Net investment income of the Series will be paid annually. Any net
realized long-term capital gains (the excess of net long-term capital gains
over net short-term capital losses) for the Series will be declared and paid
at least once annually. Net realized short-term capital gains may be declared
and paid more frequently.
Any distributions made by the Series will be automatically reinvested in
additional shares off the Series unless a shareholder elects to receive
distributions in cash. Dividends or distributions by the Series will reduce
the per share net asset value by the per share amount so paid.
FEDERAL INCOME TAX STATUS
The Series intends to qualify each year and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Accordingly, the Series generally expects
not be subject to federal income tax if it meets certain source of income,
diversification of assets, income distribution, and other requirements, to
the extent it distributes its investment company taxable income and its net
capital gains. Distributions of investment company taxable income and net
realized capital gains are automatically reinvested in additional shares of
the Series, unless an election is made by a shareholder to receive
distributions in cash. Tax consequences to the Variable Contract Owners are
described in the prospectuses for the pertinent Separate Accounts.
To comply with regulations under Section 817(h) of the Code, the Series
generally will be required to diversify its investments, so that on the last
day of each quarter of a calendar year, no more than 55% of the value of its
assets is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three
investments, and no more than 80% is represented by any three investments,
and no more than 90% is represented by any four investments. For this
purpose, securities of a single issuer are treated as one investment and each
U.S. Government agency or instrumentality is treated as a separate issuer.
Any security issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. or an agency or instrumentality of the U.S. is treated
as a security issued by the U.S. Government or its agency or instrumentality;
whichever is applicable. These regulations generally will limit the ability
of the Series to invest more that 55% of its assets in direct obligations of
the U.S. Treasury or in obligations which are deemed to be issued by a
particular agency or instrumentality of the U.S. Government. If the Series
fails to meet the diversification requirements under Code Section 817(h),
income with respect to Variable Contracts invested in the Series at any time
during the calendar quarter in which the failure occurred could become
currently taxable to the owners of such Variable Contracts, and income for
prior periods with respect to such Contracts also could be taxable, most
likely in the year of the failure to achieve the required diversification.
Other adverse tax consequences also could ensue. If the Series failed to
qualify as a regulated investment company, the results to Variable Contract
Owners would be substantially the same as a failure to meet the
diversification requirements under Code Section 817(h), and the Series'
income would be subject to taxation.
The manner in which the asset diversification requirements under Code
Section 817(h) and Subchapter M of the Code apply to the Series is not
entirely clear. The Series and the insurance company to which the Series
offers its shares intend to request rulings from the IRS to, among
14
<PAGE>
other things, confirm the intended approach of the Manager and Portfolio
Manager in applying the diversification rules. If such rulings are not
obtained, the Manager and Portfolio Manager intend to apply the asset
diversification rules in a manner in which they believe appropriate, but the
IRS might not necessarily accept such application. If it did not, Variable
Contracts with premiums allocated to the Series might not receive favorable
tax treatment, and the Series might not qualify as a regulated investment
company. Current or future diversification standards prescribed by the IRS
may restrict the Series' acquisitions of certain assets and may require the
Series to sell certain assets when it would not otherwise do so. Thus, the
Series' seeking to comply with the diversification requirements could
interfere with its ability to attain its investment objectives.
In certain circumstances, owners of variable annuity contracts may be
considered the owners for tax purposes, of the assets of the separate account
used to support their contracts. In those circumstances, income and gains
from the separate account assets would be includible in the variable contract
owner's taxable income when earned b y the separate account. The IRS has
stated in published rulings that a variable contract owner will be considered
the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. The Treasury Department also announced,
in connection with the issuance of regulations under Code Section 817(h)
concerning diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of
a segregated asset account may cause the investor (I.E., the policy owner),
rather than the insurance company, to be treated as the owner of the assets
in the account" and that future guidance would be issued. The Treasury staff
has indicated informally that it is concerned that there may be too much
contract owner control where the fund (or series) underlying a separate
account invests solely in securities issued by companies in a specific
industry. Similarly, the ability of a contract owner to select a fund (or
series) representing a specific economic risk may also be proscribed.
To date, the IRS has identified only certain circumstances as involving
prohibited incidents of ownership with respect to assets in a separate
account. The Series is similar to, but is different in certain respects from,
situations described in IRS rulings in which the IRS held that contract
owners did not possess incidents of ownership. These differences could result
in a Variable Contract Owner being treated as the owner of the assets
underlying the variable Contract. In addition, it is not known what standards
will be incorporated in future regulations or other pronouncements, and there
can be no certainty that the future rules, regulations and positions will not
be given retroactive application.
In the event that unfavorable rules, regulations or positions are
adopted, there can be no assurance that the Series will be able to operate as
currently described in the Prospectus, or that the Series will not have to
change its investment objectives, investment policies, or investment
restrictions. While the Series' investment objective is fundamental and may
be changed only by a vote of a majority of its outstanding shares, the
Trustees have reserved the right to modify the investment policies of the
Series as necessary to attempt to prevent any such prospective rules,
regulations or positions from causing the Variable Contract Owners to be
considered the owners of the shares of the Series.
Prospective purchasers of shares of the Series should consult a tax
advisor regarding the tax consequences of purchasing shares and Variable
contracts whose proceeds are invested in the Series' shares. See "Taxation"
in the Trust's Statement of Additional Information for more information on
taxes. Reference is made to the prospectus or offering memorandum of the
applicable Separate Account for information regarding the federal income tax
treatment respecting a Variable Contract.
15
<PAGE>
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on August 3,
1988, and currently consists of fourteen series that are operational, one of
which is described in this Prospectus. Other series may be offered by means
of separate prospectuses. The Board of Trustees may establish additional
series in the future. The capitalization of the Trust consists solely of an
unlimited number of shares of beneficial interest with a par value of $0.001
each. When issued in accordance with the terms of the Trust's Agreement and
Declaration of Trust ("Declaration of Trust"), shares of the Trust are fully
paid, freely transferable, and non-assessable by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed
by the Trust or the Trustees. The Declaration of Trust provides for
indemnification out of Trust property for all loss and expense of any
shareholder held personally liable for the obligations of the Trust. The risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which the Trust itself would be unable to meet
its obligations and thus should be considered remote.
VOTING RIGHTS
Shareholders of the Series are given certain voting rights. Each share of
the Series will be given one vote, unless a different allocation of voting
rights is required under applicable law for a mutual fund that is an
investment medium for variable insurance products.
Massachusetts business trust law does not require the Trust to hold
annual shareholder meetings, although special meetings may be called for the
Series, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies, or approving a contract for
investment advisory services. In the case of Variable Contracts, in
accordance with current laws, it is anticipated that an insurance company
issuing a Variable Contract funded by a Separate Account that invests in the
Series and that is registered with the Securities and Exchange Commission as
a unit investment trust will request voting instructions from Variable
Contract Owners and will vote shares or other voting interests in the
separate account in proportion to the voting instructions received.
LEGAL COUNSEL
Dechert Price & Rhoads, Washington, D.C., has passed upon certain legal
matters in connection with the shares offered by this Prospectus, and also
acts as outside counsel to the Trust.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves
as independent auditors for the Trust.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the Series for the fiscal
year ended December 31, 1995, including notes thereto, are incorporated by
reference in the Statement of Additional Information from the Trust's Annual
Report dated as of December 31, 1995. Information in the financial statements
has been audited by Ernst & Young LLP. Commencement of operations on November
14, 1994.
16
<PAGE>
THE GCG TRUST
CROSS-REFERENCE SHEET
THE FUND FOR LIFE
PART A -- PROSPECTUS
ITEM HEADING
1. Cover Page Cover Page
2. Synopsis Prospectus Synopsis
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives and
Policies; Risks and Other
Considerations
5. Management of the Fund Management of the Trust
5A. Management's Discussion of See Annual Report to
Fund Performance Contract owners
6. Capital Stock and Other Securities Dividends, Distributions and
Taxes; Portfolio Transactions;
Other Information
7. Purchase of Securities Purchase of Shares;
Being Offered Exchanges
8. Redemption or Repurchase Redemption of Shares
9. Legal Proceedings Not Applicable
PART B -- STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Management of the Trust
13. Investment Objectives and Policies Investment Policies;
Investment Restrictions
14. Management of the Registrant Management of the Trust
15. Control Persons and Principal The Management Agreement
Holders of Securities
16. Investment Advisory and Other Management of the Trust
17. Brokerage Allocation Distribution of Trust Shares
18. Capital Stock and Other Securities Voting Rights
19. Purchase, Redemption and Pricing Purchases and Redemptions
20. Tax Status Taxation
21. Underwriters Not Applicable
22. Calculation of Performance Data Performance Information
23. Financial Statements Not Applicable
<PAGE>
THE GCG TRUST
1001 Jefferson Street, Suite 400
Wilmington, Delaware 19801
(302) 576-3400
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information
is May 1, 1996.
This Statement of Additional Information discusses fourteen portfolios (the
"Series") of The GCG Trust (the "Trust"), which is an open-end management
investment company. The Series described herein are as follows: the Multiple
Allocation Series; the Fully Managed Series; the Limited Maturity Bond Series;
the Natural Resources Series; the Real Estate Series; the All-Growth Series; the
Capital Appreciation Series; the Rising Dividends Series; the Emerging Markets
Series; the Value Equity Series; the Strategic Equity Series; the Small Cap
Series; the Liquid Asset Series; and the Market Manager Series. The Series'
Manager is Directed Services, Inc. (the "Manager").
This Statement of Additional Information is intended to supplement the
information provided to investors in the Prospectus of The GCG Trust dated
May 1, 1996 (which pertains to all Series other than the Market Manager Series)
and the Prospectus of the Market Manager Series dated May 1, 1996. The
Prospectuses have been filed with the Securities and Exchange Commission as part
of the Trust's Registration Statement. Investors should note, however, that
this Statement of Additional Information is not itself a prospectus and should
be read carefully in conjunction with the Prospectuses and retained for future
reference. The contents of this Statement of Additional Information are
incorporated by reference in the Prospectuses in their entirety. A copy of
either Prospectus may be obtained free of charge from the Trust at the address
and telephone number listed above.
MANAGER:
DIRECTED SERVICES, INC.
(800) 447-3644
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES. . . . . . . . . . 1
U.S. Government Securities. . . . . . . . . . . . . . . . . . . . 1
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . 1
High Yield Bonds. . . . . . . . . . . . . . . . . . . . . . . . . 2
Brady Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sovereign Debt. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Mortgage-Backed Securities. . . . . . . . . . . . . . . . . . . . 5
GNMA Certificates. . . . . . . . . . . . . . . . . . . . . . 5
FNMA and FHLMC Mortgage-Backed Obligations . . . . . . . . . 6
Collateralized Mortgage Obligations (CMOs) . . . . . . . . . 7
Other Mortgage-Backed Securities . . . . . . . . . . . . . . 7
Other Asset-Backed Securities . . . . . . . . . . . . . . . . . . 8
Variable and Floating Rate Securities . . . . . . . . . . . . . . 9
Banking Industry and Savings Industry Obligations . . . . . . . . 9
Commercial Paper. . . . . . . . . . . . . . . . . . . . . . . . . 10
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . 11
Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . 12
Lending Portfolio Securities. . . . . . . . . . . . . . . . . . . 12
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Investment Companies. . . . . . . . . . . . . . . . . . . . 13
Short Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . 14
Futures Contracts and Options on Futures Contracts. . . . . . . . 14
General Description of Futures Contracts . . . . . . . . . . 14
Interest Rate Futures Contracts. . . . . . . . . . . . . . . 15
Options on Futures Contracts . . . . . . . . . . . . . . . . 15
Stock Index Futures Contracts. . . . . . . . . . . . . . . . 15
Gold Futures Contracts . . . . . . . . . . . . . . . . . . . 16
Limitations. . . . . . . . . . . . . . . . . . . . . . . . . 18
Options on Securities and Securities Indexes. . . . . . . . . . . 18
Purchasing Options on Securities . . . . . . . . . . . . . . 18
Writing Covered Call and Secured Put Options . . . . . . . . 19
Options on Securities Indexes. . . . . . . . . . . . . . . . 19
General. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
When-Issued or Delayed Delivery Securities. . . . . . . . . . . . 20
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . 20
Options on Foreign Currencies . . . . . . . . . . . . . . . . . . 22
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . 22
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . 25
The Management Agreement. . . . . . . . . . . . . . . . . . . . . 28
Distribution of Trust Shares. . . . . . . . . . . . . . . . . . . 33
Purchases and Redemptions . . . . . . . . . . . . . . . . . . . . 33
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PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . 34
Investment Decisions. . . . . . . . . . . . . . . . . . . . . . . 34
Brokerage and Research Services . . . . . . . . . . . . . . . . . 34
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 38
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . 45
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Custodian and Other Service Providers . . . . . . . . . . . . . . 46
Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . 46
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Registration Statement. . . . . . . . . . . . . . . . . . . . . . 46
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 47
APPENDIX 1: Description of Bond Ratings. . . . . . . . . . . . . . . . A-1
ii
<PAGE>
INTRODUCTION
This Statement of Additional Information is designed to elaborate upon
information contained in the Prospectuses for the Series, including the
discussion of certain securities and investment techniques. The more detailed
information contained herein is intended solely for investors who have read the
Prospectuses and are interested in a more detailed explanation of certain
aspects of some of the Series' securities and some investment techniques. Some
of the Series' investment techniques are described only in the Prospectuses and
are not repeated herein. Captions and defined terms in this Statement of
Additional Information generally correspond to like captions and terms in the
Series' Prospectuses.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
Each Series may invest in U.S. Government securities. U.S. Government
securities are obligations of, or are guaranteed by, the U.S. Government, its
agencies or instrumentalities. Treasury bills, notes, and bonds are direct
obligations of the U.S. Treasury. Securities guaranteed by the U.S. Government
include: federal agency obligations guaranteed as to principal and interest by
the U.S. Treasury (such as GNMA certificates, described in the section on
"Mortgage-Backed Securities," and Federal Housing Administration debentures). In
guaranteed securities, the payment of principal and interest is unconditionally
guaranteed by the U.S. Government, and thus they are of the highest credit
quality. Such direct obligations or guaranteed securities are subject to
variations in market value due to fluctuations in interest rates, but, if held
to maturity, the U.S. Government is obligated to or guarantees to pay them in
full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of nor guaranteed by the Treasury.
However, they involve federal sponsorship in one way or another: some are
backed by specific types of collateral; some are supported by the issuer's right
to borrow from the Treasury; some are supported by the discretionary authority
of the Treasury to purchase certain obligations of the issuer; others are
supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to, Federal Land Banks, Farmers Home Administration, Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"),
Student Loan Mortgage Association, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, and Federal Home Loan Banks.
All Series except the Market Manager Series may also purchase obligations
of the International Bank for Reconstruction and Development, which, while
technically not a U.S. Government agency or instrumentality, has the right to
borrow from the participating countries, including the United States.
DEBT SECURITIES
All Series may invest in U.S. dollar-denominated corporate debt securities
of domestic issuers and the Multiple Allocation, Fully Managed, Limited Maturity
Bond, Natural Resources, Liquid Asset, Capital Appreciation, Emerging Markets,
Strategic Equity, Small Cap, and Market Manager Series may invest in debt
securities of foreign issuers that are denominated in U.S. dollars. The
Multiple Allocation, Fully Managed, Natural Resources, Emerging Markets,
Strategic
1
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Equity, and Small Cap Series may invest in non-U.S. dollar-denominated debt
securities of foreign issuers. The debt securities in which the Series may
invest are limited to corporate debt securities (corporate bonds, debentures,
notes, and other similar corporate debt instruments) which meet the minimum
ratings criteria set forth for that particular Series, or, if not so rated, are,
in the Portfolio Manager's determination, comparable in quality to corporate
debt securities in which a Series may invest.
Those Series that do not specify any particular ratings criteria, i.e., the
Multiple Allocation, Natural Resources, All-Growth, Strategic Equity, and Small
Cap Series, may invest only in debt securities that are investment grade, i.e.,
rated BBB or better by Standard & Poor's Rating Group ("Standard & Poor's") and
Baa or better by Moody's Investors Service, Inc. ("Moody's"), or, if not rated
by Standard & Poor's or Moody's, of equivalent quality as determined by the
Portfolio Manager.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Bonds rated BBB or Baa, which
are considered medium-grade category bonds, do not have economic characteristics
that provide the high degree of security with respect to payment of principal
and interest associated with higher rated bonds, and generally have some
speculative characteristics. A bond will be placed in this rating category
where interest payments and principal security appear adequate for the present,
but economic characteristics that provide longer term protection may be lacking.
Any bond, and particularly those rated BBB or Baa, may be susceptible to
changing conditions, particularly to economic downturns, which could lead to a
weakened capacity to pay interest and principal.
New issues of certain debt securities are often offered on a when-issued or
firm-commitment basis; that is, the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment, but delivery and payment
for the securities normally take place after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery depending on market conditions and
changes in interest rate levels. However, the Series will not accrue any income
on these securities prior to delivery. The Series will maintain in a segregated
account with its custodian an amount of cash or high quality debt securities
equal (on a daily marked-to-market basis) to the amount of its commitment to
purchase the when-issued securities or securities purchased on a firm-commitment
basis.
Many securities of foreign issuers are not rated by Moody's or Standard and
Poor's; therefore, the selection of such issuers depends, to a large extent, on
the credit analysis performed or used by the Series' Portfolio Manager.
HIGH YIELD BONDS
The Real Estate Series may invest up to 20% of its assets in convertible
bonds and the Fully Managed Series and Emerging Markets Series may invest up to
5% and 10% of their assets, respectively, in bonds rated lower than Baa or BBB,
or, if not rated by Moody's or Standard & Poor's, of equivalent quality ("high
yield bonds," which are commonly referred to as "junk bonds"). In general, high
yield bonds are not considered to be investment grade, and investors
2
<PAGE>
should consider the risks associated with high yield bonds before investing in
the pertinent Series. Investment in such securities generally provides greater
income and increased opportunity for capital appreciation than investments in
higher quality securities, but they also typically entail greater price
volatility and principal and income risk.
Investment in high yield bonds involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
bonds are regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The high yield bond
market is relatively new, and many of the outstanding high yield bonds have not
endured a lengthy business recession. A long-term track record on bond default
rates, such as that for investment grade corporate bonds, does not exist for the
high yield market. Analysis of the creditworthiness of issuers of debt
securities, and the ability of a Series to achieve its investment objective may,
to the extent of investment in high yield bonds, be more dependent upon such
creditworthiness analysis than would be the case if the Series were investing in
higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade bonds. The
prices of high yield bonds have been found to be less sensitive to interest rate
changes than higher rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in high yield bond prices because the advent of a recession could lessen
the ability of a highly leveraged company to make principal and interest
payments on its debt securities. If an issuer of high yield bonds defaults, in
addition to risking payment of all or a portion of interest and principal, the
Series may incur additional expenses to seek recovery. In the case of high
yield bonds structured as zero coupon or pay-in-kind securities, their market
prices are affected to a greater extent by interest rate changes, and therefore
tend to be more volatile than securities which pay interest periodically and in
cash.
The secondary market on which high yield bonds are traded may be less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which the Series could sell a
high yield bond, and could adversely affect and cause large fluctuations in the
daily net asset value of the Series' shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield bonds, especially in a thinly traded market.
When secondary markets for high yield bonds are less liquid than the market for
higher grade bonds, it may be more difficult to value the securities because
such valuation may require more research, and elements of judgment may play a
greater role in the valuation because there is less reliable, objective data
available.
There are also certain risks involved in using credit ratings for
evaluating high yield bonds. For example, credit ratings evaluate the safety of
principal and interest payments, not the market value risk of high yield bonds.
Also, credit rating agencies may fail to reflect subsequent events.
BRADY BONDS
The Emerging Markets Series may invest in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady
3
<PAGE>
Bonds are not considered U.S. Government securities and are considered
speculative. Brady Plan debt restructurings have been implemented to date in
several countries, including Mexico, Venezuela, Argentina, Uruguay, Costa Rica,
Bulgaria, the Dominican Republic, Jordan, Nigeria, Bolivia, Ecuador, Niger,
Poland and the Philippines (collectively, the "Brady Countries"). In addition,
Brazil has concluded a Brady-like plan. It is expected that other countries will
undertake a Brady Plan debt restructuring in the future, including Peru and
Panama. Brady Bonds have been issued only recently, and accordingly, do not
have a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are U.S. dollar-denominated) and
they are actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds which have the same
maturity as the Brady Bonds. Interest payments on these Brady Bonds generally
are collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at the time and is adjusted at regular intervals
thereafter.
Certain Brady Bonds are entitled to "value recovery payments" in certain
circumstances, which in effect constitute supplemental interest payments but
generally are not collateralized. Brady Bonds are often viewed as having three
or four valuation components: (i) the collateralized repayment of principal at
final maturity; (ii) the collateralized interest payments; (iii) the
uncollateralized interest payments; and (iv) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the "residual
risk").
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Series may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Series to suffer
a loss of interest or principal on any of its holdings.
SOVEREIGN DEBT
The Emerging Markets Series may invest in debt obligations ("sovereign
debt") of governmental issuers in emerging market countries and industrialized
countries. Certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. The issuer or governmental authority
that controls the repayment of sovereign debt may not be willing or able to
repay the principal and/or pay interest when due in
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accordance with the terms of such obligations. A governmental entity's
willingness or ability to repay principal and pay interest due in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the government's dependence on expected
disbursements from third parties, the government's policy toward the
International Monetary Fund and the political constraints to which a government
may be subject. Governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others
abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a debtor's implementation of economic
reforms or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds to the
government debtor, which may further impair such debtor's ability or
willingness to timely service its debts. Holders of sovereign debt may be
requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. In addition, no assurance can
be given that the holders of commercial bank debt will not contest payments
to the holders of other foreign government debt obligations in the event
of default under their commercial bank loan agreements.
The issuers of the government debt securities in which the Series may
invest have in the past experienced substantial difficulties in servicing
their external debt obligations, which led to defaults on certain obligations
and the restructuring of certain indebtedness. Restructuring arrangements
have included, among other things, reducing and rescheduling interest and
principal payments by negotiating new or amended credit agreements or
converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. There can be no assurance
that the Brady Bonds and other foreign government debt securities in which the
Series may invest will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely affect the
Series' holdings. Furthermore, certain participants in the secondary market
for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available
to other market participants.
MORTGAGE-BACKED SECURITIES
All Series except the Market Manager Series may invest in mortgage-backed
securities.
GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which
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consists of both interest and principal payments. In effect, these payments are
a "pass-through" of the periodic payments made by the individual borrowers on
the residential mortgage loans, net of any fees paid to the issuer or guarantor
of such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Mortgage-backed
securities issued by GNMA are described as "modified pass-through" securities.
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates, regardless of whether or not the mortgagor actually makes the
payment. Although GNMA guarantees timely payment even if homeowners delay or
default, tracking the "pass-through" payments may, at times, be difficult.
Expected payments may be delayed due to the delays in registering the newly
traded paper securities. The custodian's policies for crediting missed payments
while errant receipts are tracked down may vary. Other mortgage-backed
securities, such as those of the Federal Home Loan Mortgage Corporation
("FHLMC") and the Federal National Mortgage Association ("FNMA"), trade in book-
entry form and should not be subject to the risk of delays in timely payment of
income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Series to a lower rate of
return upon reinvestment of principal. Prepayment rates vary widely and may be
affected by changes in market interest rates. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of the GNMA certificates. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the GNMA certificates. Accordingly, it is not possible to
accurately predict the average life of a particular pool. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, GNMA certificates can be less
effective than typical bonds of similar maturities at "locking in" yields during
periods of declining interest rates, although they may have comparable risks of
decline in value during periods of rising interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
the FNMA and the FHLMC. FNMA, a federally chartered and privately owned
corporation, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest, but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA also issues REMIC Certificates, which represent an
interest in a trust funded with FNMA Certificates. REMIC Certificates are
guaranteed by FNMA, and not by the full faith and credit of the U.S. Government.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions,
and mortgage bankers. FHLMC, a corporate instrumentality of the United States,
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from
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FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal and maintains reserves to protect holders
against losses due to default. PCs are not backed by the full faith and credit
of the U.S. Government. As is the case with GNMA certificates, the actual
maturity and realized yield on particular FNMA and FHLMC pass-through securities
will vary based on the prepayment experience of the underlying pool of
mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying investors, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner-than-desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
Series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to the principal; a like amount is paid as principal on the Series A, B,
or C Bond currently being paid off. When the Series A, B, and C Bonds are paid
in full, interest and principal on the Series Z Bond begin to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-backed securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments in the former pools. Timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers,
and the mortgage poolers. Such insurance, guarantees, and the creditworthiness
of the issuers thereof will be considered in determining whether a mortgage-
backed security meets a Series' investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements.
All Series other than the Liquid Asset Series, the Capital Appreciation
Series, the Rising Dividends Series, the Emerging Markets Series, and the Market
Manager Series may buy
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mortgage-backed securities without insurance or guarantees, if the Portfolio
Manager determines that the securities meet a Series' quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. A Series will not purchase mortgage-backed securities or any other
assets which, in the opinion of the Portfolio Manager, are illiquid if, as a
result, more than 10% of the value of a Series' total assets will be illiquid.
As new types of mortgage-backed securities are developed and offered to
investors, the Portfolio Manager will, consistent with a Series' investment
objectives, policies, and quality standards, consider making investments in such
new types of mortgage-backed securities.
It is expected that governmental, government-related, or private entities
may create mortgage loan pools and other mortgage-backed securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-backed securities are developed
and offered to investors, investments in such new types of mortgage-backed
securities may be considered for the Series.
OTHER ASSET-BACKED SECURITIES
All Series other than the Liquid Asset Series, the Capital Appreciation
Series, the Rising Dividends Series, the Emerging Markets Series, and the Market
Manager Series may purchase other asset-backed securities (unrelated to mortgage
loans) such as "CARS-SM-" ("Certificates for Automobile Receivables-SM-") and
Credit Card Receivable Securities.
CARS-SM- represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS-SM- are "passed-through" monthly to
certificate holders, and are guaranteed up to certain amounts by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to prepayment,
which may reduce the overall return to certificate holders. Certificate holders
may also experience delays in payment or losses on CARS-SM- if the full amounts
due on underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage, or loss of the vehicles securing the contracts,
or other factors.
If consistent with its investment objective and policies, a Series may
invest in "Credit Card Receivable Securities." Credit Card Receivable
Securities are asset-backed securities backed by receivables from revolving
credit card agreements. Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used to
fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account. The
initial fixed period usually may be shortened upon the occurrence of specified
events which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying Accounts during the initial period and the non-
occurrence of specified events. The Tax
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Reform Act of 1986, pursuant to which a taxpayer's ability to deduct consumer
interest in his or her federal income tax calculation was completely phased out
for taxable years beginning in 1991, as well as competitive and general economic
factors, could adversely affect the rate at which new receivables are created in
an Account and conveyed to an issuer, shortening the expected weighted average
life of the related Credit Card Receivable Security, and reducing its yield. An
acceleration in cardholders' payment rates or any other event which shortens the
period during which additional credit card charges on an Account may be
transferred to the pool of assets supporting the related Credit Card Receivable
Security could have a similar effect on the weighted average life and yield.
Credit card holders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
VARIABLE AND FLOATING RATE SECURITIES
All Series may invest in variable and floating rate securities.
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some securities which
do not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Series may invest in (i) certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in (ii) certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). The Multiple
Allocation, Limited Maturity Bond, Liquid Asset, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may invest in obligations of foreign
branches of commercial banks and foreign banks so long as the securities are
U.S. dollar-denominated, and the Emerging Markets Series may also invest in
obligations of foreign branches of commercial banks and foreign banks if the
securities are not U.S. dollar-denominated. See "Foreign Securities" discussion
in The GCG Trust Prospectus for further information regarding risks attending
investment in foreign securities.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, which are normally drawn by an importer or exporter to
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pay for specific merchandise, and which are "accepted" by a bank, meaning, in
effect, that the bank unconditionally agrees to pay the face value of the
instrument on maturity. Fixed-time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate. Fixed-time deposits
may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed-time deposit to a third
party, because there is no market for such deposits. A Series will not invest
in fixed-time deposits (i) which are not subject to prepayment or (ii) which
provide for withdrawal penalties upon prepayment (other than overnight
deposits), if, in the aggregate, more than 10% of its assets would be invested
in such deposits, in repurchase agreements maturing in more than seven days, and
in other illiquid assets, except that the Rising Dividends Series, Emerging
Markets Series, and Market Manager Series may invest up to 15% of assets in such
deposits, repurchase agreements, and other illiquid assets.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, which include: (i) the
possibility that their liquidity could be impaired because of future political
and economic developments; (ii) their obligations may be less marketable than
comparable obligations of U.S. banks; (iii) a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; (iv) foreign
deposits may be seized or nationalized; (v) foreign governmental restrictions,
such as exchange controls, may be adopted which might adversely affect the
payment of principal and interest on those obligations; and (vi) the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks and/or because the accounting,
auditing, and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to U.S. banks.
Foreign banks are not generally subject to examination by any U.S. Government
agency or instrumentality.
Certain of the Series, including the Fully Managed Series and Liquid Asset
Series, invest only in bank and S&L obligations as specified in that Series'
investment policies. Other Series will not invest in obligations issued by a
commercial bank or S&L unless:
(i) the bank or S&L has total assets of least $1 billion, or the
equivalent in other currencies, and the institution has outstanding
securities rated A or better by Moody's or Standard and Poor's, or, if the
institution has no outstanding securities rated by Moody's or Standard &
Poor's, it has, in the determination of the Portfolio Manager, similar
creditworthiness to institutions having outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured by
the FDIC or the Savings Association Insurance Fund ("SAIF"), as the case
may be; and
(iii) in the case of a foreign bank, the security is, in the
determination of the Series' Portfolio Manager, of an investment quality
comparable with other debt securities which may be purchased by the Series.
These limitations do not prohibit investments in securities issued by
foreign branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
COMMERCIAL PAPER
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All of the Series may invest in commercial paper (including variable amount
master demand notes), denominated in U.S. dollars, issued by U.S. corporations
or foreign corporations. Unless otherwise indicated in the investment policies
for a Series, a Series may invest in commercial paper (i) rated, at the date of
investment, Prime-1 or Prime-2 by Moody's or A-1 or A-2 by Standard & Poor's;
(ii) if not rated by either Moody's or Standard & Poor's, issued by a
corporation having an outstanding debt issue rated Aa or better by Moody's or AA
or better by Standard & Poor's; or (iii) if not rated, are determined to be of
an investment quality comparable to rated commercial paper in which a Series may
invest.
Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
Series, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. The lender has the right to increase or to decrease the
amount under the note at any time up to the full amount provided by the note
agreement; and the borrower may prepay up to the full amount of the note without
penalty. Because variable amount master demand notes are direct lending
arrangements between the lender and borrower, and because no secondary market
exists for those notes, such instruments will probably not be traded. However,
the notes are redeemable (and thus immediately repayable by the borrower) at
face value, plus accrued interest, at any time. In connection with master
demand note arrangements, the Portfolio Manager will monitor, on an ongoing
basis, the earning power, cash flow, and other liquidity ratios of the borrower
and its ability to pay principal and interest on demand. The Portfolio Manager
also will consider the extent to which the variable amount master demand notes
are backed by bank letters of credit. These notes generally are not rated by
Moody's or Standard & Poor's; the Series may invest in them only if the
Portfolio Manager believes that at the time of investment the notes are of
comparable quality to the other commercial paper in which the Series may invest.
Master demand notes are considered by the Series to have a maturity of one day,
unless the Portfolio Manager has reason to believe that the borrower could not
make immediate repayment upon demand. See the Appendix for a description of
Moody's and Standard & Poor's ratings applicable to commercial paper.
For purposes of limitations on purchases of restricted securities,
commercial paper issued pursuant to Section 4(2) of the 1933 Act as part of a
private placement that meets liquidity standards under procedures adopted by the
Board shall not be considered to be restricted.
REPURCHASE AGREEMENTS
All Series may invest in repurchase agreements. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. The resale price is in excess of the purchase price by an amount
which reflects an agreed-upon market rate of return, effective for the period of
time the Series is invested in the security. This results in a fixed rate of
return protected from market fluctuations during the period of the agreement.
This rate is not tied to the coupon rate on the security subject to the
repurchase agreement.
The Portfolio Manager to a Series monitors the value of the underlying
securities at the time the repurchase agreement is entered into and at all times
during the term of the agreement to ensure that its value always equals or
exceeds the agreed-upon repurchase price to be paid to the Series. The
Portfolio Manager, in accordance with procedures established by the Board of
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Trustees, also evaluates the creditworthiness and financial responsibility of
the banks and brokers or dealers with which the Series enters into repurchase
agreements.
A Series may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Series engages in
repurchase transactions, obtaining collateral at least equal in value to the
repurchase obligation, and marking the collateral to market on a daily basis.
A Series may not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements, together with any
other securities that are not readily marketable, would exceed 10% of the net
assets of the Series, except that the Rising Dividends, Emerging Markets, Value
Equity, Strategic Equity, Small Cap, and Market Manager Series may invest up to
15% of net assets in such securities and repurchase agreements. If the seller
should become bankrupt or default on its obligations to repurchase the
securities, a Series may experience delay or difficulties in exercising its
rights to the securities held as collateral and might incur a loss if the value
of the securities should decline. A Series also might incur disposition costs
in connection with liquidating the securities.
REVERSE REPURCHASE AGREEMENTS
A reverse repurchase agreement may be entered into by the Multiple
Allocation, Fully Managed, Capital Appreciation, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series and involves the sale of a security by
the Series and its agreement to repurchase the instrument at a specified time
and price. A Series will use the proceeds of a reverse repurchase agreement to
purchase other money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase agreement
or which are held under an agreement to resell maturing as of that time. A
Series will maintain a segregated account consisting of cash, U.S. Government
securities, or high-grade debt obligations to cover its obligations under
reverse repurchase agreements. Under the Investment Company Act of 1940,
reverse repurchase agreements may be considered to be borrowings by the seller;
accordingly, a Series will limit its investments in reverse repurchase
agreements consistent with the borrowing limits applicable to the Series. See
"Borrowing" for further information on these limits. The use of reverse
repurchase agreements by a Series creates leverage which increases a Series'
investment risk. If the income and gains on securities purchased with the
proceeds of reverse repurchase agreements exceed the cost of the agreements, the
Series' earnings or net asset value will increase faster than otherwise would be
the case; conversely, if the income and gains fail to exceed the costs, earnings
or net asset value would decline faster than otherwise would be the case.
LENDING PORTFOLIO SECURITIES
The Multiple Allocation, Fully Managed, Limited Maturity Bond, Natural
Resources, Capital Appreciation, Rising Dividends, Emerging Markets, Strategic
Equity, and Small Cap Series may lend portfolio securities to broker-dealers or
institutional investors for the purpose of realizing additional income.
A Series will only enter into this transaction if (1) the loan is fully
collateralized at all times with U.S. Government securities, cash, or cash
equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances, or letters of credit) maintained on a daily
marked-to-market basis, in an amount at least equal to the value of the
securities loaned;
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(2) it may at any time call the loan and obtain the return of the securities
loaned within five business days; (3) it will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed 30% of the total assets of the Series. As
with other extensions of secured credit, loans of portfolio securities involve
some risk of loss of rights in the collateral should the borrower fail
financially. Accordingly, the Series' Portfolio Manager will monitor the value
of the collateral, which will be marked-to-market daily, and will monitor the
creditworthiness of the borrowers. There is no assurance that a borrower will
return any securities loaned; however, as discussed above, a borrower of
securities from a Series must maintain with the Series cash or U.S. Government
securities equal to at least 100% of the market value of the securities
borrowed. Voting rights attached to the loaned securities may pass to the
borrower with the lending of portfolio securities; however, a Series lending
such voting securities may call them if important shareholder meetings are
imminent. A Series may only lend portfolio securities to entities that are not
affiliated with either the Manager or a Portfolio Manager.
WARRANTS
Each of the following Series may invest in warrants: the Multiple
Allocation, Fully Managed, Natural Resources, Real Estate, All-Growth, Emerging
Markets, Value Equity, Strategic Equity, and Small Cap Series. Each of these
Series may invest up to 5% of its net assets in warrants (not including those
that have been acquired in units or attached to other securities), measured at
the time of acquisition, and none of these Series, except the Emerging Markets
Series, may acquire a warrant not listed on the New York or American Stock
Exchanges if, after the purchase, more than 2% of the Series' assets would be
invested in such warrants.
The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. They pay no dividends and confer no rights other than
a purchase option. If a warrant is not exercised by the date of its expiration,
the Series will lose its entire investment in such warrant.
OTHER INVESTMENT COMPANIES
All Series may invest in shares issued by other investment companies. A
Series is limited in the degree to which it may invest in shares of another
investment company in that it may not, at the time of the purchase, (1) acquire
more than 3% of the outstanding voting shares of the investment company, (2)
invest more than 5% of the Series' total assets in the investment company, or
(3) invest more than 10% of the Series' total assets in all investment company
holdings. As a shareholder in any investment company, a Series will bear its
ratable share of the investment company's expenses, including management fees in
the case of a management investment company.
SHORT SALES
The Multiple Allocation, Natural Resources, All-Growth, Capital
Appreciation, Strategic Equity, and Small Cap Series may make short sales of
securities. A short sale is a transaction in which the Series sells a security
it does not own in anticipation of a decline in market price. A
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Series may make short sales to offset a potential decline in a long position or
a group of long positions, or if the Series' Portfolio Manager believes that a
decline in the price of a particular security or group of securities is likely.
The Multiple Allocation Series' Portfolio Manager expects that, even during
normal or favorable market conditions, the Series may make short sales in an
attempt to maintain portfolio flexibility and facilitate the rapid
implementation of investment strategies if the Portfolio Manager believes that
the price of a particular security or group of securities is likely to decline.
Under current income tax laws, any capital gains realized by the Series
from short sales will generally be treated and distributed as short-term capital
gains. If the price of the security sold short increases between the time of
the short sale and the time the Series replaces the borrowed security, the
Series will incur a loss, and if the price declines during this period, the
Series will realize a capital gain. Any realized gain will be decreased, and
any incurred loss increased, by the amount of transactional costs and any
premium, dividend, or interest which the Series may have to pay in connection
with such short sale.
SHORT SALES AGAINST THE BOX
All Series, except the Limited Maturity Bond Series, Liquid Asset Series,
and Market Manager Series, may make short sales "against the box." A short sale
"against the box" is a short sale where, at the time of the short sale, the
Series owns or has the immediate and unconditional right, at no added cost, to
obtain the identical security. The Series would enter into such a transaction
to defer a gain or loss for Federal income tax purposes on the security owned by
the Series. Short sales against the box are not subject to the percentage
limitations on short sales described above.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Multiple Allocation, Fully Managed, Limited Maturity Bond, Natural
Resources, All-Growth, Capital Appreciation, Emerging Markets, Value Equity,
Strategic Equity, Small Cap, and Market Manager Series may engage in futures
contracts. The Multiple Allocation, Fully Managed, Limited Maturity Bond,
Natural Resources, Capital Appreciation, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may purchase and sell interest-rate
futures contracts. The Limited Maturity Bond Series may also purchase and write
options on interest rate futures contracts, and the Value Equity Series may also
purchase options on interest rate futures contracts. The Multiple Allocation,
Fully Managed, Natural Resources, All-Growth, Capital Appreciation, Emerging
Markets, Value Equity, Strategic Equity, and Small Cap Series may purchase and
sell stock index futures contracts and futures contracts based upon other
financial instruments, and purchase options on such contracts. The Market
Manager Series may purchase futures contracts on securities or stock indexes and
purchase options on such contracts, but will not sell futures contracts. The
Multiple Allocation, Natural Resources, and Strategic Equity Series may engage
in gold and other futures contracts. The Fully Managed Series will not write
options on any futures contracts.
GENERAL DESCRIPTION OF FUTURES CONTRACTS. A futures contract provides for
the future sale by one party and purchase by another party of a specified amount
of a particular financial instrument (debt security) or commodity for a
specified price at a designated date, time, and place. Although futures
contracts by their terms require actual future delivery of and payment for
financial instruments, commodities futures contracts are usually closed out
before the delivery
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date. Closing out an open futures contract position is effected by entering
into an offsetting sale or purchase, respectively, for the same aggregate amount
of the same financial instrument or commodities and the same delivery date.
Where a Series has sold a futures contract, if the offsetting purchase price is
less than the original futures contract sale price, the Series realizes a gain;
if it is more, the Series realizes a loss. Where a Series has purchased a
futures contract, if the offsetting price is more than the original futures
contract purchase price, the Series realizes a gain; if it is less, the Series
realizes a loss.
INTEREST RATE FUTURES CONTRACTS. The Multiple Allocation, Fully Managed,
Limited Maturity Bond, Natural Resources, Capital Appreciation, Emerging
Markets, Value Equity, Strategic Equity, and Small Cap Series may purchase and
sell interest rate futures contracts. An interest rate futures contract is an
obligation traded on an exchange or board of trade that requires the purchaser
to accept delivery, and the seller to make delivery, of a specified quantity of
the underlying financial instrument, such as U.S. Treasury bills and bonds, in a
stated delivery month, at a price fixed in the contract.
The Series may purchase and sell interest rate futures as a hedge against
adverse changes in debt instruments and other interest rate sensitive securities
held in the Series' portfolio. As a hedging strategy a Series might employ, a
Series would purchase an interest rate futures contract when it is not fully
invested in long-term debt securities but wishes to defer their purchase for
some time until it can orderly invest in such securities or because short-term
yields are higher than long-term yields. Such a purchase would enable the
Series to earn the income on a short-term security while at the same time
minimizing the effect of all or part of an increase in the market price of the
long-term debt security which the Series intends to purchase in the future. A
rise in the price of the long-term debt security prior to its purchase either
would be offset by an increase in the value of the futures contract purchased by
the Series or avoided by taking delivery of the debt securities under the
futures contract.
A Series would sell an interest rate futures contract in order to continue
to receive the income from a long-term debt security, while endeavoring to avoid
part or all of the decline in market value of that security which would
accompany an increase in interest rates. If interest rates did rise, a decline
in the value of the debt security held by the Series would be substantially
offset by the ability of the Series to repurchase at a lower price the interest
rate futures contract previously sold. While the Series could sell the long-
term debt security and invest in a short-term security, ordinarily the Series
would give up income on its investment, since long-term rates normally exceed
short-term rates.
OPTIONS ON FUTURES CONTRACTS. The Multiple Allocation, Fully Managed,
Natural Resources, All-Growth, Capital Appreciation, and Emerging Markets Series
may purchase options on interest rate futures contracts, although these Series
will not write options on any such contracts. The Strategic Equity and Market
Manager Series may purchase options on futures contracts and stock index futures
contracts, but will not write options on such contracts. The Value Equity and
Small Cap Series may purchase options on stock index futures contracts, interest
rate futures contracts, and foreign currency futures contracts, but will not
write options on such contracts. The Limited Maturity Bond Series may purchase
and write options on interest-rate futures contracts. A futures option gives
the Series the right, in return for the premium paid, to assume a long position
(in the case of a call) or short position (in the case of a put) in a futures
contract at a specified exercise price prior to the expiration of the option.
Upon exercise of a call option, the purchaser acquires a long position in the
futures contract and the writer of the option is
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assigned the opposite short position. In the case of a put option, the converse
is true. A futures option may be closed out (before exercise or expiration) by
an offsetting purchase or sale of a futures option by the Series.
The Series may use options on futures contracts in connection with hedging
strategies. Generally these strategies would be employed under the same market
conditions in which a Series would use put and call options on debt securities,
as described hereafter in "Options on Securities and Securities Indexes."
STOCK INDEX FUTURES CONTRACTS. The Multiple Allocation, Fully Managed,
Natural Resources, All-Growth, Capital Appreciation, Emerging Markets, Value
Equity, Strategic Equity, and Small Cap Series may purchase and sell stock index
futures contracts, and the Market Manager Series may purchase stock index
futures contracts. A "stock index" assigns relative values to the common stock
included in an index (for example, the Standard & Poor's 500 Index of Composite
Stocks or the New York Stock Exchange Composite Index), and the index fluctuates
with changes in the market values of such stocks. A stock index futures
contract is a bilateral agreement to accept or make payment, depending on
whether a contract is purchased or sold, of an amount of cash equal to a
specified dollar amount multiplied by the difference between the stock index
value at the close of the last trading day of the contract and the price at
which the futures contract is originally purchased or sold.
To the extent that changes in the value of the Multiple Allocation, Fully
Managed, Natural Resources, All-Growth, Capital Appreciation, Emerging Markets,
Value Equity, Strategic Equity, and Small Cap Series' portfolio corresponds to
changes in a given stock index, the sale of futures contracts on that index
("short hedge") would substantially reduce the risk to the portfolio of a market
decline and, by so doing, provide an alternative to a liquidation of securities
position, which may be difficult to accomplish in a rapid and orderly fashion.
Stock index futures contracts might also be sold:
(1) when a sale of portfolio securities at that time would appear to be
disadvantageous in the long-term because such liquidation would:
(a) forego possible price appreciation,
(b) create a situation in which the securities would be difficult to
repurchase, or
(c) create substantial brokerage commissions;
(2) when a liquidation of the portfolio has commenced or is contemplated,
but there is, in the Series' Portfolio Manager's determination, a
substantial risk of a major price decline before liquidation can be
completed; or
(3) to close out stock index futures purchase transactions.
Where a Series anticipates a significant market or market sector advance,
the purchase of a stock index futures contract ("long hedge") affords a hedge
against not participating in such advance at a time when the Series is not fully
invested. Such purchases would serve as a temporary substitute for the purchase
of individual stocks, which may then be purchased in an orderly fashion. As
purchases of stock are made, an amount of index futures contracts which is
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comparable to the amount of stock purchased would be terminated by offsetting
closing sales transactions. Stock index futures might also be purchased:
(1) if the Series is attempting to purchase equity positions in issues
which it had or was having difficulty purchasing at prices considered by
the Series' Portfolio Manager to be fair value based upon the price of the
stock at the time it qualified for inclusion in the portfolio, or
(2) to close out stock index futures sales transactions.
GOLD FUTURES CONTRACTS. The Multiple Allocation, Natural Resources, and
Strategic Equity Series may enter into futures contracts on gold. A gold
futures contract is a standardized contract which is traded on a regulated
commodity futures exchange, and which provides for the future delivery of a
specified amount of gold at a specified date, time, and price. When the Series
purchases a gold futures contract it becomes obligated to take delivery of and
pay for the gold from the seller, and when the Series sells a gold futures
contract, it becomes obligated to make delivery of precious metals to the
purchaser, in each case at a designated date and price. A Series will enter
into gold futures contracts only for the purpose of hedging its holdings or
intended holdings of gold stocks and, with regard to the Natural Resources
Series, gold bullion. The Series will not engage in these contracts for
speculation or for achieving leverage. The Series' hedging activities may
include purchases of futures contracts as an offset against the effect of
anticipated increases in the price of gold or sales of futures contracts as an
offset against the effect of anticipated declines in the price of gold.
As long as required by regulatory authorities, each investing Series will
limit its use of futures contracts and futures options to hedging transactions
and other strategies as described under the heading "Limitations" in this
section, in order to avoid being deemed a commodity pool. For example, a Series
might use futures contracts to hedge against anticipated changes in interest
rates that might adversely affect either the value of the Series' securities or
the price of the securities which the Series intends to purchase. The Series'
hedging may include sales of futures contracts as an offset against the effect
of expected increases in interest rates and purchases of futures contracts as an
offset against the effect of expected declines in interest rates. Although
other techniques could be used to reduce that Series' exposure to interest rate
fluctuations, a Series may be able to hedge its exposure more effectively and
perhaps at a lower cost by using futures contracts and futures options. See the
Prospectuses for a discussion of other strategies involving futures and futures
options.
If a purchase or sale of a futures contract is made by a Series, the Series
is required to deposit with its custodian a specified amount of cash or U.S.
Government securities ("initial margin"). The margin required for a futures
contract is set by the exchange or board of trade on which the contract is
traded and may be modified during the term of the contract. The initial margin
is in the nature of a performance bond or good faith deposit on the futures
contract which is returned to the Series upon termination of the contract,
assuming all contractual obligations have been satisfied. Each investing Series
expects to earn interest income on its initial margin deposits. A futures
contract held by a Series is valued daily at the official settlement price of
the exchange on which it is traded. Each day the Series pays or receives cash,
called "variation margin" equal to the daily change in value of the futures
contract. This process is known as "marking to market." The payment or receipt
of the variation margin does not represent a borrowing or loan by a Series but
is settlement between the Series and the broker of the amount one would owe the
other if the
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futures contract expired. In computing daily net asset value, each Series will
mark-to-market its open futures positions.
A Series is also required to deposit and maintain margin with respect to
put and call options on futures contracts it writes. Such margin deposits will
vary depending on the nature of the underlying futures contract (including the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Series.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security, and delivery month). If an offsetting purchase
price is less than the original sale price, the Series realizes a capital gain,
or if it is more, the Series realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Series
realizes a capital gain, or if it is less, the Series realizes a capital loss.
The transaction costs must also be included in these calculations.
LIMITATIONS. When purchasing a futures contract, a Series must maintain
with its custodian cash or cash equivalents (including any margin) equal to the
market value of such contract. When writing a call option on a futures
contract, the Series similarly will maintain with its custodian, cash or cash
equivalents (including any margin) equal to the amount such option is "in-the-
money" until the option expires or is closed out by the Series. A call option
is "in-the-money" if the value of the futures contract that is the subject of
the option exceeds the exercise price.
A Series may not maintain open short positions in futures contracts or call
options written on futures contracts if, in the aggregate, the market value of
all such open positions exceeds the current value of its portfolio securities,
plus or minus unrealized gains and losses on the open positions, adjusted for
the historical relative volatility of the relationship between the Series and
the positions. For this purpose, to the extent the Series has written call
options on specific securities it owns, the value of those securities will be
deducted from the current market value of the securities portfolio.
In compliance with the requirements of the Commodity Futures Trading
Commission ("CFTC") under which an investment company may engage in futures
transactions, the Trust will comply with certain regulations of the CFTC to
qualify for an exclusion from being a "commodity pool." The regulations require
that the Trust enter into futures and options (1) for "bona fide hedging"
purposes, without regard to the percentage of assets committed to initial margin
and options premiums, or (2) for other strategies, provided that the aggregate
initial margin and premiums required to establish such positions do not exceed
5% of the liquidation value of a Series' portfolio, after taking into account
unrealized profits and unrealized gains on any such contracts entered into.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
In pursuing their investment objectives, the Multiple Allocation, Fully
Managed, Limited Maturity Bond, Natural Resources, Real Estate, All-Growth,
Capital Appreciation, Emerging Markets, Value Equity, Strategic Equity, and
Small Cap Series may engage in transactions on options on securities. The
Multiple Allocation Series, All-Growth Series, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may engage in transactions on options on
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securities indexes. The Market Manager Series may purchase put and call options
on securities and on securities indexes, but will not write such options. See
"Description of Securities and Investment Techniques" in the Prospectuses for a
description of the options transactions in which each Series may engage.
PURCHASING OPTIONS ON SECURITIES. An option on a security is a contract
that gives the purchaser of the option, in return for the premium paid, the
right to buy a specified security (in the case of a call option) or to sell a
specified security (in the case of a put option) from or to the seller
("writer") of the option at a designated price during the term of the option. A
Series may purchase put options on securities to protect holdings in an
underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
to one another. For example, the purchase of put options on debt securities
held by a Series would enable a Series to protect, at least partially, an
unrealized gain in an appreciated security without actually selling the
security. In addition, the Series would continue to receive interest income on
such security.
A Series may purchase call options on securities to protect against
substantial increases in prices of securities the Series intends to purchase
pending its ability to invest in such securities in an orderly manner. A Series
may sell put or call options it has previously purchased, which could result in
a net gain or loss depending on whether the amount realized on the sale is more
or less than the premium and other transactional costs paid on the put or call
option which is sold.
WRITING COVERED CALL AND SECURED PUT OPTIONS. In order to earn additional
income on its portfolio securities or to protect partially against declines in
the value of such securities, a Series may write covered call options. The
exercise price of a call option may be below, equal to, or above the current
market value of the underlying security at the time the option is written.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. Closing purchase transactions will ordinarily be effected to
realize a profit on an outstanding call option, to prevent an underlying
security from being called, to permit the sale of the underlying security, or to
enable the Series to write another call option on the underlying security with
either a different exercise price or expiration date or both.
In order to earn additional income or to facilitate its ability to purchase
a security at a price lower than the current market price of such security, a
Series may write secured put options. During the option period, the writer of a
put option may be assigned an exercise notice by the broker-dealer through whom
the option was sold requiring the writer to purchase the underlying security at
the exercise price.
A Series may write a call or put option only if the option is "covered" or
"secured" by the Series holding a position in the underlying securities. This
means that so long as the Series is obligated as the writer of a call option, it
will own the underlying securities subject to the option or if the Series holds
a call at the same exercise price, for the same exercise period, and on the same
securities as the written call. Alternatively, a Series may maintain, in a
segregated account with the Trust's custodian, cash, cash equivalents, or U.S.
Government securities with a value sufficient to meet its obligation as writer
of the option. A put is secured if the Series maintains cash, cash equivalents,
or U.S. Government securities with a value equal to the exercise price in a
segregated
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account, or holds a put on the same underlying security at an equal or greater
exercise price. Prior to exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series.
OPTIONS ON SECURITIES INDEXES. Call and put options on securities indexes
also may be purchased or sold by the Series for the same purposes as the
purchase or sale of options on securities. The Market Manager Series may only
purchase options on securities indexes. Options on securities indexes are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. In addition, securities index options are designed to reflect
price fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security. When such options are
written, the Series is required to maintain a segregated account consisting of
cash, cash equivalents or high grade obligations or the Series must purchase a
like option of greater value that will expire no earlier than the option sold.
Purchased options may not enable the Series to hedge effectively against stock
market risk if they are not highly correlated with the value of the Series'
portfolio securities. Moreover, the ability to hedge effectively depends upon
the ability to predict movements in the stock market.
GENERAL. If an option written by a Series expires unexercised, the Series
realizes a capital gain equal to the premium received at the time the option was
written. If an option purchased by a Series expires unexercised, the Series
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Series desires.
A Series will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or if it is more, the Series will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Series will realize a capital gain or, if it is
less, the Series will realize a capital loss. The principal factors affecting
the market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security in relation to the
exercise price of the option, the volatility of the underlying security, and the
time remaining until the expiration date.
The premium paid for a put or call option purchased by a Series is recorded
as an asset of the Series and subsequently adjusted. The premium received for
an option written by a Series is included in the Series' assets and an equal
amount is included in its liabilities. The value of an option purchased or
written is marked to market daily and valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Series except the Market Manager Series may purchase securities on a
when-issued or delayed delivery basis if the Series holds, and maintains until
the settlement date in a segregated account, cash, U.S. Government securities,
or high-grade debt obligations in an amount sufficient to meet the purchase
price, or if the Series enters into offsetting contracts for the forward sale of
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other securities it owns. Purchasing securities on a when-issued or delayed
delivery basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Series' other assets. Although a Series
would generally purchase securities on a when-issued basis or enter into forward
commitments with the intention of acquiring securities, the Series may dispose
of a when-issued or delayed delivery security prior to settlement if the
Portfolio Manager deems it appropriate to do so. The Series may realize short-
term profits or losses upon such sales.
FOREIGN CURRENCY TRANSACTIONS
The Multiple Allocation, Fully Managed, Natural Resources, Rising
Dividends, Emerging Markets, Value Equity, Strategic Equity, and Small Cap
Series may enter into forward currency contracts and enter into currency
exchange transactions on a spot (i.e., cash) basis. A forward currency contract
is an obligation to purchase or sell a currency against another currency at a
future date and price as agreed upon by the parties. A Series may either accept
or make delivery of the currency at the maturity of the forward contract or,
prior to maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. A Series will engage in forward currency
transactions in anticipation of or to protect itself against fluctuations in
currency exchange rates. A Series might sell a particular currency forward, for
example, when it wanted to hold bonds or bank obligations denominated in that
currency but anticipated or wished to be protected against a decline in the
currency against the dollar. Similarly, it might purchase a currency forward to
"lock in" the dollar price of securities denominated in that currency which it
anticipated purchasing.
A Series may enter into forward foreign currency contracts in two
circumstances. When a Series enters into a contract for the purchase or sale of
a security denominated in a foreign currency, the Series may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
a fixed amount of dollars for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Series will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and such foreign currency during the period
between the date on which the security is purchased or sold and the date on
which payment is made or received.
Second, when the Series' Portfolio Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars to
sell the amount of foreign currency approximating the value of some or all of
the Series' portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Series will enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Series to deliver an amount of
foreign currency in excess of the value of the Series' portfolio securities or
other assets denominated in that currency.
At the maturity of a forward contract, a Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual
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obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, if a decision is made
to sell the security and make delivery of the foreign currency, it may be
necessary for the Series to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Series is
obligated to deliver.
If the Series retains the portfolio security and engages in an offsetting
transaction, the Series will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between the Series' entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Series will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Series will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
Forward contracts are not traded on regulated commodities exchanges. There
can be no assurance that a liquid market will exist when a Series seeks to close
out a forward currency position, and in such an event, a Series might not be
able to effect a closing purchase transaction at any particular time. In
addition, a Series entering into a forward foreign currency contract incurs the
risk of default by the counter party to the transaction. The CFTC has indicated
that it may in the future assert jurisdiction over certain types of forward
contracts in foreign currencies and attempt to prohibit certain entities from
engaging in such foreign currency forward transactions.
For more information on forward currency contracts, including limits upon
the Series with respect to such contracts, see "Foreign Currency Transactions"
in The GCG Trust Prospectus.
OPTIONS ON FOREIGN CURRENCIES
The Multiple Allocation, Natural Resources, Emerging Markets, Value Equity,
Strategic Equity, and Small Cap Series may engage in transactions in options on
foreign currencies. A call option on a foreign currency gives the buyer the
right to buy, and a put option the right to sell, a certain amount of foreign
currency at a specified price during a fixed period of time. Currently, options
are traded on the following foreign currencies on a domestic exchange: British
Pound, Canadian Dollar, German Mark, Japanese Yen, French Franc, and Swiss
Franc. A Series may enter into closing sale transactions with respect to such
options, exercise them, or permit them to expire.
A Series may employ hedging strategies with options on currencies before
the Series purchases a foreign security denominated in the hedged currency that
the Series anticipates acquiring, during the period the Series holds the foreign
security, or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received.
In those situations where foreign currency options may not be readily
purchased (or where such options may be deemed illiquid) in the currency in
which the hedge is desired, the hedge may
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be obtained by purchasing or selling an option on a "surrogate" currency, i.e.,
a currency where there is tangible evidence of a direct correlation in the
trading value of the two currencies. A surrogate currency is a currency that
can act, for hedging purposes, as a substitute for a particular currency because
the surrogate currency's exchange rate movements parallel that of the primary
currency. Surrogate currencies are used to hedge an illiquid currency risk,
when no liquid hedge instruments exist in world currency markets for the primary
currency.
INVESTMENT RESTRICTIONS
Each Series' investment objective as set forth under "Investment Objectives
and Policies" in the Prospectus, together with the investment restrictions set
forth below, are, unless otherwise noted, fundamental policies of each Series
and may not be changed with respect to any Series without the approval of a
majority of the outstanding voting shares of that Series. The vote of a
majority of the outstanding voting securities of a Series means the vote, at an
annual or special meeting, of the lesser of (a) 67% or more of the voting
securities present at such meeting, if the holders of more than 50% of the
outstanding voting securities of such Series are present or represented by
proxy; or (b) more than 50% of the outstanding voting securities of such Series.
Under these restrictions, a Series may not:
(1) Invest in a security if, with respect to 75% of its total assets, more
than 5% of the total assets (taken at market value at the time of such
investment) would be invested in the securities of any one issuer, except
that this restriction does not apply to securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities, and except that
this restriction shall not apply to the Market Manager Series;
(2) Invest in a security if, with respect to 75% of its assets, it would
hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any one issuer, except securities issued
or guaranteed by the U.S. Government, or its agencies or instrumentalities;
(3) Invest in a security if more than 25% of its total assets (taken at
market value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except that this
restriction does not apply: (a) to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase
agreements with respect thereto), (b) with respect to the Liquid Asset
Series, to securities or obligations issued by U.S. banks, (c) with respect
to the Market Manager Series, to options on stock indexes issued by
eligible broker-dealers or banks, as described in the Market Manager
Series' Prospectus; and (d) to the Real Estate Series, which will normally
invest more than 25% of its total assets in securities of issuers in the
real estate industry and related industries, or to the Natural Resources
Series, which will normally invest more than 25% of its total assets in the
group of industries engaged in natural resources activities, provided that
such concentration for these two Series is permitted under tax law
requirements for regulated investment companies that are investment
vehicles for variable contracts;
(4) Purchase or sell real estate, except that a Series may invest in
securities secured by real estate or real estate interests or issued by
companies in the real estate industry or which invest in real estate or
real estate interests;
23
<PAGE>
(5) Purchase securities on margin (except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities),
except a Series engaged in transactions in options, futures, and options on
futures may make margin deposits in connection with those transactions,
except that effecting short sales will be deemed not to constitute a margin
purchase for purposes of this restriction, and except that the Natural
Resources Series may, consistent with its investment objective and subject
to the restrictions described in the Prospectus and in the Statement of
Additional Information, purchase securities on margin;
(6) Lend any funds or other assets, except that a Series may, consistent
with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of such
obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance with applicable
guidelines established by the Securities and Exchange Commission and
any guidelines established by the Board of Trustees;
(7) Issue senior securities, except insofar as a Series may be deemed to
have issued a senior security by reason of borrowing money in according
with that Series' borrowing policies, and except, for purposes of this
investment restriction, collateral or escrow arrangements with respect to
the making of short sales, purchase or sale of futures contracts or related
options, purchase or sale of forward currency contracts, writing of stock
options, and collateral arrangements with respect to margin or other
deposits respecting futures contracts, related options, and forward
currency contracts are not deemed to be an issuance of a senior security;
(8) Act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, a Series may be
deemed to be an underwriter under the federal securities laws;
(9) With respect to the Multiple Allocation, Fully Managed, Limited
Maturity Bond, Natural Resources, Real Estate, All-Growth, Capital
Appreciation, and Liquid Asset Series, make short sales of securities,
except short sales against the box, and except that this restriction shall
not apply to the Multiple Allocation, Natural Resources, All-Growth, or
Capital Appreciation Series, which may engage in short sales within the
limitations described in the Prospectus and in the Statement of Additional
Information;
(10) Borrow money or pledge, mortgage, or hypothecate its assets, except
that a Series may:
(a) borrow from banks, but only if immediately after each borrowing and
continuing thereafter there is asset coverage of 300%; and (b) enter into
reverse repurchase agreements and transactions in options, futures, options
on futures, and forward currency contracts as described in the Prospectus
and in the Statement of Additional Information. (The deposit of assets in
escrow in connection with the writing of covered put and call options and
the purchase of securities on a "when-issued" or delayed delivery basis and
24
<PAGE>
collateral arrangements with respect to initial or variation margin and
other deposits for futures contracts, options on futures contracts, and
forward currency contracts will not be deemed to be pledges of a Series'
assets);
(11) With respect to the Multiple Allocation, Fully Managed, Limited
Maturity Bond, Natural Resources, Real Estate, All-Growth, Capital
Appreciation, and Liquid Asset Series, invest in securities that are
illiquid because they are subject to legal or contractual restrictions on
resale, in repurchase agreements maturing in more than seven days, or other
securities which in the determination of the Portfolio Manager are illiquid
if, as a result of such investment, more than 10% of the total assets of
the Series (taken at market value at the time of such investment) would be
invested in such securities;
(12) Purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts), except:
(a) any Series may engage in interest rate futures contracts, stock
index futures contracts, futures contracts based on other financial
instruments, and on options on such futures contracts;
(b) the Natural Resources Series may invest in gold bullion and coins
and other precious metals bullion and engage in futures contracts with
respect to such commodities; and
(c) the Multiple Allocation, Natural Resources and Strategic Equity
Series may engage in futures contracts on gold; and
(13) Invest in puts, calls, straddles, spreads, or any combination thereof,
provided that this restriction does not apply to puts that are a feature of
variable or floating rate securities or to puts that are a feature of other
corporate debt securities, and except that any Series may engage in
transactions in options, futures contracts, and options on futures.
The Rising Dividends Series, Emerging Markets Series, Value Equity Series,
Strategic Equity Series, Small Cap Series, and Market Manager Series are also
subject to the following restrictions and policies that are not fundamental and
may, therefore, be changed by the Board of Trustees (without shareholder
approval). Unless otherwise indicated, the Rising Dividends Series, Emerging
Markets Series, Value Equity Series, Strategic Equity Series, Small Cap Series,
and Market Manager Series may not:
(1) Make short sales of securities, except short sales against the box
(this restriction shall not apply to the Strategic Equity and Small Cap
Series, which may make short sales within the limitations described in the
Prospectus and elsewhere in this Statement of Additional Information); and
(2) Invest in securities that are illiquid because they are subject to
legal or contractual restrictions on resale, in repurchase agreements
maturing in more than seven days, or other securities which in the
determination of the Portfolio Manager are illiquid if, as a result of such
investment, more than 15% of the net assets of the Series (taken at market
value at the time of such investment) would be invested in such securities.
25
<PAGE>
MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of
the Board of Trustees according to the applicable laws of the Commonwealth of
Massachusetts and the Trust's Agreement and Declaration of Trust. The Trustees
are Terry L. Kendall, Robert A. Grayson, John L. Murphy, M. Norvel Young, and
Roger B. Vincent. The Executive Officers of the Trust are Terry L. Kendall,
Barnett Chernow, Myles R. Tashman, and Mary Bea Wilkinson.
The Trustees and Executive Officers of the Trust, their business addresses,
and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST BUSINESS AFFILIATIONS AND PRINCIPAL OCCUPATIONS
<S> <C> <C>
Terry L. Kendall Chairman of the Board Managing Director, Bankers Trust Company;
*Golden American Life and President President, Director, and Chief Executive Officer,
Insurance Co. Golden American Life Insurance Company;
1001 Jefferson Street President, Director, and Chief Executive Officer,
Wilmington, DE 19801 BT Variable, Inc.; Chairman of the Board and
President of Separate Account of Golden
American Life Insurance Company ("Separate
Account D"); formerly, President and Chief
Executive Officer, United Pacific Life
Insurance Company (1983-1993).
Barnett Chernow Vice President Executive Vice President, BT Variable, Inc.;
Golden American Life Executive Vice President, Golden American Life
Insurance Co. Insurance Company; Executive Vice President,
1001 Jefferson Street Directed Services, Inc.; Senior Vice President
Wilmington, DE 19801 and Chief Financial Officer, Reliance Insurance
Company, August 1977 to July 1993.
John L. Murphy* Trustee Former Managing Director, Bankers Trust
32 Talmadgeville Road Company and group head of Bankers Trust
Darien, CT 06820 Global Investors; Member of the Board of
Governors of Separate Account D. Mr. Murphy
joined Bankers Trust Company in 1969 and served
as a Managing Director (1986-1996).
Robert A. Grayson Trustee Co-founder, Grayson Associates, Inc.; Adjunct
Grayson Associates Professor of Marketing, New York University
108 Loma Media Road School of Business Administration; Member of
Santa Barbara, CA the Board of Governors of Separate Account D;
93103 former Director, The Golden Financial Group,
Inc.; former Senior Vice President, David &
Charles Advertising.
26
<PAGE>
Myles R. Tashman Secretary Executive Vice President and Secretary, Golden
Golden American Life American Life Insurance Company; Executive
Insurance Co. Vice President, BT Variable, Inc.; Executive
1001 Jefferson Street Vice President and Secretary, Directed
Wilmington, DE 19801 Services, Inc; Secretary of GCG Trust;
formerly, Senior Vice President and General
Counsel, United Pacific Life Insurance Company
(1986-1993).
M. Norvel Young Trustee Chancellor Emeritus and Board of Regents,
Pepperdine University Pepperdine University; Director of Imperial
Malibu, CA 90263 Bancorp, Imperial Bank, Imperial Trust Co. and
20th Century Christian Publishing Company;
Member of the Board of Governors of Separate
Account D; formerly: Chancellor, Pepperdine
University, 1971 to 1984; President, Pepperdine
University, 1957 to 1971; Director, National
Conference of Christians and Jews, 1978 to
1982.
</TABLE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST BUSINESS AFFILIATIONS AND PRINCIPAL OCCUPATIONS
<S> <C> <C>
Mary Bea Wilkinson Treasurer Senior Vice President and Treasurer, Golden
Golden American Life American Life Insurance Company; Senior Vice
Insurance Co. President and Treasurer, BT Variable, Inc.;
1001 Jefferson Street President and Treasurer, Directed Services,
Wilmington, DE 19801 Inc.; Assistant Vice President, CIGNA
Insurance Companies, August 1993 to
October 1993; various positions with United
Pacific Life Insurance Company, January 1987
to July 1993, and was Vice President and
Controller upon leaving.
Roger B. Vincent Trustee President, Springwell Corporation; Director,
230 Park Avenue Petralone, Inc.; Member of the Board of
New York, NY 10169 Governors of Separate Account D; formerly,
Managing Director, Bankers Trust Company.
</TABLE>
- - --------------------------
*Messrs. Kendall and Murphy are "interested persons" of the Trust (as that
term is defined in the Investment Company Act of 1940) because of their
affiliations with the Manager and its affiliated companies as shown above.
As of April 15, 1996, none of the Trustees directly owns shares of the
Series. In addition, as of April 15, 1996, the Trustees and Officers as a group
owned Variable Contracts that entitled them to give voting instructions with
respect to less than one percent of the outstanding shares of each Series in the
aggregate.
27
<PAGE>
As indicated above, the Trustees and officers hold positions with Separate
Account D of Golden American Life Insurance Company ("Separate Account D"),
another fund for which the Manager serves as investment adviser. Through
December 31, 1995, Trustees other than those affiliated with the Manager or a
Portfolio Manager ("Non-Affiliated Trustees") received a fee for each Board of
Trustees meeting attended based on the level of the Trust's assets at the time
of the meeting as follows: $2,000 per meeting for aggregate assets up to $500
million; $3,000 per meeting for aggregate assets in excess of $500 million and
up to $1 billion; $4,000 per meeting for aggregate assets in excess of $1
billion and up to $2 billion; and $5,000 per meeting for aggregate assets in
excess of $2 billion. Effective January 1, 1996, Non-Affiliated Trustees
receive a flat fee of $6,000 for each Board of Trustees meeting attended.
Trustees have been and will continue to be reimbursed for any expenses incurred
in attending such meetings or otherwise in carrying out their responsibilities
as Trustees of the Trust. During the fiscal year ended December 31, 1995, fees
totaling $54,000 were paid by the Trust or accrued to Messrs. Grayson ($18,000),
Young ($18,000), and Vincent ($18,000). During the fiscal year ended December
31, 1995, Messrs. Grayson, Young, and Vincent earned total fees of $20,500,
$20,500, and $20,500, respectfully, from the Trust and Separate Account D. No
officer or Trustee received any other compensation directly from the Trust.
The table below lists each Variable Contract Owner who owns a Variable
Contract that entitles the owner to give voting instructions with respect
to 5% or more of the shares of the Series as of April 15, 1996. The
address for each record owner is c/o Golden American Life Insurance Company,
1001 Jefferson Avenue, Wilmington, DE 19801.
NAME SERIES PERCENTAGE
Darald Libby Charitable Market Manager 6.85%
Remainder Unit Trust
George Berman Charitable Market Manager 6.10%
Remainder Trust
David and Anita Swann Market Manager 10.98%
Charitable Remainder Trust
In addition, as of April 15, 1996 the General Account of Golden American
owned 160.02% of the shares of the Market Manager Series.
THE MANAGEMENT AGREEMENT
Directed Services, Inc. ("DSI" or the "Manager") serves as Manager to the
Series pursuant to a Management Agreement (the "Management Agreement") between
the Manager and the Trust. DSI's address is 1001 Jefferson Street, Suite 400,
Wilmington, Delaware 19801. DSI is a New York corporation that is a wholly
owned subsidiary of BT Variable, Inc. which, in turn, is an indirect subsidiary
of Bankers Trust Company. DSI is registered with the Securities and Exchange
Commission as an investment adviser and a broker-dealer. The Trust currently
offers the shares of its operating Series to, among others, separate accounts of
Golden American Life Insurance Company ("Golden American") to serve as the
investment medium for Variable Contracts issued by Golden American. DSI is the
principal underwriter and distributor of the Variable Contracts issued by Golden
American. Golden American is a stock life insurance company organized under
28
<PAGE>
the laws of the State of Delaware. Prior to December 30, 1993, Golden American
was a Minnesota corporation. Golden American is an indirect wholly owned
subsidiary of Bankers Trust Company.
Pursuant to the Management Agreement, the Manager, subject to the direction
of the Board of Trustees, is responsible for providing all supervisory,
management, and administrative services reasonably necessary for the operation
of the Trust and its Series other than the investment advisory services
performed by the Portfolio Managers. These services include, but are not
limited to, (i) coordinating all matters relating to the operation of the
Series, including any necessary coordination among the Series' Portfolio
Managers, Custodian, Dividend Disbursing Agent, Portfolio Accounting Agent
(including pricing and valuation of the Series' portfolios), accountants,
attorneys, and other parties performing services or operational functions for
the Trust; (ii) providing the Trust and the Series, at the Manager's expense,
with the services of a sufficient number of persons competent to perform such
administrative and clerical functions as are necessary to ensure compliance with
federal securities laws and to provide effective supervision and administration
of the Trust; (iii) maintaining or supervising the maintenance by third parties
selected by the Manager of such books and records of the Trust and the Series as
may be required by applicable federal or state law; (iv) preparing or
supervising the preparation by third parties selected by the Manager of all
federal, state, and local tax returns and reports of the Trust relating to the
Series required by applicable law; (v) preparing and filing and arranging for
the distribution of proxy materials and periodic reports to shareholders of the
Series as required by applicable law in connection with the Series; (vi)
preparing and arranging for the filing of such registration statements and other
documents with the Securities and Exchange Commission and other federal and
state regulatory authorities as may be required by applicable law in connection
with the Series; (vii) taking such other action with respect to the Trust, as
may be required by applicable law, including without limitation the rules and
regulations of the SEC and other regulatory agencies; and (viii) providing the
Trust at the Manager's expense, with adequate personnel, office space,
communications facilities, and other facilities necessary for operation of the
Series contemplated in the Management Agreement. Other responsibilities of the
Manager are described in the Prospectus.
The Manager shall make its officers and employees available to the Board of
Trustees and Officers of the Trust for consultation and discussions regarding
the supervision and administration of the Series.
Pursuant to the Management Agreement, the Manager is authorized to exercise
full investment discretion and make all determinations with respect to the
investment of a Series' assets and the purchase and sale of portfolio securities
for one or more Series in the event that at any time no Portfolio Manager is
engaged to manage the assets of such Series.
The Management Agreement shall continue in effect until October 1, 1996,
and from year to year thereafter, provided such continuance after October 1,
1996 is approved annually by (i) the holders of a majority of the outstanding
voting securities of the Trust or by the Board of Trustees, and (ii) a majority
of the Trustees who are not parties to such Management Agreement or "interested
persons" (as defined in the Investment Company Act of 1940 (the "1940 Act")) of
any such party. The Management Agreement, dated October 1, 1993, was approved
by shareholders at a meeting held on August 31, 1993, and was last continued by
the Board of Trustees, including the Trustees who are not parties to the
Management Agreement or interested persons of such parties, at a meeting held on
September 21, 1995. The Management Agreement may be terminated without penalty
by vote of the Trustees or the shareholders of the Series or by the Manager, on
60 days'
29
<PAGE>
written notice by either party to the Management Agreement, and will terminate
automatically if assigned as that term is described in the 1940 Act.
Prior to October 1, 1993, DSI served as manager to the then operational
Series pursuant to a management agreement that was effective as of September 30,
1992. The Manager's fees for supervisory and management services under the
prior management agreement were 0.20% of the average daily net assets of each of
the Series, computed and accrued daily and paid monthly. Under the prior
management agreement, the Manager was not responsible, as it is under the
current Management Agreement, for providing or procuring services necessary for
the ordinary operation of the Series, including portfolio management, custodial,
administrative, transfer agency, portfolio accounting, dividend disbursing,
auditing and ordinary legal expenses.
Gross fees paid to the Manager under the current Management Agreement
(pursuant to which the Manager provides all services reasonably necessary for
the operation of the Trust) for the fiscal year ended December 31, 1995 were as
follows: Multiple Allocation Series -- $3,056,095; Strategic Equity Series
(commencement of operation October 2, 1995) -- $11,085; Fully Managed Series --
$1,102,160; Limited Maturity Bond Series -- $516,872; Natural Resources Series -
- - - $291,869; Real Estate Series -- $347,823; All-Growth Series -- $832,889;
Capital Appreciation Series -- $1,055,352; Rising Dividends Series -- $641,200;
Emerging Markets Series -- $817,859; Liquid Asset Series -- $254,546; and Value
Equity Series -- $108,140. The management fee payable to the Manager for the
Market Manager Series for the fiscal period ending December 31, 1995 was waived
in part ($6,748) and paid in part ($51,724) by the Manager. Gross fees paid to
the Manager under the current Management Agreement (pursuant to which the
Manager provides all services reasonably necessary for the operation of the
Trust) for the fiscal year ended December 31, 1994 were as follows: Multiple
Allocation Series -- $3,008,912; Fully Managed Series -- $1,093,894;
Limited Maturity Bond Series -- $447,478; Natural Resources Series --
$292,787; Real Estate Series -- $354,228; All-Growth Series -- $624,518;
Capital Appreciation Series -- $912,861; Rising Dividends Series --
$367,866; Emerging Markets Series -- $892,888; and Liquid Asset Series --
$226,289. The management fee payable to the Manager for the Market Manager
Series for the fiscal period November 14, 1994 to December 31, 1994 was
waived by the Manager. Gross fees paid to the Manager for the period October
1, 1993 to December 31, 1993 were as follows: Multiple Allocation Series --
$641,069, Fully Managed Series -- $257,788, Limited Maturity Bond Series --
$102,389, Natural Resources Series -- $43,426, Real Estate Series -- $72,064,
All-Growth Series -- $133,480, Capital Appreciation Series -- $204,545, Rising
Dividends Series -- $13,784, Emerging Markets Series -- $35,514, and Liquid
Asset Series -- $26,882. Gross fees paid to the Manager for the period January
1, 1993 to September 30, 1993 under the prior management agreement (pursuant to
which the Manager provided supervisory and management services) were as follows:
Multiple Allocation Series -- $249,845, Fully Managed Series -- $96,568,
Limited Maturity Bond Series -- $49,996, Natural Resources Series -- $11,528,
Real Estate Series -- $20,379, All-Growth Series -- $51,416, Capital
Appreciation Series -- $70,127, and Liquid Asset Series -- $6,695.
Pursuant to an agreement to limit certain expenses of the Series, the
Series received from DSI for the period January 1, 1993 to September 30, 1993
the following amounts: Multiple Allocation Series -- $51,197, Fully Managed
Series -- $27,633, Limited Maturity Bond Series -- $22,467, Natural Resources
Series -- $8,504, Real Estate Series -- $18,209, All-Growth Series -- $2,517,
Capital Appreciation Series -- $19,889, and Liquid Asset Series -- $12,035.
30
<PAGE>
The Trust, DSI and several Portfolio Managers -- Zweig Advisors Inc.;
Bankers Trust Company; Van Eck Associates Corporation; and Chancellor Trust
Company -- entered into Portfolio Management Agreements dated and effective as
of September 30, 1992, as amended by an addendum to each Portfolio Management
Agreement dated and effective as of October 1, 1993 and (with the exception of
Bankers Trust Company) as further amended by an addendum to each Portfolio
Management Agreement dated and effective as of April 30, 1995. The Portfolio
Management Agreements were approved by the shareholders of each of the
respective operational series of the Trust other than the Capital Appreciation
Series at a meeting held on June 29, 1992. The shareholders of the Capital
Appreciation Series approved the Portfolio Management Agreement for that Series
at a meeting held on August 31, 1993. The first addenda to the Portfolio
Management Agreements were approved by shareholders of each operational Series
of the Trust at a meeting held on August 31, 1993. Under the addenda to the
Portfolio Management Agreements, the Manager (and not the Trust) pays each
Portfolio Manager a monthly fee based on an annual percentage of average daily
net assets of the Series managed by that Portfolio Manager. The second addenda
to the Portfolio Management Agreements was approved by the Board of Trustees
at a meeting held on March 29, 1995 and by shareholders at a meeting held on
April 28, 1995. The Portfolio Management Agreement with Zweig Advisors Inc. was
amended by an addendum dated September 29, 1995, for the purpose of adding the
Strategic Equity Series. The addendum to that Portfolio Management Agreement
was approved by the Board of Trustees at a meeting held on September 21, 1995,
and was approved by the sole shareholder of the Series at a meeting held on
September 29, 1995. With the exception of the Portfolio Management Agreements
for the Fully Managed Series and Real Estate Series, each of the Portfolio
Management Agreements was last continued by the Board of Trustees of the Trust,
including the Trustees who are not parties to the Portfolio Management
Agreements or interested persons of such parties, at a meeting held on
September 21, 1995. The Portfolio Management Agreements with Weiss, Peck &
Greer Advisers, Inc. for the Fully Managed Series and Chancellor Trust Company
for the Real Estate Series terminated on December 31, 1994.
The Trust, DSI, and Warburg, Pincus Counsellors, Inc. entered into a
Portfolio Management Agreement dated as of June 9, 1994 on behalf of the All-
Growth Series. The Portfolio Management Agreement with Warburg, Pincus
Counsellors, Inc. was approved by shareholders of that Series at a meeting held
on September 15, 1994 and was last continued by the Board of Trustees at a
meeting held on September 21, 1995
The Trust, DSI, and Kayne, Anderson Investment Management, Inc. entered
into a Portfolio Management Agreement dated as of October 1, 1993, as amended by
an addendum dated April 30, 1995, on behalf of the Rising Dividends Series. The
Portfolio Management Agreement with Kayne, Anderson Investment Management, Inc.
was approved by the sole shareholder of that Series at a meeting held on
September 30, 1993 and was last continued by the Board of Trustees at a meeting
held on September 21, 1995. On January 1, 1995, Kayne, Anderson Investment
Management, L.P. became Portfolio Manager pursuant to a Substitution Agreement.
The addendum to the Portfolio Management Agreement was approved by the Board of
Trustees at a meeting held on March 29, 1995 and by shareholders at a meeting
held on April 28, 1995.
The Trust, DSI, and Bankers Trust Company entered into an Addendum dated
October 1, 1993 to the Portfolio Management Agreement dated September 30, 1992
on behalf of the Emerging Markets Series. The Portfolio Management Agreement
was approved by the sole shareholder of that Series at a meeting held on
September 30, 1993 and was last continued by the Board of Trustees at a meeting
held on September 21, 1995. The Trust, DSI, and Bankers Trust
31
<PAGE>
Company entered into a second Addendum dated October 4, 1994 to the Portfolio
Management Agreement on behalf of the Market Manager Series. The Addendum was
approved by the Board of Trustees at a meeting held on September 27, 1994, and
the Portfolio Management Agreement was approved by the sole shareholder of that
Series at a meeting held on November 7, 1994.
The Trust, DSI, and Eagle Asset Management, Inc. entered into a Portfolio
Management Agreement dated as of January 1, 1995 on behalf of the Value Equity
Series. The Portfolio Management Agreement with Eagle Asset Management, Inc.
was approved by the Board of Trustees at a meeting held on September 27, 1994,
and was approved by the sole shareholder of that Series at a meeting held on
December 30, 1994.
The Trust, DSI, and T. Rowe Price Associates, Inc. entered into a Portfolio
Management Agreement dated as of January 1, 1995 on behalf of the Fully Managed
Series. The Portfolio Management Agreement with T. Rowe Price Associates, Inc.
was approved by the Board of Trustees at a meeting held on December 20, 1994,
and was approved by the shareholders of that Series at a meeting held on
April 28, 1995.
The Trust, DSI, and E.I.I. Realty Securities, Inc. entered into a Portfolio
Management Agreement dated as of January 1, 1995 on behalf of the Real Estate
Series. The Portfolio Management Agreement with E.I.I. Realty Securities, Inc.
was approved by the Board of Trustees at a meeting held on December 20, 1994,
and was approved by the shareholders of that Series at a meeting held on
April 28, 1995.
The Trust, DSI, and Fred Alger Management, Inc. entered into a Portfolio
Management Agreement dated as of January 1, 1996 on behalf of the Small Cap
Series. The Portfolio Management Agreement with Fred Alger Management, Inc. was
approved by the Board of Trustees at a meeting held on December 5, 1995, and was
approved by the sole shareholder of that Series at a meeting held on
December 29, 1995.
As discussed in the section entitled "The Manager" in the Prospectus, prior
to October 1, 1993, the Trust bore the expenses of portfolio management fees.
Pursuant to the addenda to the Portfolio Management Agreements, the Manager (and
not the Trust) pays each Portfolio Manager for its services a monthly fee at
annual rates which are expressed as percentages of the average daily net assets
of each Series. For the fiscal year ended December 31, 1995, the Manager (and
not the Trust) paid the Portfolio Managers the following amounts: Zweig
Advisors Inc. -- $1,623,170 for the Multiple Allocation Series and $5,543
for the Strategic Equity Series (operation commencement from October 2, 1995);
T. Rowe Price Associates, Inc. -- $552,676 for the Fully Managed Series; Bankers
Trust Company -- $222,697 for the Limited Maturity Bond Series, $410,190 for
the Emerging Markets Series, $76,360 for the Liquid Asset Series and
$22,410 for the Market Manager Series; Van Eck Associates Corp. -- $150,474
for the Natural Resources Series; Chancellor Trust Company -- $559,368 for
the Capital Appreciation Series; Kayne, Anderson Investment Management, L.P. -
- - - $325,429 for the Rising Dividends Series; E.I.I. Realty Securities, L.P. --
$174,495 for the Real Estate Series; Eagle Asset Management, Inc. -- $54,070
for the Value Equity Series; and Warburg, Pincus Counsellors, Inc. -- $417,408
for the All-Growth Series. For the fiscal year ended December 31, 1994, the
Manager (and not the Trust) paid the Portfolio Managers the following
amounts: Zweig Advisors Inc. -- $1,656,915 for the Multiple Allocation
Series; Weiss, Peck & Greer Advisers, Inc. -- $734,134 for the Fully Managed
Series; Bankers Trust Company -- $198,421 for the Limited Maturity Bond
Series, $445,183 for the Emerging Markets Series, and $81,751 for the
Liquid Asset Series; Van
32
<PAGE>
Eck Associates Corp. -- $158,413 for the Natural Resources Series;
Chancellor Trust Company -- $250,164 for the Real Estate Series and $546,256
for the Capital Appreciation Series; Kayne, Anderson Investment Management,
Inc. -- $195,541 for the Rising Dividends Series. For the fiscal period
from November 14, 1994 (commencement of operations) to December 31, 1994,
the Manager (and not the Trust) paid Bankers Trust Company $0 for the Market
Manager Series. The Manager paid J.M. Hartwell & Company, Inc. $160,575 for
the All-Growth Series for the period of January 1, 1994 through June 30,
1994, and Warburg, Pincus Counsellors, Inc. $165,317 for the All-Growth Series
for the period of July 1, 1994 to December 31, 1994. For the period of
October 1, 1993 through December 31, 1993, the Manager (and not the Trust) paid
the Portfolio Managers the following amounts: Zweig Advisors Inc. -- $384,642
for the Multiple Allocation Series; Weiss, Peck & Greer Advisers, Inc. --
$154,673 for the Fully Managed Series; Bankers Trust Company -- $45,813 for the
Limited Maturity Bond Series; Van Eck Associates Corporation -- $23,884 for the
Natural Resources Series; Chancellor Trust Company -- $43,234 for the Real
Estate Series; J.M. Hartwell & Company, Inc. -- $73,414 for the All-Growth
Series; Chancellor Trust Company -- $122,727 for the Capital Appreciation
Series; and Bankers Trust Company -- $8,822 for the Liquid Asset Series. For
the period of October 4, 1993 (commencement of operations) through December 31,
1993, the Manager (and not the Trust) paid the Portfolio Managers of the Rising
Dividends Series and Emerging Markets Series, pursuant to the Portfolio
Management Agreements, the following amounts: Kayne, Anderson Investment
Management, Inc. -- $7,582 for the Rising Dividends Series and Bankers Trust
Company -- $17,117 for the Emerging Markets Series. Prior to October 1, 1993,
pursuant to the Portfolio Management Agreements or the prior portfolio
management agreements, the Trust (and not the Manager) paid each Portfolio
Manager for its services. Fees paid to the Portfolio Managers for the period of
January 1, 1993 through September 30, 1993 were as follows: Zweig Advisors Inc.
- - -- $749,534 for the Multiple Allocation Series; Weiss, Peck & Greer Advisers,
Inc. -- $289,704 for the Fully Managed Series; Bankers Trust Company -- $108,259
for the Limited Maturity Bond Series; Van Eck Associates Corporation -- $31,701
for the Natural Resources Series; Chancellor Trust Company -- $61,138 for the
Real Estate Series; J.M. Hartwell & Company, Inc. -- $141,676 for the All-Growth
Series; Chancellor Trust Company -- $210,811 for the Capital Appreciation
Series; and Bankers Trust Company -- $26,178 for the Liquid Asset Series.
DISTRIBUTION OF TRUST SHARES
Directed Services, Inc. ("DSI") serves as the Series' Distributor. DSI is
not obligated to sell a specific amount of the Series' shares. DSI bears all
expenses of providing distribution services including the costs of sales
presentations, mailings, advertising, and any other marketing efforts by DSI in
connection with the distribution or sale of the shares.
PURCHASES AND REDEMPTIONS
For information on purchase and redemption of shares, see "Purchase of
Shares" and "Redemption of Shares" in the Prospectuses. The Trust may suspend
the right of redemption of shares of any Series and may postpone payment beyond
seven days for any period: (i) during which the New York Stock Exchange is
closed other than customary weekend and holiday closing or during which trading
on the New York Stock Exchange is restricted; (ii) when the Securities and
Exchange Commission determines that a state of emergency exists which may make
payment or transfer not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any other time when the Trust may, under
applicable laws and regulations, suspend payment on the redemption of its
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shares. If the Board of Trustees should determine that it would be detrimental
to the best interests of the remaining shareholders of a Series to make payment
wholly or partly in cash, the Series may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with applicable rules of the Securities and
Exchange Commission. If shares are redeemed in kind, the redeeming shareholder
might incur brokerage costs in converting the assets into cash.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Series are made by the Portfolio Manager of
each Series. Each Portfolio Manager has investment advisory clients other than
the Series. A particular security may be bought or sold by a Portfolio Manager
for certain clients even though it could have been bought or sold for other
clients at the same time. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, allocated between such
clients in a manner deemed fair and reasonable by the Portfolio Manager.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Portfolio Manager, and the results of
such allocations, are subject to periodic review by the Trust's Manager and
Board of Trustees. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.
The Portfolio Manager for a Series may receive research services from many
broker-dealers with which the Portfolio Manager places the Series' portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Portfolio Manager and its affiliates in advising its various clients
(including the Series), although not all of these services are necessarily
useful and of value in managing a Series.
BROKERAGE AND RESEARCH SERVICES
The Portfolio Manager for a Series places all orders for the purchase and
sale of portfolio securities, options, and futures contracts for a Series
through a substantial number of brokers and dealers or futures commission
merchants. In executing transactions, the Portfolio Manager will attempt to
obtain the best execution for a Series taking into account such factors as price
(including the applicable brokerage commission or dollar spread), size of order,
the nature of the market for the security, the timing of the transaction, the
reputation, experience and financial stability of the broker-dealer involved,
the quality of the service, the difficulty of execution and operational
facilities of the firms involved, and the firm's risk in positioning a block of
securities. In transactions on stock exchanges in the United States, payments
of brokerage commissions are negotiated. In effecting purchases and sales of
portfolio securities in transactions on United States stock exchanges for the
account of the Trust, the Portfolio Manager may pay higher commission rates than
the lowest available when the Portfolio Manager believes it is reasonable to do
so in light of the value of the brokerage and research services provided by the
broker effecting the transaction, as described below. In the case of securities
traded on some foreign stock exchanges, brokerage commissions may be fixed and
the Portfolio Manager may be unable to negotiate commission rates for these
transactions. In the case of securities traded on the over-the-counter
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markets, there is generally no stated commission, but the price includes an
undisclosed commission or markup.
There is generally no stated commission in the case of fixed-income
securities, which are generally traded in the over-the-counter markets, but the
price paid by the Series usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Series includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Series of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Portfolio Manager for a Series may receive research services from many
broker-dealers with which the Portfolio Manager places the Series' portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Portfolio Manager and its affiliates in advising its various clients
(including the Series), although not all of these services are necessarily
useful and of value in managing a Series. The advisory fee paid by the Series
to the Portfolio Manager is not reduced because the Portfolio Manager and its
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Portfolio Manager may cause a Series to pay a broker-dealer, which provides
"brokerage and research services" (as defined in the Act) to the Portfolio
Manager, a disclosed commission for effecting a securities transaction for the
Series in excess of the commission which another broker-dealer would have
charged for effecting that transaction.
A Portfolio Manager may place orders for the purchase and sale of exchange-
listed portfolio securities with a broker-dealer that is an affiliate of the
Portfolio Manager where, in the judgment of the Portfolio Manager, such firm
will be able to obtain a price and execution at least as favorable as other
qualified brokers.
Pursuant to rules of the Securities and Exchange Commission, a broker-
dealer that is an affiliate of the Manager or a Portfolio Manager or, if it is
also a broker-dealer, the Portfolio Manager may receive and retain compensation
for effecting portfolio transactions for a Series on a national securities
exchange of which the broker-dealer is a member if the transaction is "executed"
on the floor of the exchange by another broker which is not an "associated
person" of the affiliated broker-dealer or Portfolio Manager, and if there is in
effect a written contract between the Portfolio Manager and the Trust expressly
permitting the affiliated broker-dealer or Portfolio Manager to receive and
retain such compensation. The Portfolio Management Agreements provide that each
Portfolio Manager may retain compensation on transactions effected for a Series
in accordance with the terms of these rules. The Fully Managed Series and
Rising Dividends Series currently intend to use a broker-dealer that is an
affiliate of the Portfolio Manager.
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Securities and Exchange Commission rules further require that commissions
paid to such an affiliated broker-dealer or Portfolio Manager by a Series on
exchange transactions not exceed "usual and customary brokerage commissions."
The rules define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Board of Trustees
has adopted procedures for evaluating the reasonableness of commissions paid to
broker-dealers that are affiliated with Portfolio Managers or to Portfolio
Managers that are broker-dealers and will review these procedures periodically.
BT Brokerage Corporation, Watermark Securities, Inc., Zweig Securities Corp., KA
Associates, Inc., Counsellors Securities Inc., Raymond James & Associates, Inc.,
and Fred Alger & Company, Incorporated are registered broker-dealers, and each
is an affiliate of a Portfolio Manager. Certain affiliates of Robert Fleming
Holdings Limited and Jardine Fleming Group Limited are broker-dealers affiliated
with T. Rowe Price Associates, Inc. Any of the above firms may retain
compensation on transactions effected for a Series in accordance with these
rules and procedures.
For the fiscal year ended December 31, 1995, the Multiple Allocation
Series, Strategic Equity Series (operation commencement from October 2, 1995),
Fully Managed Series, Limited Maturity Bond Series, Emerging Markets Series,
Liquid Asset Series, Market Manager Series, Natural Resources Series, Real
Estate Series, Capital Appreciation Series, Rising Dividends Series, Value
Equity Series and All-Growth Series paid brokerage commissions of $519,963,
$10,355, $321,876, $0, $600,724, $0, $1,575, $40,242, $113,534, $235,075,
$82,924, $59,789 and $193,100, respectively. The Multiple Allocation Series
paid brokerage commissions of $86,365 (16.61% of its total brokerage
commissions) to Watermark Securities, Inc. The Market Manager Series paid
brokerage commissions of $1,425 (90.48% of its total brokerage commissions) to
BT Brokerage Corporation. The Value Equity Series paid brokerage commissions of
$240 (0.40% of its total brokerage commissions) to Raymond James & Associates,
Inc. During the fiscal year ended December 31, 1994, the Multiple Allocation
Series, Fully Managed Series, Natural Resources Series, Real Estate Series,
All-Growth Series, Capital Appreciation Series, Rising Dividends Series,
Emerging Markets Series, and Market Manager Series paid brokerage commissions of
$301,480, $157,580, $69,954, $69,376, $260,691, $183,029, $106,828, $589,210,
and $975, respectively. During the fiscal year ended December 31, 1993, the
Multiple Allocation Series, Fully Managed Series, Natural Resources Series, Real
Estate Series, All-Growth Series, and Capital Appreciation Series paid brokerage
commissions of $265,151, $119,201, $42,006, $54,079, $30,669, and $157,757,
respectively. During the fiscal period from October 4, 1993 (commencement of
operations) to December 31, 1993, the Rising Dividends Series and Emerging
Markets Series paid brokerage commissions of $29,028 and $77,618, respectively.
The Fully Managed Series paid brokerage commissions of $68,311 (57.3% of its
total brokerage commissions) to Weiss, Peck & Greer Advisers, Inc. The Multiple
Allocation Series paid brokerage commissions of $49,242 (18.6% of its total
brokerage commissions) to Watermark Securities, Inc. The Rising Dividends
Series paid brokerage commissions of $20,641 (71.1% of its total brokerage
commissions) to KA Associates, Inc.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectuses, the Series' net
asset value per share for the purpose of pricing purchase and redemption orders
is determined at or about 4:00 P.M., New York City time, on each day the New
York Stock Exchange is open for trading, exclusive of federal holidays.
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The Liquid Asset Series' portfolio securities are valued using the
amortized cost method of valuation. This involves valuing a security at cost on
the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Series would receive if it sold the instrument. During such periods the yield
to investors in the Series may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities.
The Securities and Exchange Commission's regulations require the Liquid
Asset Series to adhere to certain conditions. The Trustees, as part of their
responsibility within the overall duty of care owed to the shareholders, are
required to establish procedures reasonably designed, taking into account
current market conditions and the Series' investment objectives, to stabilize
the net asset value per share as computed for the purpose of distribution and
redemption at $1.00 per share. The Trustees' procedures include a requirement
to periodically monitor, as appropriate and at such intervals as are reasonable
in light of current market conditions, the relationship between the amortized
cost value per share and the net asset value per share based upon available
indications of market value. The Trustees will consider what steps should be
taken, if any, in the event of a difference of more than 1/2 of 1% between the
two. The Trustees will take such steps as they consider appropriate (e.g.,
selling securities to shorten the average portfolio maturity) to minimize any
material dilution or other unfair results which might arise from differences
between the two. The Series also is required to maintain a dollar-weighted
average portfolio maturity of 90 days or less, to limit its investments to
instruments having remaining maturities of 13 months or less (except securities
held subject to repurchase agreements having 13 months or less to maturity) and
to invest only in securities determined by the Portfolio Manager under
procedures established by the Board of Trustees to be of high quality with
minimal credit risks.
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PERFORMANCE INFORMATION
The Trust may, from time to time, include the current yield and effective
yield of its Liquid Asset Series, the yield of the remaining Series, and the
total return of all Series in advertisements or sales literature. In the case
of Variable Contracts, performance information for the Series will not be
advertised or included in sales literature unless accompanied by comparable
performance information for a separate account to which the Series offer their
shares.
Current yield for Liquid Asset Series will be based on the change in the
value of a hypothetical investment (exclusive of capital charges) over a
particular seven-day period, less a pro-rata share of Series expenses accrued
over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The base
period return is then annualized by multiplying by 365/7, with the resulting
yield figure carried to at least the nearest hundredth of one percent.
"Effective yield" for the Liquid Asset Series assumes that all dividends
received during an annual period have been reinvested. Calculation of
"effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Yield = [ ( (Base Period Return) + 1 )365/7 ] - 1
Quotations of yield for the remaining Series will be based on all
investment income per share earned during a particular 30-day period (including
dividends and interest and calculated in accordance with a standardized yield
formula adopted by the Securities and Exchange Commission), less expenses
accrued during the period ("net investment income"), and are computed by
dividing net investment income by the maximum offering price per share on the
last day of the period, according to the following formula:
a-b 6
YIELD = 2 [ ( ----- + 1 ) - 1 ]
cd
where,
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
Quotations of average annual total return for a Series will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Series over certain periods that will include periods of one,
five, and ten years (or, if less, up to the life of the Series), calculated
pursuant to the following formula: P (1 + T)n = ERV (where P = a hypothetical
initial payment of $1,000, T = the average annual total return, n = the number
of years, and ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period). Quotations of total return may also be
shown for other periods. All total return figures reflect the deduction of a
proportional share of Series expenses on an annual basis, and assume that all
dividends and distributions are reinvested when paid.
For the period of January 3, 1989 (inception of the Trust) to December
31, 1995 and for the five- and one-year periods ended December 31, 1995,
the average annual total return
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for each Series was as follows: 9.03%, 9.81%, and 18.93% for the Multiple
Allocation Series; 7.57%, 10.52%, and 20.71% for the Fully Managed Series;
7.17%, 6.46%, and 11.72% for the Limited Maturity Bond Series; 6.39%,
9.12%, and 22.42% for the All-Growth Series; 8.29%, 17.29%, and 16.59% for
the Real Estate Series; 7.46%, 9.95%, and 10.69% for the Natural Resources
Series; and 5.19%, 4.13%, and 5.51% for the Liquid Asset Series. For the
period of May 4, 1992 (inception of the Capital Appreciation Series) to
December 31, 1995 and the one-year period ended December 31, 1995, the average
total return for the Capital Appreciation Series was 12.50% and 31.06%. For
the period of October 1, 1993 (inception of the Rising Dividends and
Emerging Markets Series) to December 31, 1995 and for the one-year period
ended December 31, 1995, the average total return for the Rising Dividends
Series was 14.66% and 31.06% and the average annual total return for the
Emerging Markets Series was -2.32% and -10.11%. For the period of November
14, 1994 (inception of the Market Manager Series) to December 31, 1995 and for
the one-year period ended December 31, 1995, the average total return for the
Market Manager Series was 21.52% and 24.33%. For the period of January 1,
1995 (inception of the Value Equity Series) to December 31, 1995, the
average total return for the Value Equity Series was 35.21%. For the period
of October 2, 1995 (inception of the Strategic Equity Series) to December 31,
1995, the average total return for the Strategic Equity Series was 1.33%.
Performance information for a Series may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's 500
Stock Index ("S&P 500"), the Dow Jones Industrial Average ("DJIA"), the Lehman
Brothers Government Bond Index, the Donoghue Money Market Institutional
Averages, the Lehman Brothers Government Corporate Index, the Salomon High Yield
Index, or other indices that measure performance of a pertinent group of
securities, (ii) other groups of mutual funds tracked by Lipper Analytical
Services, Inc., a widely used independent research firm which ranks mutual funds
by overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Series.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
Reports and promotional literature may also contain other information
including (i) the ranking of any Series derived from rankings of mutual funds or
other investment products tracked by Lipper Analytical Services, Inc. or by
other rating services, companies, publications, or other persons who rank mutual
funds or other investment products on overall performance or other criteria, and
(ii) the effect of tax deferred compounding on a Series' investment returns, or
returns in general, which may be illustrated by graphs, charts, or otherwise,
and which may include a comparison, at various points in time, of the return
from an investment in a Series (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis.
In addition, reports and promotional literature may contain information
concerning the Manager, the Portfolio Managers, or affiliates of the Trust, the
Manager, or the Portfolio Managers, including (i) performance rankings of other
mutual funds managed by a Portfolio Manager, or the individuals employed by a
Portfolio Manager who exercise responsibility for the day-to-day management of a
Series, including rankings of mutual funds published by Morningstar, Inc., Value
Line Mutual Fund Survey, or other rating services, companies, publications, or
other persons who rank mutual funds or other investment products on overall
performance or other criteria; (ii) lists of clients, the number of clients, or
assets under management; and (iii)
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information regarding services rendered by the Manager to the Trust, including
information related to the selection and monitoring of the Portfolio Managers.
Reports and promotional literature may also contain a description of the type of
investor for whom it could be suggested that a Series is intended, based upon
each Series' investment objectives.
In the case of Variable Contracts, quotations of yield or total return for
a Series will not take into account charges and deductions against any Separate
Accounts to which the Series shares are sold or charges and deductions against
the life insurance policies or annuity contracts issued by Golden American,
although comparable performance information for the Separate Account will take
such charges into account. Performance information for any Series reflects only
the performance of a hypothetical investment in the Series during the particular
time period on which the calculations are based. Performance information should
be considered in light of the Series' investment objective or objectives and
investment policies, the characteristics and quality of the portfolios, and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
TAXATION
The following discussion summarizes certain U.S. federal tax considerations
incident to an investment in a Series.
Each Series intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify as a regulated investment company, each Series generally must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities, or currencies (to satisfy this requirement, it is
intended that the Series investing in gold and other commodities will be managed
so that the gross income derived from its investments in gold and other
commodities and future contracts on gold and other commodities, when combined
with any other gross income of the Series which is not derived from qualifying
sources, will not exceed 10% of the Series' gross income during any fiscal
year); (ii) derive in each taxable year less than 30% of its gross income from
the sale or other disposition of certain assets held less than three months
(namely (a) stock or securities, (b) options, futures, and forward contracts
(other than those on foreign currencies), and (c) foreign currencies (including
options, futures, and forward contracts on such currencies) not directly related
to a Series' principal business of investing in stocks or securities (or options
and futures with respect to stocks and securities)); (iii) diversify its
holdings so that, at the end of each quarter of the taxable year, (a) at least
50% of the market value of the Series' assets is represented by cash, cash
items, U.S. Government securities, the securities of other regulated investment
companies, and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Series' total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Series controls (as that term is
defined in the relevant provisions of the Code) and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses; and (iv) distribute at least 90% of its investment company taxable
income (which includes, among other items,
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dividends, interest, and net short-term capital gains in excess of any net long-
term capital losses) each taxable year.
A Series qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net short-
term capital losses), if any, that it distributes to shareholders. Each Series
intends to distribute to its shareholders, at least annually, substantially all
of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Series, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to
avoid the tax, a regulated investment company must distribute during each
calendar year, an amount at least equal to the sum of (i) 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (ii) 98% of its capital gains in excess of its capital losses (adjusted
for certain ordinary losses) for the twelve-month period ending on October 31 of
the calendar year, and (iii) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, each Series intends to make its distributions in accordance with the
calendar year distribution requirement. A distribution is treated as paid on
December 31 of the calendar year if it is declared by a Series in October,
November, or December of that year to shareholders of record on a date in such a
month and paid by the Series during January of the following calendar year. Such
distributions are taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. The excise tax provisions described above do not
apply to a regulated investment company, like a Series, all of whose
shareholders at all times during the calendar year are (i) segregated asset
accounts of life insurance companies where the shares are held in connection
with variable contracts or (ii) tax-exempt retirement trusts described in Code
Section 401(a). (For this purpose, any shares of a Series attributable to an
investment in the Series not exceeding $250,000 made in connection with the
organization of the Series shall not be taken into account.) Accordingly, if
this condition regarding the ownership of shares of a Series is met, the excise
tax will be inapplicable to that Series.
Some of the Series may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC if at least one-half of its
assets constitutes investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which a Series held the PFIC stock. A Series itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to a Series' holding period in prior taxable years (an interest factor
will be added to the tax, as if the tax had actually been payable in such prior
taxable years) even though a Series distributes the corresponding income to
shareholders. Excess distributions include any gain from the sale of PFIC stock
as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
A Series may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Series
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another
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election may be available that would involve marking to market a Series' PFIC
stock at the end of each taxable year (and on certain other dates prescribed in
the Code), with the result that unrealized gains are treated as though they were
realized. If this election were made, tax at the Series level under the PFIC
rules would be eliminated, but a Series could, in limited circumstances, incur
nondeductible interest charges. A Series' intention to qualify annually as a
regulated investment company may limit a Series' elections with respect to PFIC
stock.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Series
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
Certain options, futures contracts, and forward contracts in which a Series
may invest are "Section 1256 contracts." Gains or losses on Section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses; however, foreign currency gains or losses arising from certain
Section 1256 contracts may be treated as ordinary income or loss. Also, Section
1256 contracts held by a Series at the end of each taxable year (and at certain
other times as prescribed pursuant to the Code) are "marked to market" with the
result that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Series may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Series. In addition, losses
realized by a Series on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Series of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Series which is taxed as ordinary income when
distributed to shareholders.
A Series may make one or more of the elections available under the Code
which are applicable to straddles. If a Series makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Income received by a Series from sources within a foreign country may be
subject to withholding and other taxes imposed by that country. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
42
<PAGE>
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Series of the Trust accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Series actually collects such receivables or pays
such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain futures contracts, forward contracts and options,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of a Series' investment company taxable income to be
distributed to its shareholders as ordinary income.
To comply with regulations under Section 817(h) of the Code, each Series of
the Trust generally will be required to diversify its investments so that on the
last day of each quarter of a calendar year, no more than 55% of the value of
its assets is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three
investments, and no more than 90% is represented by any four investments. For
additional information on the application of the asset diversification
requirements under Code Section 817(h), and the asset diversification
requirements applicable to regulated investment companies, potential investors
in the Market Manager Series should see "Federal Income Tax Status" in the
Market Manager Series' Prospectus.
Generally, securities of a single issuer are treated as one investment and
obligations of each U.S. Government agency and instrumentality (such as the
Government National Mortgage Association) are treated for purposes of Section
817(h) as issued by separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income.
Among the areas in which Treasury has indicated informally that it is concerned
that there may be too much contract owner control is where a mutual fund (or
series) underlying a separate account invests solely in securities issued by
companies in a specific industry.
These future rules and regulations proscribing investment control may
adversely affect the ability of certain Series of the Trust to operate as
described in this Prospectus. There is, however, no certainty as to what
standards, if any, Treasury will ultimately adopt.
In the event that unfavorable rules, regulations or positions are adopted,
there can be no assurance that the Series will be able to operate as currently
described in the Prospectus, or that a Series will not have to change its
investment objective or objectives, investment policies, or investment
restrictions. While a Series' investment objective is fundamental and may be
changed only by a vote of a majority of its outstanding shares, the Trustees
have reserved the right to modify the investment policies of a Series as
necessary to prevent any such prospective rules, regulations and positions from
causing the Variable Contract Owners to be considered the owners of the assets
underlying the Separate Accounts.
43
<PAGE>
The requirements applicable to a Series' qualification as a regulated
investment company and its compliance with the diversification test under Code
Section 817(h) may limit the extent to which a Series will be able to engage in
transactions in options, futures contracts or forward contracts, investments in
precious metals, and in short sales.
Debt securities purchased by the Series (such as zero coupon bonds) may be
treated for U.S. Federal income tax purposes as having original issue discount.
Original issue discount is treated as interest for Federal income tax purposes
and can generally be defined as the excess of the stated redemption price at
maturity over the issue price. Original issue discount, whether or not cash
payments actually are received by the Series, is treated for Federal income tax
purposes as income earned by the Series, and therefore is subject to the
distribution requirements of the Code. Generally, the amount of original issue
discount included in the income of the Series each year is determined on the
basis of a constant yield to maturity which takes into account the compounding
of accrued interest.
In addition, debt securities may be purchased by the Series at a discount
which exceeds the original issue discount remaining on the securities, if any,
at the time the Series purchased the securities. This additional discount
represents market discount for income tax purposes. Treatment of market
discount varies depending upon the maturity of the debt security. Generally, in
the case of any debt security having a fixed maturity date of more than one year
from the date of issue and having market discount, the gain realized on
disposition will be treated as ordinary income to the extent it does not exceed
the accrued market discount on the security (unless the Series elects for all
its debt securities having a fixed maturity date of more than one year from the
date of issue to include market discount in income in tax years to which it is
attributable). Generally, market discount accrues on a daily basis. For any
debt security having a fixed maturity date of not more than one year from the
date of issue, special rules apply which may require in some circumstances the
ratable inclusion of income attributable to discount at which the bond was
acquired as calculated under the Code. The Series may be required to
capitalize, rather than deduct currently, part or all of any net direct interest
expense on indebtedness incurred or continued to purchase or carry any debt
security having market discount (unless the Series makes the election to include
market discount currently).
DISTRIBUTIONS
Distributions of investment company taxable income (which includes among
other items, interest, dividends, and net realized short-term capital gains in
excess of net realized long-term capital losses) and of net realized capital
gains, whether received in cash or additional shares are includable in the gross
income of the shareholder. Distributions of investment company taxable income
are treated as ordinary income for tax purposes. Net capital gains designated
as capital gains dividends by a Series will, to the extent distributed, be
treated as long-term capital gains regardless of the length of time a
shareholder may have held the shares. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by a Series in October,
November, or December of that year to shareholders of record on a date in such a
month and paid by the Series during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which they
are declared, rather than the calendar year in which they are received.
Distributions received by tax-exempt shareholders will not be subject to federal
income tax to the extent permitted under the applicable tax exemption.
OTHER TAXES
44
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Distributions may also be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Shareholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in a Series. Depending upon the nature
and extent of a Series' contacts with a state or local jurisdiction, the Series
may be subject to the tax laws of such jurisdiction if it is regarded under
applicable law as doing business in, or as having income derived from, the
jurisdiction.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an Agreement
and Declaration of Trust dated August 3, 1988 and currently consists of twenty-
six Series. The fourteen Series that are discussed in this Statement of
Additional Information and accompanying prospectuses and a Series that is
described in an additional prospectus and statement of additional information
are operational. The capitalization of the Trust consists of an unlimited
number of shares of beneficial interest with a par value of $0.001 each. The
Board of Trustees may establish additional Series (with different investment
objectives and fundamental policies) at any time in the future. Establishment
and offering of additional Series will not alter the rights of the Trust's
shareholders, the Separate Accounts. When issued in accordance with the terms
of the Agreement and Declaration of Trust, shares are fully paid, redeemable,
freely transferable, and non-assessable by the Trust. Shares do not have
preemptive rights or subscription rights. In liquidation of a Series of the
Trust, each shareholder is entitled to receive his or her pro rata share of the
net assets of that Series.
On January 31, 1992, the name of the Trust was changed to The GCG Trust.
Prior to that change, the name of the Trust was The Specialty Managers Trust.
VOTING RIGHTS
Shareholders of the Series are given certain voting rights. Each share of
each Series will be given one vote, unless a different allocation of voting
rights is required under applicable law for a mutual fund that is an investment
medium for variable insurance products.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
Series, or for the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies, or approving a contract for investment
advisory services. The Trust will be required to hold a meeting to elect
Trustees to fill any existing vacancies on the Board if, at any time, fewer than
a majority of the Trustees have been elected by the shareholders of the Trust.
In addition, the Agreement and Declaration of Trust provides that the holders of
not less than two-thirds of the outstanding shares or other voting interests of
the Trust may remove a person serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trust's shares do not have
cumulative voting rights. The Trustees are required to call a meeting for the
purpose of considering the removal of a person serving as Trustee, if requested
in writing to do so by the holders of not less than 10% of the outstanding
shares of the Trust. The Trust is required to assist in shareholders'
communications.
45
<PAGE>
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Series is Bankers Trust Company, 280 Park Avenue, New
York, New York 10017. FirstData Investors Services Group of FirstData
Corporation, One Exchange Place, 4th Floor, Boston, MA 02109, provides
administrative and portfolio accounting services for all Series.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as
independent auditors for the Trust.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005, has
passed upon certain legal matters in connection with the shares offered by the
Trust and acts as outside counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectuses do not
contain all the information included in the Trust's Registration Statement filed
with the Securities and Exchange Commission under the Securities Act of 1933
with respect to the securities offered by the Prospectus. Certain portions of
the Registration Statement have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Registration
Statement, including the exhibits filed therewith, may be examined at the
offices of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements for the Series dated as of December 31,
1995, including notes thereto, are incorporated by reference in this Statement
of Additional Information from the Trust's Annual Report dated as of
December 31, 1995.
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APPENDIX 1: DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc.'s ("Moody's") description of its
bond ratings:
Aaa - judged to be the best quality; they carry the smallest degree of
investment risk. Aa - judged to be of high quality by all standards; together
with the Aaa group, they comprise what are generally known as high grade bonds.
A - possess many favorable investment attributes and are to be considered as
"upper medium grade obligations." Baa - considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured; interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Ba - judged to have speculative elements; their future cannot
be considered as well assured. B - generally lack characteristics of the
desirable investment. Caa - are of poor standing; such issues may be in default
or there may be present elements of danger with respect to principal or
interest. Ca - speculative in a high degree; often in default. C - lowest rate
class of bonds; regarded as having extremely poor prospects.
Moody's also applies numerical indicators 1, 2, and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; 2 indicates a mid-range ranking; and 3 indicates a ranking toward the
lower end of the category.
Excerpts from Standard & Poor's Rating Group ("S&P") description of its
bond ratings:
AAA - highest grade obligations; capacity to pay interest and repay
principal is extremely strong. AA - also qualify as high grade obligations; a
very strong capacity to pay interest and repay principal and differs from AAA
issues only in small degree. A - regarded as upper medium grade; they have a
strong capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. BBB - regarded as having an
adequate capacity to pay interest and repay principal; whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity than in higher
rated categories - this group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C- predominately speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligation: BB indicates the lowest degree of speculation and C the highest.
S&P applies indicators "+", no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
A-1
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PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
(1) Part A for The GCG Trust (Multiple Allocation Series, Fully
Managed Series, Limited Maturity Bond Series, Natural
Resources Series, Real Estate Series, All-Growth Series,
Capital Appreciation Series, Rising Dividends Series,
Emerging Markets Series, Value Equity Series, Strategic
Equity Series, Small Cap Series, and Liquid Asset Series):
Financial Highlights
(Not applicable for the Small Cap Series, which
commenced operations January 2, 1996)
Part A for Market Manager Series:
Financial Highlights
Part B for The GCG Trust (Multiple Allocation Series, Fully
Managed Series, Limited Maturity Bond Series, Natural
Resources Series, Real Estate Series, All-Growth Series,
Capital Appreciation Series, Rising Dividends Series,
Emerging Markets Series, Value Equity Series, Strategic
Equity Series, Small Cap Series, and Liquid Asset Series):
The audited financial statements (for all series except the
Small Cap Series) dated as of December 31, 1995 are
incorporated by reference from the Trust's Annual Report
dated as of December 31, 1995.
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Statements of Investments
Notes to Financial Statements
Report of Ernst & Young LLP, Independent Auditors
(2) Part A for The Fund For Life Series of The GCG Trust:
Financial Highlights
Part B for The Fund For Life Series of The GCG Trust: The
audited financial statements dated as of December 31, 1995
are incorporated by reference from The Fund For Life's
Annual Report dated as of December 31, 1995.
Statement of Net Assets
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
Report of Ernst & Young LLP, Independent Auditors
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(b) Exhibits (the number of each exhibit relates to the exhibit
designation in Form N-1A):
(1) Restated Agreement and Declaration of Trust
(2) By-laws(2)
(3) Not Applicable
(4) Not Applicable
(5) (a) (i) (A) Form of Management Agreement (on behalf of all
Series except The Fund For Life)(1)
(B) Form of Addendum to Management Agreement (adding
the Strategic Equity Series)(1)
(C) Form of Addendum to Management Agreement (adding
the Small Cap Series)(14)
(ii) Form of Management Agreement (for The Fund For Life)(3)
(b) Portfolio Management Agreements
(i) (A) Van Eck Associates Corporation(4)
(B) Form of Addendum to Portfolio Management
Agreement(5)
(C) Form of Addendum to Portfolio Management
Agreement(6)
(ii) T. Rowe Price Associates, Inc.(7)
(iii) (A) Zweig Advisors Inc.(1)
(B) Form of Addendum to Portfolio Management
Agreement(1)
(C) Form of Addendum to Portfolio Management
Agreement(1)
(D) Form of Addendum to Portfolio Management Agreement
(adding Strategic Equity Series)(1)
(iv) (A) Chancellor Capital Management, Inc.(4)
(B) Form of Addendum to Portfolio Management
Agreement(5)
(C) Form of Assignment Agreement(4)
(D) Form of Addendum to Portfolio Management
Agreement(6)
(v) (A) Form of Portfolio Management Agreement among the
Trust, Directed Services, Inc., and Bankers Trust
Company(8)
(B) Form of Addendum to the Portfolio Management
Agreement(5)
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(C) Form of Addendum to the Portfolio Management
Agreement (adding the Market Manager Series)9
(vi) (A) Form of Portfolio Management Agreement among the
Trust, Directed Services, Inc., and Kayne,
Anderson Investment Management, Inc.(5)
(B) Form of Substitution Agreement(6)
(C) Form of Addendum to Portfolio Management
Agreement(6)
(vii) Portfolio Management Agreement among the
Trust, Directed Services, Inc., and Warburg,
Pincus Counsellors, Inc.(9)
(viii) Form of Portfolio Management Agreement among
the Trust, Directed Services, Inc., and Eagle
Asset Management, Inc.(10)
(ix) Portfolio Management Agreement among the
Trust, Directed Services, Inc., and E.I.I.
Realty Securities, Inc.(7)
(x) Portfolio Management Agreement among the
Trust, Directed Services, Inc., and Fred
Alger Management, Inc.(14)
(c) Form of Sub-Investment Advisory Agreement between
Bankers Trust Company and BT Fund Managers
(International) Limited for the Emerging Markets
Series(11)
(d) Form of Administrative Services Agreement for The Fund
For Life(3)
(e) Administration and Fund Accounting Agreement among the
Trust, Directed Services, Inc., and The Shareholder
Services Group, Inc.(6)
(6) (i) Distribution Agreement(10)
(ii) Form of Addendum to the Distribution
Agreement (adding The Fund For Life, Zero
Target 2002 Series, and Capital Appreciation
Series)(3)
(iii) Form of Addendum to the Distribution
Agreement (adding the Market Manager Series
and Value Equity Series)(10)
(iv) Form of Addendum to the Distribution
Agreement (adding the Strategic Equity
Series)(1)
(v) Form of Addendum to the Distribution
Agreement (adding the Small Cap Series)(14)
(7) Not Applicable
(8) (a) (i) Custodian Agreement(4)
(ii) Form of Addendum to Custodian Agreement(5)
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<PAGE>
(iii) Form of Addendum to Custodian Agreement
(adding the Market Manager Series and Value
Equity Series)(10)
(iv) Form of Addendum to the Custodian Agreement
(adding the Strategic Equity Series)(1)
(v) Form of Addendum to the Custodian Agreement
(adding the Small Cap Series)(14)
(9) (a) (i) Transfer Agency and Service Agreement(12)
(ii) Form of Addendum to the Transfer Agency and
Service Agreement for The Fund For Life, Zero
Target 2002 Series, and Capital Appreciation
Series(3)
(b) (i) Form of Organizational Agreement for Golden
American Life Insurance Company(12)
(ii) Assignment Agreement for Organizational
Agreement(13)
(iii) Form of Organizational Agreement for The
Mutual Benefit Life Insurance Company(13)
(iv) Assignment Agreement for Organizational
Agreement(13)
(v) Form of Addendum to Organizational Agreement
(adding Market Manager Series and Value
Equity Series)(10)
(vi) Form of Addendum to the Organizational
Agreement (adding the Strategic Equity
Series)(1)
(vii) Form of Addendum to the Organizational
Agreement (adding the Small Cap Series)(14)
(c) (i) Form of Settlement Agreement for Golden
American Life Insurance Company(12)
(ii) Assignment Agreement for Settlement
Agreement(13)
(iii) Form of Settlement Agreement for The Mutual
Benefit Life Insurance Company(13)
(iv) Form of Assignment Agreement for Settlement
Agreement(13)
(d) Indemnification Agreement(13)
(e) (i) Form of Expense Reimbursement Agreement(13)
(ii) Amendment No. 1 to the Expense Reimbursement
Agreement(4)
(iii) Amendment No. 2 to the Expense Reimbursement
Agreement(4)
(iv) Amendment No. 3 to the Expense Reimbursement
Agreement(4)
(v) Amendment No. 4 to the Expense Reimbursement
Agreement(4)
(10) Opinion and Consent of Counsel(12)
(11) Consent of Ernst & Young LLP
(12) Not Applicable
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<PAGE>
(13) (a) Initial Capital Agreement(12)
(b) Form of Initial Capital Agreement for The Fund For
Life(4)
(14) Not Applicable
(15) Not Applicable
(16) Schedule showing computation of performance quotations
provided in response to Item 22 (unaudited)(7)
(17) Financial Data Schedules
(18) Secretary's Certificate pursuant to Rule 483(b)(10)
(19) Powers of Attorney
- - -----------------------
(1) Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A of The GCG Trust as filed on September
26, 1995, File No. 33-23512.
(2) Incorporated by reference to the original Registration Statement on Form
N-1A of Western Capital Specialty Managers Trust as filed on August 4,
1988, File No. 33-23512.
(3) Incorporated by reference to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A of the Specialty Managers Trust as
filed on December 4, 1991, File No. 33-23512.
(4) Incorporated by reference to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A of The GCG Trust as filed on May 3,
1993, File No. 33-23512.
(5) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of The GCG Trust as filed on August 2,
1993, File No. 33-23512.
(6) Incorporated by reference to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A of The GCG Trust as filed on April 28,
1995, File No. 33-23512.
(7) Incorporated by reference to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A of The GCG Trust as filed on March 2,
1995, File No. 33-23512.
(8) Incorporated by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A of The GCG Trust as filed on April 30,
1992, File No. 33-23512.
(9) Incorporated by reference to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A of The GCG Trust as filed on August 5,
1994, File No. 33-23512.
(10) Incorporated by reference to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A of The GCG Trust as filed on
October 17, 1994, File No. 33-23512.
(11) Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A of The GCG Trust as filed on
October 1, 1993, File No. 33-23512.
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<PAGE>
(12) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A of Western Capital Specialty
Managers Trust as filed on November 23, 1988, File No. 33-23512.
(13) Incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A of The Specialty Managers Trust as
filed on April 23, 1991, File No. 33-23512.
(14) Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A of The GCG Trust as filed on
December 22, 1995, File No. 33-23512.
ITEM 25. PERSONS CONTROLLED BY OR UNDER CONTROL WITH REGISTRANT.
As of the date of this Post-Effective Amendment, a separate account of
The Mutual Benefit Life Insurance Company ("MBL"), separate accounts
of Hartford Life Insurance Company, separate accounts of Security
Equity Life Insurance Company, and Golden American Life Insurance
Company and its separate accounts own all of the outstanding shares of
Registrant.
MBL, Hartford Life Insurance Company, Security Equity Life Insurance
Company, and Golden American Life Insurance Company are required to
vote fund shares in accordance with instructions received from owners
of variable life insurance and annuity contracts funded by separate
accounts of that company.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of the date of this Registration Statement, there are 9
shareholders of record of Registrant's shares.
ITEM 27. INDEMNIFICATION.
Reference is made to Article V, Section 5.4 of the Registrant's
Agreement and Declaration of Trust, which is incorporated by reference
herein.
Pursuant to Indemnification Agreements between the Trust and each
Independent Trustee, the Trust indemnifies each Independent Trustee
against any liabilities resulting from the Independent Trustee's
serving in such capacity, provided that the Trustee has not engaged in
certain disabling conduct.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant by the Registrant
pursuant to the Trust's Agreement and Declaration of Trust, its By-
laws or otherwise, the Registrant is aware that in the opinion of
the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and, therefore, is unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by directors, officers or controlling persons or the Registrant in
connection with the successful defense of any act, suit or proceeding)
is asserted by such directors, officers or controlling persons in
connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a
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court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
DIRECTED SERVICES, INC.
The Manager of all Series of the Trust is Directed Services, Inc.
The directors and officers of the Manager have, during the past two
fiscal years, had substantial affiliations as follows. In addition to
Directed Services, Inc., BT Variable, Inc. and Golden American Life
Insurance Company have a principal business address of 1001 Jefferson
Street, Wilmington, Delaware 19801. Unless otherwise stated, the
principal business address of each other organization listed is 280
Park Avenue, New York, New York 10017.
Name Position With Adviser Other Affiliations
---- --------------------- ------------------
Paul Daniel Borge, Jr. Director Managing Director,
Bankers Trust Company;
Director, Golden American
Life Insurance Company,
Whitewood Properties Corp.
and BT Variable, Inc.
Richard A. Marin Director Managing Director,
Bankers Trust Company,
Director, Whitewood
Properties Corp., BT
Variable, Inc., and
Golden American Life
Insurance Company.
Terry L. Kendall Chief Executive Managing Director,Bankers
Officer and Director Trust Company; President,
Director, and Chief
Executive Officer, Golden
American Life Insurance
Company; President,
Director, and Chief
Executive Officer, BT
Variable, Inc., 1993 to
present; Director,
Whitewood Properties
Corp.; President and
Chief Executive Officer,
United Pacific Life
Insurance Company, 1983
to 1993.
Mary Bea Wilkinson President Senior Vice President,
Golden American Life
Insurance Company and BT
Variable, Inc.; formerly,
Assistant Vice President,
CIGNA Insurance Companies
and Vice President and
Controller, United
Pacific Life Insurance
Company.
Barnett Chernow Executive Vice Executive Vice President,
President Golden American Life
Insurance Company;
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<PAGE>
Executive Vice President,
BT Variable, Inc.; Senior
Vice President and Chief
Financial Officer,
Reliance Insurance
Company, August 1977-
July 1993.
Mitchell R. Katcher Executive Vice Executive Vice President
President of BT Variable,
Inc. and Golden American
Life Insurance Company;
formerly, Consulting
Actuary, Tillinghast.
Myles R. Tashman Executive Vice Executive Vice President
President and Secretary, Golden
American Life Insurance
Company and BT Variable,
Inc.; formerly Senior
Vice President and
General Counsel, United
Pacific Life Insurance
Company.
ZWEIG ADVISORS INC.
For information regarding Zweig Advisors Inc., reference is made to Form
ADV of Zweig Advisors Inc., SEC File No. 801-27366, which is incorporated
by reference.
T. ROWE PRICE ASSOCIATES, INC.
For information regarding T. Rowe Price Associates, Inc., reference is made
to Form ADV of T. Rowe Price Associates, Inc., SEC File No. 801-00856,
which is incorporated by reference.
VAN ECK ASSOCIATES CORPORATION
For information regarding Van Eck Associates Corporation, reference is made
to Item 28 on Form N-1A for Van Eck Funds, Registration No. 2-97596, which
is incorporated by reference.
WARBURG, PINCUS COUNSELLORS, INC.
For information regarding Warburg, Pincus Counsellors, Inc., reference
is made to Form ADV of Warburg, Pincus Counsellors, Inc., SEC File No.
801-7321, which is incorporated by reference.
KAYNE, ANDERSON INVESTMENT MANAGEMENT, L.P.
For information regarding Kayne, Anderson Investment Management, L.P,
reference is made to Form ADV of Kayne, Anderson Investment Management,
L.P., SEC File No. 801-24241, which is incorporated by reference.
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<PAGE>
EAGLE ASSET MANAGEMENT, INC.
For information regarding Eagle Asset Management, Inc., reference is made
to Form ADV of Eagle Asset Management, Inc., SEC File No. 801-21343, which
is incorporated by reference.
E.I.I. REALTY SECURITIES, INC.
For information regarding E.I.I. Realty Securities, Inc., reference is made
to Form ADV of E.I.I. Realty Securities, Inc., SEC File No. 801-44099,
which is incorporated herein by reference.
FRED ALGER MANAGEMENT, INC.
For information regarding Fred Alger Management, Inc., reference is made to
Form ADV of Fred Alger Management, Inc., SEC File No. 801-6709, which is
incorporated by reference.
CHANCELLOR TRUST COMPANY
For information regarding Chancellor Trust Company, Inc. ("CTC"), reference
is made to Form ADV of Chancellor Capital Management, Inc. ("CCM"), the
direct parent of CTC, SEC File No. 801-9087, which is incorporated by
reference. Officers and directors of CCM have the same titles and
responsibilities in CTC.
BANKERS TRUST COMPANY
For information regarding Bankers Trust Company, reference is made to Part
C of the Registration Statement of BT Investment Funds, SEC File Nos.
33-07404, and 811-7460, which is incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) DIRECTED SERVICES, INC. serves as Distributor of Shares of The
GCG Trust. Directed Services, Inc. also serves as principal
underwriter to DSI Series Fund, Inc.
(b) The following officers of Directed Services, Inc. hold positions
with the registrant: Terry Kendall (President and Chairman),
Barnett Chernow (Vice President), Myles R. Tashman (Secretary),
and Mary Bea Wilkinson (Treasurer).
(c) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The Trust maintains its books of account for each Series as required
by Section 31(a) of the 1940 Act and rules thereunder at its principal
office at 280 Park Avenue, New York, New York 10017.
ITEM 31. MANAGEMENT SERVICES.
There are no management-related service contracts not discussed in
Part A or Part B.
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<PAGE>
ITEM 32. UNDERTAKINGS.
(a) Not Applicable
(b) Not Applicable
(c) Registrant undertakes to furnish to each person to whom a
prospectus for The GCG Trust or The Fund For Life is provided a
copy of the Trust's or The Fund For Life's latest Annual Report
upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all the requirements
for effectivess of this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 25
to the Registration Statement on Form N-1A (File No. 33-23512) to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Wilmington, and the State of Delaware, on April 29, 1996.
THE GCG TRUST
----------------------------
(Registrant)
----------------------------
Terry L. Kendall*
President
*By: /s/ Myles R. Tashman
---------------------
Myles R. Tashman
as Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A (File No. 33-23512)
has been duly signed below by the following persons on behalf of The GCG Trust
in the capacity indicated on April 29, 1996.
SIGNATURE TITLE
---------------------- Chairman of the Board
Terry L. Kendall* and President
---------------------- Trustee
Robert A. Grayson*
---------------------- Trustee
John L. Murphy*
---------------------- Trustee
M. Norvel Young*
---------------------- Trustee
Roger B. Vincent*
---------------------- Treasurer
Mary Bea Wilkinson*
*By: /s/ Myles R. Tashman
---------------------
Myles R. Tashman
as Attorney-in-Fact
<PAGE>
EXHIBIT LIST
NUMBER: EXHIBIT NAME: PAGE:
1 Restated Agreement and Declaration of Trust
11 Consent of Ernst & Young LLP
17 Financial Data Schedules
19 Powers of Attorney
-1-
<PAGE>
1 -- RESTATED AGREEMENT AND DECLARATION OF TRUST
<PAGE>
THE GCG TRUST
AMENDED AND RESTATED
AGREEMENT AND
DECLARATION OF TRUST
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I -- THE TRUST
Section 1.1 Name. . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Definitions . . . . . . . . . . . . . . . . 2
ARTICLE II -- TRUSTEES
Section 2.1 Management of the Trust . . . . . . . . . . 3
Section 2.2 Election of Trustees. . . . . . . . . . . . 4
Section 2.3 Term of Office of Trustees. . . . . . . . . 4
Section 2.4 Termination of Service and
Appointment of Trustees . . . . . . . . . . 4
Section 2.5 Temporary Absence of Trustee. . . . . . . . 5
Section 2.6 Number of Trustees. . . . . . . . . . . . . 5
Section 2.7 Effect of Death, Resignation, etc.
of a Trustee. . . . . . . . . . . . . . . . 5
Section 2.8 No Accounting . . . . . . . . . . . . . . . 5
Section 2.9 Ownership of the Trust. . . . . . . . . . . 6
ARTICLE III -- POWERS OF TRUSTEES
Section 3.1 General . . . . . . . . . . . . . . . . . . 6
Section 3.2 Investments . . . . . . . . . . . . . . . . 6
Section 3.3 Legal Title . . . . . . . . . . . . . . . . 7
Section 3.4 Issuance and Repurchase of
Securities. . . . . . . . . . . . . . . . . 8
Section 3.5 Borrow Money. . . . . . . . . . . . . . . . 8
Section 3.6 Officers; Delegation; Committees. . . . . . 8
Section 3.7 Collection and Payment. . . . . . . . . . . 8
Section 3.8 Expenses. . . . . . . . . . . . . . . . . . 9
Section 3.9 Manner of Acting; By-laws . . . . . . . . . 9
Section 3.10 Voting Trusts . . . . . . . . . . . . . . . 9
Section 3.11 Miscellaneous Powers. . . . . . . . . . . . 9
Section 3.12 Further Powers. . . . . . . . . . . . . . . 10
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<PAGE>
ARTICLE IV -- ADVISORY, MANAGEMENT AND DISTRIBUTION
ARRANGEMENTS
Section 4.1 Advisory and Management Arrangements. . . . 10
Section 4.2 Distribution Arrangements . . . . . . . . . 11
Section 4.3 Parties to Contract . . . . . . . . . . . . 12
Section 4.4 Provisions and Amendments . . . . . . . . . 12
ARTICLE V -- LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 5.1 Trustees, Shareholders, etc. Not
Personally Liable; Notice . . . . . . . . . 12
Section 5.2 Trustee's Good Faith Action; Expert
Advice; No Bond or Surety . . . . . . . . . 13
Section 5.3 Indemnification of Shareholders . . . . . . 14
Section 5.4 Indemnification of Trustees,
Officers, etc.. . . . . . . . . . . . . . . 14
Section 5.5 Compromise Payment. . . . . . . . . . . . . 15
Section 5.6 Indemnification Not Exclusive, etc. . . . . 16
Section 5.7 Liability of Third Persons Dealing
with Trustees . . . . . . . . . . . . . . . 16
ARTICLE VI -- SHARES OF BENEFICIAL INTEREST
Section 6.1 Beneficial Interest . . . . . . . . . . . . . 16
Section 6.2 Series Designation. . . . . . . . . . . . . . 16
Section 6.3 Rights of Shareholders. . . . . . . . . . . . 21
Section 6.4 Trust Only. . . . . . . . . . . . . . . . . . 22
Section 6.5 Issuance of Shares. . . . . . . . . . . . . . 22
Section 6.6 Register of Shares. . . . . . . . . . . . . . 22
Section 6.7 Transfer Agent and Registrar. . . . . . . . . 23
Section 6.8 Transfer of Shares. . . . . . . . . . . . . . 23
Section 6.9 Notice. . . . . . . . . . . . . . . . . . . . 23
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<PAGE>
ARTICLE VII -- CUSTODIANS
Section 7.1 Appointment and Duties. . . . . . . . . . . 23
Section 7.2 Action Upon Termination of Custodian
Agreement . . . . . . . . . . . . . . . . . 24
Section 7.3 Central Certificate System. . . . . . . . . 25
Section 7.4 Acceptance of Receipts in Lieu of
Certificates. . . . . . . . . . . . . . . . 25
ARTICLE VIII -- REDEMPTION
Section 8.1 Redemptions . . . . . . . . . . . . . . . . . 25
Section 8.2 Redemptions of Accounts of Less Than
a Minimum Dollar Amount . . . . . . . . . . . 26
ARTICLE IX -- DETERMINATION OF NET ASSET VALUE, NET
INCOME AND DISTRIBUTIONS
Section 9.1 Net Asset Value . . . . . . . . . . . . . . 26
Section 9.2 Distributions to Shareholders . . . . . . . 26
Section 9.3 Power to Modify Foregoing Procedures. . . . 27
ARTICLE X -- SHAREHOLDERS
Section 10.1 Voting Powers. . . . . . . . . . . . . . . 27
Section 10.2 Meetings . . . . . . . . . . . . . . . . . 28
Section 10.3 Quorum and Required Vote . . . . . . . . . 28
Section 10.4 Record Date for Meetings . . . . . . . . . 28
Section 10.5 Proxies. . . . . . . . . . . . . . . . . . 28
Section 10.6 Additional Provisions. . . . . . . . . . . 29
Section 10.7 Reports. . . . . . . . . . . . . . . . . . 29
Section 10.8 Shareholder Action by
Written Consent. . . . . . . . . . . . . . 29
ARTICLE XI -- DURATION; TERMINATION OF TRUST; AMENDMENT;
MERGERS, ETC.
Section 11.1 Duration . . . . . . . . . . . . . . . . . 29
Section 11.2 Termination. . . . . . . . . . . . . . . . 30
Section 11.3 Reorganization . . . . . . . . . . . . . . 31
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<PAGE>
Section 11.4 Amendment Procedure. . . . . . . . . . . . 32
Section 11.5 Incorporation. . . . . . . . . . . . . . . 32
ARTICLE XII -- MISCELLANEOUS
Section 12.1 Filing . . . . . . . . . . . . . . . . . . 33
Section 12.2 Resident Agent . . . . . . . . . . . . . . 33
Section 12.3 Governing Law. . . . . . . . . . . . . . . 33
Section 12.4 Counterparts . . . . . . . . . . . . . . . 33
Section 12.5 Reliance by Third Parties. . . . . . . . . 34
Section 12.6 Provisions in Conflict with
Law or Regulations . . . . . . . . . . . . 34
- iv -
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND
DECLARATION OF TRUST
OF
THE GCG TRUST
THE AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST made the 19th
day of March, 1996 by the parties signatory hereto, as trustees (such persons,
so long as they shall continue in office in accordance with the terms of this
Agreement and Declaration of Trust, and all other persons who at the time in
question have been duly elected or appointed as trustees in accordance with the
provisions of this Agreement and Declaration of Trust and are then in office,
being hereinafter called the "Trustees") and by the holders of shares of
beneficial interest to be issued hereunder hereinafter provided.
W I T N E S S E T H
WHEREAS, the Trustees desire to form a trust fund under the laws of the
Commonwealth of Massachusetts for the investment and reinvestment of funds
contributed thereto; and
WHEREAS, it is proposed that the beneficial interest in the trust assets be
divided into transferable shares of beneficial interest, which may, at the
discretion of the Trustees, be divided into separate series as hereinafter
provided;
NOW, NOW, THEREFORE, the Trustees hereby declare that they will hold in
trust all money and property contributed to the trust fund to manage and
dispose of the same for the benefit of the holders from time to time of the
shares of beneficial interest issued hereunder and subject to the provisions
hereof, to wit:
<PAGE>
ARTICLE I
THE TRUST
SECTION 1.1 NAME. The name of the trust created hereby (the "Trust"),
which term shall be deemed to include any series of the Trust when the context
requires, shall be "The GCG Trust", and so far as may be practicable the
Trustees shall conduct the activities of the Trust, execute all documents and
sue or be sued under that name, which name (and the word "Trust" wherever
hereinafter used) shall refer to the Trustees as Trustees, and not individually,
and shall not refer to the officers, agents, employees or shareholders of the
Trust or any Series thereof. Each Series of the Trust shall be established and
designated by the Trustees pursuant to Section 6.2 and each Series shall conduct
its activities under such name as the Trustees shall determine and set forth in
the instrument establishing such Series. Should the Trustees determine that the
use of the name of the Trust or any Series is not advisable, they may select
such other name for the Trust or such Series as they deem proper and the Trust
or such Series may conduct its activities under such other name. Any name
change shall be effective upon the execution by a majority of the then Trustees
of an instrument setting forth the new name. Any such instrument shall have the
status of an amendment to this Agreement and Declaration of Trust.
SECTION 1.2 DEFINITIONS. As used in this Agreement and Declaration of
Trust, the following terms shall have the following meanings:
The "1940 ACT" refers to the Investment Company Act of 1940 as amended
from time to time and the regulations promulgated thereunder.
The terms "AFFILIATED PERSON", "ASSIGNMENT", "COMMISSION", "INTERESTED
PERSON", "MAJORITY SHAREHOLDER VOTE" (the 67% or 50% requirement of the
third sentence of Section 2(a)(42) of the 1940 Act, whichever may be
applicable) and "PRINCIPAL UNDERWRITER" shall have the
- 2 -
<PAGE>
meanings given them in the 1940 Act. "COMMISSION" shall mean the U.S.
Securities and Exchange Commission.
"DECLARATION" OR "DECLARATION OF TRUST" shall mean this Agreement and
Declaration of Trust as amended from time to time. References in this
Declaration to "DECLARATION", "HEREOF", "HEREIN" and "HEREUNDER' shall be
deemed to refer to the Declaration rather than the article or section in
which such words appear.
"FUNDAMENTAL POLICIES" shall mean the investment objective for each
Series and the investment restrictions set forth in the registration
statement for the Trust on Form N-1A and designated as fundamental policies
therein.
"PERSON" shall mean and include individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof.
"PROSPECTUS" shall mean the currently effective prospectus of any
Series of the Trust under the Securities Act of 1933, as amended.
"SERIES" shall mean any separate Series that may be established and
designated pursuant to Section 6.2.
"SHAREHOLDERS" shall mean as of any particular time all holders of
record of outstanding Shares at such time.
"SHARES" shall mean the equal proportionate transferable units of
interest into which the beneficial interest in any Series of the Trust
shall be divided from time to time and includes fractions of Shares as well
as whole Shares. All references to Shares shall be deemed to be Shares of
any or all Series as the context may require.
- 3 -
<PAGE>
"TRUSTEES" shall mean the signatories to this Declaration, so long as
they shall continue in office in accordance with the terms hereof, and all
other persons who at the time in question have been duly elected or
appointed and have qualified as Trustees in accordance with the provisions
hereof and are then in office, and each such person is herein referred to
as the "Trustee", and reference in this Declaration to a Trustee or
Trustees shall refer to such person or persons in their capacity as Trustee
hereunder.
"TRUST PROPERTY" shall mean as of any particular time any and all
property, real or personal, tangible or intangible, which at such time is
owned or held by or for the account of the Trust, any Series thereof or the
Trustees.
ARTICLE II
TRUSTEES
SECTION 2.1 MANAGEMENT OF THE TRUST. The business and affairs of the
Trust shall be managed by the Trustees, and they shall have all powers necessary
and desirable to carry out that responsibility. The Trustees named herein (or
their successors appointed hereunder) shall serve until the election of Trustees
at the first meeting of Shareholders of the Trust.
- 4 -
<PAGE>
SECTION 2.2 ELECTION OF TRUSTEES. Except for the Trustees named herein
and those Trustees designated by such Trustees prior to the issuance of Shares,
or appointed to fill vacancies pursuant to Section 2.4 hereof, the Shareholders
of the Trust shall elect Trustees at Shareholder meetings called for that
purpose. The Trustees need not be elected annually or at regular intervals.
Except as provided in Section 10.2, the Trustees shall not be required to call a
meeting of Shareholders for the purpose of electing Trustees, provided, however,
that in the event that at any time, other than the time preceding the first
meeting of Shareholders for the purpose of electing Trustees, less than a
majority of the Trustees holding office at that time were elected by the
Shareholders, a meeting of the Shareholders for the purpose of electing Trustees
shall be held promptly and in any event within 60 days (unless the Commission
shall by order extend such period). No election of a Trustee shall become
effective, however, until the person elected shall have accepted such election
and agreed in writing to be bound by the terms of this Declaration. If
re-elected, a Trustee may succeed himself. Trustees need not own shares.
SECTION 2.3 TERM OF OFFICE OF TRUSTEES. A Trustee duly appointed or
elected hereunder shall hold office until the occurrence of any of the
following: (a) the Trustee may resign his trust by written instrument signed by
him and delivered to the other Trustees, which shall take effect upon such
delivery or upon such later date as is specified therein; (b) the Trustee may be
removed at any time by written instrument signed by at least two-thirds of the
number of Trustees prior to such removal, specifying the date when such removal
shall become effective; (c) the Trustee who requests in writing to be retired or
who has become mentally or physically incapacitated may be retired by written
instrument signed by a majority of the other Trustees, specifying the date of
his retirement; and (d) the Trustee may be removed at any meeting of
Shareholders of the Trust by a vote of two-thirds of the outstanding Shares or
by a written declaration executed, without a meeting, by the holders of not less
than two-thirds of the outstanding Shares. A meeting for the purpose of
considering the removal of a
- 5 -
<PAGE>
person serving as Trustee shall be called by the Trustees if requested in
writing to do so by the holders (which for purposes of this provision and only
this provision shall be the persons having a voting interest in the shares of
the Trust) of not less than 10% of the outstanding shares of the Trust.
SECTION 2.4 TERMINATION OF SERVICE AND APPOINTMENT OF TRUSTEES. In case
of the death, resignation, retirement, removal or mental or physical incapacity
of any of the Trustees, or in case a vacancy shall, by reason of an increase in
number, or for any other reason, exist, the remaining Trustees may (but need not
unless required by the 1940 Act, so long as there are at least two remaining
Trustees) fill such vacancy by appointing for the remaining term of the
predecessor Trustee such other person as they in their discretion shall see fit
Such appointment shall be effective upon the signing of a written instrument by
a majority of the Trustees in office and the written acceptance of this
Declaration by the appointee. An appointment of a Trustee may be made by the
Trustees then in office in anticipation of a vacancy to occur by reason of
retirement, resignation or increase in number of Trustees effective at a later
date, provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of Trustees
and the written acceptance of this Declaration by the appointee. As soon as any
Trustee so appointed shall have accepted this Trust, the trust estate shall vest
in the new Trustee or Trustees, together with the continuing Trustees, without
any further act of conveyance, and he shall be deemed a Trustee hereunder. Any
appointment authorized by this Section 2.4 is subject to the provisions of
Section 16(a) of the 1940 Act.
SECTION 2.5 TEMPORARY ABSENCE OF TRUSTEE. Any Trustee may, by power of
attorney, delegate his power for a period not exceeding six months at any one
time to any other Trustee or Trustees, provided that in no case shall less than
two of the Trustees personally exercise the power hereunder except as herein
otherwise expressly provided.
SECTION 2.6 NUMBER OF TRUSTEES. The number of Trustees serving hereunder
at any time shall be determined by the
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<PAGE>
Trustees themselves, but once Shares have been issued shall not be less than two
(2) or more than fifteen (15).
SECTION 2.7 EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE. The death,
resignation, retirement, removal, or mental or physical incapacity of the
Trustees, or any one of them, shall not operate to annul or terminate the Trust
or any Series hereunder or to revoke or terminate any existing agency or
contract created pursuant to the terms of this Declaration, and until such
vacancy is filled, the Trustees in office, regardless of their number, shall
have all of the powers granted to the Trustees and shall discharge all the
duties imposed upon them by this Declaration.
SECTION 2.8 NO ACCOUNTING. Except to the extent required by the 1940 Act
or under circumstances which would justify his removal for cause, no person
ceasing to be a Trustee as a result of his death, resignation, retirement,
removal or incapacity (nor the estate of any such person) shall be required to
make an accounting to the shareholders or remaining Trustees upon such
cessation.
SECTION 2.9 OWNERSHIP OF THE TRUST. The assets of the Trust shall be held
separate and apart from any assets now or hereafter held in any capacity other
than as Trustee hereunder by the Trustees or by any successor Trustees. All of
the assets of the Trust shall at all times be considered as vested in the
Trustees. No Shareholder shall be deemed to have a severable ownership in any
individual asset of the Trust or any right of partition or possession thereof,
but each Shareholder shall have a proportionate undivided beneficial interest in
the Trust.
ARTICLE III
POWERS OF TRUSTEES
SECTION 3.1 GENERAL. The Trustees in all instances shall act as
principals, and are and shall be free from the control of the Shareholders. The
Trustees shall have full
- 7 -
<PAGE>
power and authority to do any and all acts and to make and execute any and all
contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not be bound or
limited by present or future laws or customs with regard to investment by
trustees or fiduciaries, but shall have full authority and absolute power and
control over the Trust Property and business of the Trust to the same extent as
if the Trustees were the sole owners of the Trust Property and business in their
own right, including such authority, power and control to do all acts and things
as they, in their uncontrolled discretion, shall deem proper to accomplish the
purposes of this Trust. The enumeration of any specific power herein shall not
be construed as limiting the aforesaid powers.
SECTION 3.2 INVESTMENTS. The Trustees shall have power, subject to the
Fundamental Policies, to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, lend, exchange, mortgage,
hypothecate, lease, distribute or otherwise deal in or dispose of common
stocks, preferred stocks, bonds, debentures, warrants and rights to
purchase securities, mortgage related securities such as mortgage-backed
securities and collateralized mortgage obligations, options on securities,
futures contracts and options on futures contracts, covered spread options,
gold bullion and coins and other precious metals (silver and platinum)
bullion and futures contracts with respect to such commodities,
certificates of beneficial interest, negotiable or non-negotiable
instruments, bank obligations, evidences of indebtedness, privately placed
debt securities, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, reverse repurchase agreements, firm commitment
agreements and "when-issued" securities and other securities, including,
without limitation, those issued,
- 8 -
<PAGE>
guaranteed or sponsored by any state, territory or possession of the United
States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, or by the United States Government or its
agencies or instrumentalities, or international instrumentalities, or by
any bank, savings institution, corporation or other business entity
organized under the laws of the United States and, to the extent provided
in the Prospectus and not prohibited by the Fundamental Policies of the
Trust, foreign securities of issuers or governments organized under foreign
laws, foreign currency transactions and options on foreign currency
transactions, and other assets; and to exercise any and all rights, powers
and privileges of ownership or interest in respect of any and all such
investments of every kind and description, with power to designate one or
more persons, firms, associations or corporations to exercise any of said
rights, powers and privileges in respect of any of said instruments; and
the Trustees shall be deemed to have the foregoing powers with respect to
any additional securities or other assets in which any Series of the Trust
may invest should the investment policies set forth in the Prospectus or
the Fundamental Policies be amended.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust or any Series.
SECTION 3.3 LEGAL TITLE. Legal title to all the Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more the Trustees, or in the name of the Trust or any Series thereof, or
in the name of any other Person as nominee, on such terms as the Trustees may
determine, provided that the interest of the Trust or any Series thereof is
appropriately protected.
SECTION 3.4 ISSUANCE AND REPURCHASE OF SECURITIES. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose
- 9 -
of, transfer, and otherwise deal in, Shares, including shares in fractional
denominations, and, subject to the more detailed provisions set forth in
Articles VIII and IX, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds or property of the applicable
Series of the Trust whether capital or surplus or otherwise, to the full extent
now or hereafter permitted by the laws of the Commonwealth of Massachusetts
governing business corporations.
SECTION 3.5 BORROW MONEY. Subject to the Fundamental Policies, the
Trustees shall have power to borrow money or otherwise obtain credit and to
secure the same by mortgaging, pledging or otherwise subjecting as security the
assets of the Trust or any Series thereof, including the lending of portfolio
securities, and to endorse, guarantee or undertake the performance of any
obligation, contract or engagement of any other person, form, association or
corporation.
SECTION 3.6 OFFICERS; DELEGATION; COMMITTEES. The Trustees may, as they
consider appropriate, elect and remove officers and appoint and terminate agents
and consultants and hire and terminate employees, any one or more of the
foregoing of whom may be a Trustee and may provide for the compensation of all
of the foregoing. The Trustees shall have power, consistent with their
continuing exclusive authority over the management of the Trust and the Trust
Property, to delegate from time to time to such of their number or to officers,
employees or agents of the Trust the doing of such things and the execution of
such instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient. The Trustees may appoint from
their number and terminate any one or more committees consisting of two or more
Trustees, including without implied limitation an Executive Committee which may,
when the Trustees are not in session and subject to the 1940 Act, exercise some
or all of the powers and authority of the Trustees as the Trustees may
determine.
SECTION 3.7 COLLECTION AND PAYMENT. The Trustees shall have power to
collect all property due to the Trust or any Series thereof; to pay all claims,
including taxes, against the
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<PAGE>
Trust Property; to prosecute, defend, compromise, arbitrate or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust
or any Series thereof; and to enter into releases, agreements and other
instruments.
SECTION 3.8 EXPENSES. The Trustees shall have power to incur and pay any
expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of the Trust or any Series, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The
Trustees shall fix the compensation of all officers, employees and Trustees.
The Trustees may pay themselves such compensation for special services,
including legal, underwriting, syndicating and brokerage services, as they in
good faith may deem reasonable and reimbursement for expenses reasonably
incurred by themselves on behalf of the Trust.
SECTION 3.9 MANNER OF ACTING; BY-LAWS. Except as otherwise provided
herein or in the By-laws or required by the 1940 Act, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
the Trustees (a quorum being present), including any meeting held by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, or by written consents
of a majority of Trustees then in office (or such larger or different number as
may be required by the 1940 Act or other applicable law). The Trustees may
adopt and from time to time amend or repeal the By-laws for the conduct of the
business of the Trust.
SECTION 3.10 VOTING TRUSTS. The Trustees shall have power and authority
for and on behalf of the Trust to join with other holders of any securities or
debt instruments in acting through a committee, depository, voting trustee or
otherwise, and in that connection to deposit any security or debt instrument
with, or transfer any security or debt instrument to, any such committee,
depository or trustee, and to delegate to them such power and authority with
relation to any security or debt instrument (whether or not so deposited or
transferred)
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as the Trustees shall deem proper, and to agree to pay, and to pay, such portion
of the expenses and compensation of such committee, depository or trustee as the
Trustees shall deem proper.
SECTION 3.11 MISCELLANEOUS POWERS. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for
the transaction of the business of the Trust or any Series thereof; (b) enter
into joint ventures, partnership and any other combinations or associations; (c)
purchase, and pay for out of Trust Property, insurance as they deem necessary or
appropriate for the conduct of the business, including without limitation,
policies insuring the Shareholders, Trustees, officers, employees, agents,
managers, investment advisers, distributors, selected dealers or independent
contractors of the Trust or any Series thereof against all claims arising by
reason of holding any such position or by reason of any action taken or omitted
by any such Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person against
such liability; (d) establish pension, profit-sharing, share purchase, and other
retirement, incentive and benefit plans for any Trustees, officers, employees
and agents of the Trust; (e) make donations, irrespective of benefit to the
Trust, for charitable, religious, educational, scientific, civic or similar
purposes; (f) to the extent permitted by law, indemnify any Person with whom the
Trust or any Series thereof has dealings, including any adviser, administrator,
manager, distributor and selected dealers with respect to any Series, to such
extent as the Trustees shall determine; (g) guarantee indebtedness or
contractual obligations of others; (h) determine and change the fiscal year of
the Trust and the method in which its accounts shall be kept; and (i) adopt a
seal for the Trust, provided that the absence of such seal shall not impair the
validity of any instrument executed on behalf of the Trust.
SECTION 3.12 FURTHER POWERS. The Trustees shall have power to conduct the
business of the Trust or any Series thereof, carry on its operations and
maintain offices both within and without the Commonwealth of Massachusetts, in
any
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and all states of the United States of America, in the District of Columbia, and
in any and all commonwealths, territories, dependencies, colonies, possessions,
agencies or instrumentalities of the United States of America and of foreign
governments, and to do all such other things and execute all such instruments as
they deem necessary, proper or desirable in order to promote the interests of
the Trust or any Series thereof although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust or any
Series thereof made by the Trustees in good faith shall be conclusive. In
construing the provisions of this Declaration, the presumption shall be in favor
of a grant of power to the Trustees. The Trustees will not be required to
obtain any court order to deal with the Trust Property. No Trustee shall be
required to give any bond or other security for the performance of any of his
duties hereunder.
ARTICLE IV
ADVISORY, MANAGEMENT AND DISTRIBUTION ARRANGEMENTS
SECTION 4.1 ADVISORY AND MANAGEMENT ARRANGEMENTS. Subject to a Majority
Shareholder Vote, if required by law, of the Trust or the applicable Series, the
Trustees may in their discretion from time to time enter into advisory,
management, or administrative contracts whereby the other party to such contract
shall undertake to furnish to the Trust or one or more Series thereof such
advisory, management and/or administrative services, with respect to one or more
Series as the Trustees shall from time to time consider desirable and all upon
such terms and conditions as the Trustees may in their discretion determine.
Subject to a Majority Shareholder Vote if required by law, the Trustees and/or
the investment adviser or manager may engage one or more firms to serve as
portfolio manager to a Series pursuant to a portfolio management contract in
which the portfolio manager makes all determinations with respect to the
purchase and sale of portfolio securities and places, in the names of one or
more Series all orders for execution of the Series' portfolio transactions upon
such terms and conditions and for such compensation as the Trustees may in their
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discretion approve. A portfolio manager may, in turn, engage its own sub-
advisers in managing a particular Series. Notwithstanding any provisions of
this Declaration, the Trustees may authorize any manager, adviser, portfolio
manager, or administrator (subject to such general or specific instructions as
the Trustees may from time to time adopt) to effect purchases, sales, loans or
exchanges of portfolio securities of any Series of the Trust on behalf of the
Trustees or may authorize any officer, employee or Trustee to effect such
purchases, sales, loans or exchanges pursuant to recommendations of any such
manager, adviser, portfolio manager or administrator (and all without further
action by the Trustees). Any such purchases, sales, loans or exchanges shall be
deemed to have been authorized by all of the Trustees.
SECTION 4.2 DISTRIBUTION ARRANGEMENTS. The Trustees may in their
discretion from time to time enter into a contract, providing for the sale of
the Shares of the Trust or any Series of the Trust, whereby the Trust may either
agree to sell the Shares to the other party to the contract or appoint such
other party as its sales agent for such Shares. In either case, the contract
shall be on such terms and conditions as the Trustees may in their discretion
determine to be not inconsistent with the provisions of this Article IV or the
By-laws; and such contract may also provide for the repurchase or sale of Shares
by such other party as principal or as agent of the Trust and may provide that
such other party may enter into selected dealer agreements with registered
securities dealers to further the purpose of the distribution or repurchase of
the Shares. The Trustees may adopt a Distribution Plan pursuant to Rule 12b-1
of the 1940 Act and may authorize the Trust to make payments from its assets
pursuant to such Plan.
SECTION 4.3 PARTIES TO CONTRACT. Any contract of the character described
in Sections 4.1 and 4.2 of this Article IV or in Article VII hereof may be
entered into with any corporation, firm, trust or association, although one or
more of the Trustees or officers of the Trust may be an officer, director,
Trustee, shareholder or member of such other party to the contract, and no such
contract shall be invalidated or rendered voidable by reason of the existence of
any such
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relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article IV
or the By-laws. The same person (including a firm, corporation, trust or
association) may be the other party to contracts entered into pursuant to
Sections 4.1 and 4.2 above or Article VII, and any individual may be financially
interested or otherwise affiliated with persons who are parties to any or all of
the contracts mentioned in this Section 4.3.
SECTION 4.4 PROVISIONS AND AMENDMENTS. Any contract entered into pursuant
to Sections 4.1 and 4.2 of this Article IV shall, to the extent applicable be
consistent with and subject to the requirements of Section 15 of the 1940 Act
with respect to its continuance in effect, its termination, and the method of
authorization and approval of such contract or renewal thereof, and no amendment
to any contract entered into pursuant to Section 4.1 shall be effective unless
consented to by a Majority Shareholder Vote of the applicable Series if required
by law.
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS
SECTION 5.1 TRUSTEES, SHAREHOLDERS, ETC. NOT PERSONALLY LIABLE; NOTICE.
All persons extending credit to, contracting with or having any claim against
the Trust shall look only to the assets of the Series with which such person
dealt for payment under such credit, contract or claim; and neither the
Shareholders of any Series nor the Trustees, nor any of the Trust's officers,
employees or agents, whether past, present or future, nor any other Series shall
be personally liable therefor. Every note, bond, contract, instrument,
certificate or undertaking and every other act or thing whatsoever executed or
done by or on behalf of the Trust, any Series or the Trustees or any of them in
connection with the Trust shall be
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conclusively deemed to have been executed or done only by or for the Trust (or
the Series) or the Trustees and not personally. Nothing in this Declaration
shall protect any Trustee or officer against any liability to the Trust or the
Shareholders to which such Trustee or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office of Trustee or of such
officer.
Every note, bond, contract, instrument, certificate, share or undertaking
made or issued by the Trustees or by any officers or officer shall give notice
that this Declaration is on file with the Secretary of The Commonwealth of
Massachusetts and shall recite to the effect that the same was executed or made
by or on behalf of the Trust or by them as Trustees or Trustee or as officers or
officer and not individually and that the obligations of such instrument are not
binding upon any of them or the Shareholders individually but are binding only
upon the assets and property of the Trust, or the particular Series in question,
as the case may be, but the omission thereof shall not operate to bind any
Trustees or Trustee or officers or officer or Shareholders or Shareholder
individually.
SECTION 5.2 TRUSTEE'S GOOD FAITH ACTION; EXPERT ADVICE; NO BOND OR SURETY.
The exercise by the Trustees of their powers and discretion hereunder shall be
binding upon everyone interested. A Trustee shall be liable for his own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and for nothing else, and
shall not be liable for errors of judgment or mistakes of fact or law. Subject
to the foregoing, (a) the Trustees shall not be responsible or liable in any
event for any neglect or wrongdoing of any officer, agent, employee, consultant,
adviser, manager, administrator, distributor or principal underwriter, custodian
or transfer, dividend disbursing, Shareholder servicing or accounting agent of
the Trust, nor shall any Trustee be responsible for the act or omission of any
other Trustee; (b) the Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration and their duties as
Trustees, and shall be under no liability for any act or omission in
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accordance with such advice or for failing to follow such advice; and (c) in
discharging their duties, the Trustees, when acting in good faith, shall be
entitled to rely upon the books of account of the Trust and upon written reports
made to the Trustees by any officer appointed by them, any independent public
accountant, and (with respect to the subject matter of the contract involved)
any officer, partner or responsible employee of any adviser, administrator,
manager, distributor, selected dealer, appraiser or other expert, consultant or
agent. The Trustees as such shall not be required to give any bond or surety or
any other security for the performance of their duties.
SECTION 5.3 INDEMNIFICATION OF SHAREHOLDERS. In case any Shareholder (or
former Shareholder) of any Series of the Trust shall be charged or held to be
personally liable for any obligation or liability of the Trust solely by reason
of being or having been a Shareholder and not because of such Shareholder's acts
or omissions or for some other reason, said Series (upon proper and timely
request by the Shareholder) shall assume the defense against such charge and
satisfy any judgment thereon, and the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or in the case
of a corporation or other entity, its corporate or other general successor)
shall be entitled out of the assets of said Series' estate to be held harmless
from and indemnified against all loss and expense arising from such liability.
SECTION 5.4 INDEMNIFICATION OF TRUSTEES, OFFICERS, ETC. The Trust shall
indemnify (from the assets of the Series or Series in question) each of its
Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise) [hereinafter referred to
as a "Covered Person"] against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or other
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proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being or having been
such a Trustee or officer, director or trustee, except with respect to any
matter as to which it has been determined that such Covered Person (i) did not
act in good faith in the reasonable belief that such Covered Person's action was
in or not opposed to the best interests of the Trust or (ii) had acted with
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office (either and both
of the conduct described in (i) and (ii) being referred to hereafter as
"Disabling Conduct"). A determination that the Covered Person is entitled to
indemnification may be made by (i) a final decision on the merits by a court or
other body before whom the proceeding was brought that the person to be
indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of a
court action or an administrative proceeding against a Covered Person for
insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Trust as defined in section
2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. Expenses, including accountants' and
counsel fees so incurred by any such Covered Person (but excluding amounts paid
in satisfaction of judgments, in compromise or as fines or penalties), may be
paid from time to time by the Series in question in advance of the final
disposition of any such action, suit or proceeding, provided that the Covered
Person shall have undertaken to repay the amounts so paid to the Series in
question if it is ultimately determined that indemnification of such expenses is
not authorized under this Article V and (i) the Covered Person shall have
provided security for such undertaking, (ii) the Trust shall be insured against
losses arising by reason of any lawful advances, or (iii) a majority of a quorum
of the disinterested Trustees who are not a party to the proceeding, or an
independent legal
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counsel in a written opinion, shall have determined, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that there is
reason to believe that the Covered Person ultimately will be found entitled to
indemnification.
SECTION 5.5 COMPROMISE PAYMENT. As to any matter disposed of by a
compromise payment by any such Covered Person referred to in Section 5.4,
pursuant to a consent decree or otherwise, no such indemnification either for
said payment or for any other expenses shall be provided unless such
indemnification shall be approved (a) by a majority of the disinterested
Trustees who are not parties to the proceeding or (b) by an independent legal
counsel in a written opinion. Approval by the Trustees pursuant to clause (a)
or by independent legal counsel pursuant to clause (b) shall not prevent the
recovery from any Covered Person of any amount paid to such Covered Person in
accordance with any of such clauses as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have acted
in good faith in the reasonable belief that such Covered Person's action was in
or not opposed to the best interests of the Trust or to have been liable to the
Trust or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office.
SECTION 5.6 INDEMNIFICATION NOT EXCLUSIVE, ETC. The right of
indemnification provided by this Article V shall not be exclusive of or affect
any other rights to which any such Covered Person may be entitled. As used in
this Article V, "Covered Person" shall include such person's heirs, executors
and administrators; "interested Covered Person" is one against whom the action,
suit or other proceeding in question or another action, suit or other proceeding
on the same or similar grounds is then or has been pending or threatened, and a
"disinterested" person is a person against whom none of such actions, suits or
other proceedings or another action, suit or other proceeding on the same or
similar grounds is then or has been pending or threatened. Nothing contained in
this Article shall affect any rights to indemnification to which personnel
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of the Trust, other than Trustees and officers, and other persons may be
entitled by contract or otherwise under law, nor the power of the Trust to
purchase and maintain liability insurance on behalf of any such person.
SECTION 5.7 LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
SECTION 6.1 BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest with
par value $.001 per share. The number of such shares of beneficial interest
authorized hereunder is unlimited. All Shares issued hereunder including,
without limitation, Shares issued in connection with a dividend in Shares or a
split of Shares, shall be fully paid and nonassessable.
SECTION 6.2 SERIES DESIGNATION. The Trustees, in their discretion from
time to time, may authorize the division of Shares into additional Series, each
additional Series relating to a separate portfolio of investments. The Series
are hereby established and designated:
The Liquid Asset Series
The Limited Maturity Bond Series
The All-Growth Series
The Natural Resources Series
The Real Estate Series
The Fully Managed Series
The Multiple Allocation Series
The Fund For Life
The Global Income and Currency Fund
The Global Equity Fund
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Zero Target 2000 Series
Zero Target 2003 Series
Zero Target 2004 Series
Zero Target 2005 Series
Zero Target 2006 Series
Zero Target 2010 Series
The Tremont Select Managers Fund
The Masters Series
The Intermediate Bond Series
The Capital Appreciation Series
The Rising Dividends Series
The Emerging Markets Series
The Market Manager Series
The Value Equity Series
The Strategic Equity Series
The Small Cap Series
These Series shall be the only Series until additional Series are established
and designated by the Trustees. Different Series may be established and
designated and variations in the relative rights and preferences as between the
different Series shall be fixed and determined by the Trustees; provided that
all Shares shall be identical except that there may be variations between
different Series as to investment policies, securities portfolios, purchase
price, determination of net asset value, the price, terms and manner of
redemption, special and relative rights as to dividends and on liquidation,
conversion rights, and conditions under which the several Series shall have
separate voting rights. All references to Shares in this Declaration shall be
deemed to be shares of any or all Series as the context may require.
The following provisions shall be applicable to all Series:
(a) The number of Shares of each Series that may be issued shall be
unlimited. The Trustees may classify or reclassify any unissued Shares or
any Shares previously issued and required of any Series into one or more
Series that may be established and designated from time to time. The
Trustees may hold as treasury Shares
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(of the same or some other Series), reissue for such consideration and on such
terms as they may determine, or cancel any Shares of any Series reacquired by
the Trust at their discretion from time to time.
(b) The power of the Trustees to invest and reinvest the Trust
Property of each Series that has been or that may be established shall be
governed by Section 3.2 of this Declaration.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of account of
the Trust. In the event that there are any assets, income, earnings,
profits and proceeds thereof, funds or payments which are not readily
identifiable as belonging to any particular Series, the Trustees shall
allocate them among any one or more of the Series established and
designated from time to time in such manner and on such basis as they, in
their sole discretion, deem fair and equitable. Each such allocation by
the Trustees shall be conclusive and binding upon the Shareholders of all
Series for all purposes.
(d) The assets belonging to each particular Series shall be charged
with the liabilities of the Trust in respect of that Series and all
expenses, costs, charges and reserves attributable to that Series, and any
general liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as belonging to any particular Series
shall be allocated and charged by the Trustees to and among any one or more
of the Series established and designated from time to
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time in such manner and on such basis as the Trustees in their sole
discretion deem fair and equitable.
(i) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares of the Series
designated The Fund For Life shall be
amortized for such Series over the lesser of
the life of such Series or the five-year
period beginning with the month that such
Series commenced operations.
(ii) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares of The Global
Income and Currency Fund, the Global Equity
Fund, Zero Target 2002 Series, Zero Target
2003 Series, Zero Target 2004 Series, Zero
Target 2005 Series, Zero Target 2006 Series,
Zero Target 2010 Series, and The Tremont
Select Managers Fund shall be amortized for
each such Series over the lesser of the life
of each such Series or the five-year period
beginning with the month that each such
Series commences operations.
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(iii) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares designated The
Masters Series and The Intermediate Bond
Series shall be amortized for such Series
over the lesser of the life of each such
Series or the five-year period beginning with
the month that each such Series commences
operations.
(iv) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares designated Capital
Appreciation Series may be amortized for such
Series over the lesser of the life of the
Series or the five-year period beginning with
the month that such Series commenced
operations.
(v) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares designated Rising
Dividends Series and Emerging Markets Series
may be amortized for such Series over the
lesser of the life of the Series or the five-
year period beginning with the month that such Series commenced operations.
(vi) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares designated Market
Manager Series may be amortized for such
Series over the lesser of the life of the
Series or the five-year period beginning with
the month that such Series commenced
operations.
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(vii) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares designated Value
Equity Series may be amortized for such
Series over the lesser of the life of the
Series or the five-year period beginning with
the month that such Series commenced
operations.
(viii) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares designated
Strategic Equity Series may be amortized for
such Series over the lesser of the life of
the Series or the five-year period beginning
with the month that such Series commenced
operations.
(ix) Costs incurred by the Trust in connection
with the organization, registration and
public offering of Shares designated Small
Cap Series may be amortized for such Series
over the lesser of the life of the Series or
the five-year period beginning with the month
that such Series commenced operations.
Each allocation of liabilities, expenses, costs, charges and reserves by
the Trustees shall be conclusive and binding upon the holders of all Series
for all purposes. The Trustees shall have full discretion, to the extent
not inconsistent with the 1940 Act, to determine which
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items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(e) The power of the Trustees to pay dividends and make
distributions with respect to any one or more Series shall be governed by
Section 9.2 of this Trust. Dividends and distributions on Shares of a
particular Series may be paid with such frequency as the Trustees may
determine, which may be daily or otherwise, pursuant to a standing
resolution or resolutions adopted only once or with such frequency as the
Trustees may determine, to the holders of Shares of that Series, from such
of the income and capital gains, accrued liabilities belonging to that
Series. All dividends and distributions on Shares of a particular Series
shall be distributed pro rata to the holders of that Series in proportion
to the number of Shares of that Series held by such holders at the date and
time of record established for the payment of such dividends or
distributions.
The establishment and designation of any additional Series of Shares shall
be effective upon the execution by a majority of the then Trustees of any
instrument setting forth the establishment and designation of such Series. Such
instrument shall also set forth any rights and preferences of such Series which
are in addition to the rights and preferences of Shares set forth in this
Declaration. The Trustees may by an instrument executed by a majority of their
number abolish a Series and the establishment and designation thereof. Each
instrument referred to in this paragraph shall have the status of an amendment
to this Declaration.
SECTION 6.3 RIGHTS OF SHAREHOLDERS. The ownership of the Trust Property
of every description and the right to conduct any business hereinbefore
described are vested exclusively in the Trustees, and the Shareholders shall
have no interest therein other than the beneficial interest conferred by their
Shares with respect to a particular Series, and they shall have no right to call
for any partition or division of any property, profits, rights or interests of
the Trust nor can they be called upon to share or assume any losses of the
Trust,
<PAGE>
or suffer an assessment of any kind by virtue of their ownership of Shares. The
Shares shall be personal property giving only the rights in this Declaration
specifically set forth. The Shares shall not entitle the holder to preference,
preemptive, appraisal, conversion or exchange rights (except for rights to
exchange Shares of one Series for Shares of another Series as set forth in the
Prospectus).
SECTION 6.4 TRUST ONLY. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.
SECTION 6.5 ISSUANCE OF SHARES. The Trustees, in their discretion, may
from time to time without a vote of the Shareholders issue Shares with respect
to any Series that may have been established pursuant to Section 6.2, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount not less than the then
current net asset value of said Shares and type of consideration, including cash
or property, at such time or times and on such terms as the Trustee may deem
best, and may in such manner acquire other assets (including the acquisition of
assets subject to, and in connection with the assumption of, liabilities) and
businesses. In connection with any issuance of Shares, the Trustees may issue
fractional Shares. The Trustees may from time to time divide or combine the
Shares of any Series into a greater or lesser number without thereby changing
the proportionate beneficial interests in such Series of the Trust.
Contributions to the Trust may be accepted for, and Shares shall be redeemed as,
whole Shares and/or 1/1,000ths of a Share or multiples thereof.
SECTION 6.6 REGISTER OF SHARES. A register shall be kept at the Trust or
the offices of any transfer agent duly appointed by the Trustees under the
direction of the Trustees which shall contain the names and addresses of the
Shareholders
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and the number of Shares (with respect to each Series that may have been
established) held by them respectively and a record of all transfers thereof.
Separate registers shall be established and maintained for each Series of the
Trust. Each such register shall be conclusive as to who are the holders of the
Shares of the applicable Series and who shall be entitled to receive dividends
or distributions or otherwise to exercise or enjoy the rights of Shareholders.
No Shareholder shall be entitled to receive payment of any dividend or
distribution, nor to have notice given to him as herein provided, until he has
given his address to a transfer agent or such other officer or agent of the
Trustees as shall keep the register for entry thereon. The Trust shall not be
required to issue certificates for the Shares; however, the Trustees, in their
discretion, may authorize the issuance of share certificates and promulgate
appropriate rules and regulations as to their use.
SECTION 6.7 TRANSFER AGENT AND REGISTRAR. The Trustee shall have power to
employ a transfer agent or transfer agents, and a registrar or registrars, with
respect to the Shares of the various Series. The transfer agent may keep the
applicable register and record therein the original issues and transfers, if
any, of the said Shares of the applicable Series. Any such transfer agent and
registrar shall perform the duties usually performed by transfer agents and
registrars of certificates of stock in a corporation, except as modified by the
Trustees.
SECTION 6.8 TRANSFER OF SHARES. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereto
duly authorized in writing, upon delivery to the Trustees or a transfer agent of
the Trust of a duly executed instrument of transfer, together with such evidence
of the genuineness of each such execution and authorization and of other matters
as may reasonably be required. Upon such delivery, the transfer shall be
recorded on the applicable register of the Trust. Until such record is made,
the Shareholder of record shall be deemed to be the holder of such Shares for
all purposes hereof and neither the Trustees nor any transfer agent or registrar
nor any officer, employee or agent of the Trust shall be affected by any notice
of the proposed transfer.
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Any person becoming entitled to any Shares in consequence of the death,
bankruptcy or incompetence of any Shareholder, or otherwise by operation of law,
shall be recorded on the applicable register of Shares as the holder of such
Shares upon production of the proper evidence thereof to the Trustees or a
transfer agent of the Trust, but until such record is made, the Shareholder of
record shall be deemed to be the holder of such Shares for all purposes hereof
and neither the Trustees nor any transfer agent or registrar nor any officer or
agent of the Trust shall be affected by any notice of such death, bankruptcy or
incompetence, or other operation of law.
SECTION 6.9 NOTICE. Any and all notices to which any Shareholder
hereunder may be entitled and any and all communications shall be deemed duly
served or given if mailed, postage prepaid, addressed to any Shareholder of
record at his last known address as recorded on the applicable register of the
Trust.
ARTICLE VII
CUSTODIANS
SECTION 7.1 APPOINTMENT AND DUTIES. The Trustees shall at all times
employ, as custodian with respect to each Series of the Trust, a custodian or
custodians, each of which shall have an aggregate capital, surplus and undivided
profits (as shown on its last published report) of at least two million dollars
and shall meet the qualifications for custodians for portfolio securities of
investment companies contained in the 1940 Act. It is contemplated that
separate custodians may be employed for the different Series of the Trust. Any
custodian, acting with respect to one or more Series, shall have authority as
agent of the Trust or the Series with respect to which it is acting, but subject
to such restrictions, limitations and other requirements, if any, as may be
contained in the By-laws of the Trust and the 1940 Act:
(1) to hold the securities owned by the Trust or the Series and
deliver the same upon written order;
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(2) to receive any receipt for any monies due to the Trust or
the Series and deposit the same in its own banking department (if a bank)
or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and
accounts of the Trust or the Series and furnish clerical and accounting
services; and
(5) if authorized to do so by the Trustees, to compute the net
income and the value of the net assets of the Trust or the Series;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote of the Series
with respect to which the custodian is acting, the custodian shall deliver and
pay over all property of the Trust held by it as specified in such vote.
The Trustees may also authorize each custodian to employ one or more sub-
custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall meet the qualifications for custodians
contained in the 1940 Act.
SECTION 7.2 ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of any custodian agreement with respect to any Series or inability
of any custodian to continue to serve, the Trustees shall promptly appoint a
successor custodian, but in the event that no successor custodian can be found
who has the required qualifications and is willing to serve, the Trustees shall
call as promptly as possible a special Shareholders' meeting to determine
whether such Series shall function without a custodian or shall be liquidated.
If so directed by vote of the holders of a majority of the Shares of such Series
outstanding and entitled to vote, the custodian
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shall deliver and pay over all Trust Property held by it as specified in such
vote.
SECTION 7.3 CENTRAL CERTIFICATE SYSTEM. Subject to such rules,
regulations and orders as the Commission may adopt or issue, the Trustees may
direct the custodian to deposit all or any part of the securities owned by the
Trust or the Series in a system for the central handling of securities
established by a national securities exchange or a national securities
association registered with the Commission under the Securities Exchange Act of
1934, or such other person as may be permitted by the Commission, or otherwise
in accordance with the 1940 Act, pursuant to which system all securities of any
particular class or series of any issuer deposited within the system are treated
as fungible and may be transferred or pledged by bookkeeping entry without
physical delivery of such securities, provided that all such deposits shall be
subject to withdrawal only upon the order of the Trust.
SECTION 7.4 ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATES. Subject to
such rules, regulations and orders as the Commission may adopt, the Trustees may
direct the custodian to accept written receipts or other written evidences
indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.
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ARTICLE VIII
REDEMPTION
SECTION 8.1 REDEMPTIONS. All outstanding Shares of any Series of the
Trust may be redeemed at the option of the holders thereof, upon and subject to
the terms and conditions provided in this Article VIII. The Trust shall, upon
application of any Shareholder or pursuant to authorization from any Shareholder
of a particular Series, redeem or repurchase from such Shareholder outstanding
Shares of such Series at the then current net asset value of such Shares. If so
authorized by the Trustees, the Trust may, at any time and from time to time,
charge fees or deferred sales charges for effecting such redemption, at such
rates as the Trustees may establish, as and to the extent permitted under the
1940 Act, and may, at any time and from time to time, pursuant to such Act,
suspend such right of redemption. The procedures for effecting redemption shall
be as set forth in the Prospectus with respect to the applicable Series from
time to time.
SECTION 8.2 REDEMPTIONS OF ACCOUNTS OF LESS THAN A MINIMUM DOLLAR
AMOUNT. The Trustees shall have the power to redeem shares at a redemption
price determined in accordance with Section 8.1 if at any time the total
investment in such account does not have a minimum dollar value determined from
time to time by the Trustees in their sole discretion; provided, however, that
the Trustees may exercise such power with respect to Shares of any Series only
to the extent the Prospectus describes such power with respect to such Series.
In the event the Trustees determine to exercise their power to redeem Shares
provided in this Section 8.2, Shareholders shall be notified that the value of
their account is less than the then effective minimum dollar amount and allowed
60 days to make an additional investment before redemption is processed.
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ARTICLE IX
DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS
SECTION 9.1 NET ASSET VALUE. The net asset value of each outstanding
Share of each Series of the Trust shall be determined with respect to each
Series at such time or times on such days as the Trustees may determine, in
accordance with the 1940 Act. The method of determination of net asset value
shall be determined by the Trustees and shall be as set forth in the Prospectus
with respect to the applicable Series. The power and duty to make the daily
calculations for any Series may be delegated by the Trustees to the adviser,
manager, administrator, manager, custodian, transfer agent or such other person
as the Trustees may determine. The Trustees may suspend the daily determination
of net asset value to the extent permitted by the 1940 Act.
SECTION 9.2 DISTRIBUTIONS TO SHAREHOLDERS. Except at such times when
the Trustees deem proper, the Trustees will not distribute to Shareholders net
investment income and realized capital gains, but will retain and reinvest such
net profits. The Trustees may make distributions to Shareholders to the extent
the distribution and the circumstances in which it may be made are determined by
the Trustees to be in the best interests of the Series. The Trustees may retain
and not reinvest from the net profits such amount as they may deem necessary to
pay the debts or expenses of the Trust or to meet obligations of the Trust, or
as they may deem desirable to use in the conduct of its affairs or to retain for
future requirements or extensions of the business.
SECTION 9.3 POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any
of the foregoing provisions of this Article IX, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
share net asset value of the Trust's Shares or net income, or the declaration
and payment of dividends and distributions as they may deem necessary or
desirable to enable the Trust to comply with any provision of the 1940 Act, or
any securities association registered under the Securities Exchange Act of
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1934, or any order of exemption issued by said Commission, all as in effect now
or hereafter amended or modified.
ARTICLE X
SHAREHOLDERS
SECTION 10.1 VOTING POWERS. The Shareholders shall have the power to
vote (i) for the election of Trustees as provided in Article II, Section 2.2;
(ii) for the removal of Trustees as provided in Article II, Section 2.3(d);
(iii) with respect to any investment adviser as provided in Article IV, Section
4.1; (iv) with respect to the merger, consolidation and sale of assets of the
Trust as provided in Article XI, Section 11.3; (v) with respect to the amendment
of this Declaration as provided in Article XI, Section 11.4; (vi) to the same
extent as the Shareholders of a Massachusetts business corporation as to whether
or not a court action, proceeding or claim should be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders
(provided, however, that a shareholder of a particular Series shall not be
entitled to a derivative or class action on behalf of any other Series (or
shareholders of any other Series) of the Trust); and (vii) with respect to such
additional matters relating to the Trust as may be required by law, by this
Declaration, or the By-laws of the Trust or any regulation of the Trust, by the
Commission or any State, or as the Trustees may consider desirable. Any matter
affecting a particular Series, including without limitation, matters affecting
the investment advisory arrangements or investment policies or restrictions of a
Series, if required by law, shall not be deemed to have been effectively acted
upon unless approved by the required vote of the Shareholders of such Series if
required by law. Unless otherwise required by law, each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote, and each
fractional Share shall be entitled to a proportionate fractional vote. There
shall be no cumulative voting in the election of Trustees. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action to be taken by Shareholders which is required or permitted by law, this
Declaration or any By-laws of the Trust.
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SECTION 10.2 MEETINGS. Shareholder meetings shall be held as specified
in Article I of the By-laws and in Section 2.2 hereof at the principal office of
the Trust or at such other place as the Trustees may designate. No annual or
regular meetings of shareholders are required. Meetings of the Shareholders may
be called by the Trustees and shall be held at such times, on such day and at
such hour as the Trustees may from time to time determine, for the purposes
specified in Section 2.2 and for such other purposes as may be specified by the
Trustees.
SECTION 10.3 QUORUM AND REQUIRED VOTE. Except as otherwise provided by
law, the holders of thirty percent of the outstanding Shares of each Series
present in person or by proxy shall constitute a quorum for the transaction of
any business at any meeting of Shareholders. If a quorum, as above defined,
shall not be present for the purpose of any vote that may properly come before
the meeting, the Shareholders present in person or by proxy and entitled to vote
at such meeting on such matter holding a majority of the Shares present entitled
to vote on such matter may by vote adjourn the meeting from time to time to be
held at the same place without further notice than by announcement to be given
at the meeting until a quorum, as above defined, entitled to vote on such matter
shall be present, whereupon any such matter may be voted upon at the meeting as
though held when originally convened. Subject to any applicable requirement of
law, this Declaration or the By-laws, a plurality of the votes cast shall elect
a Trustee and all other matters shall be decided by a majority of the votes cast
entitled to vote thereon.
SECTION 10.4 RECORD DATE FOR MEETINGS. For the purpose of determining
the Shareholders who are entitled to notice of and to vote at any meeting, or to
participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding 30 days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than 180 days prior to the
date of any meeting of Shareholders or declaration of dividends or other action
as a record date for the determination of the persons to be treated as
Shareholders of record for such purposes, except
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for dividend payments which shall be governed by Section 9.2 hereof.
SECTION 10.5 PROXIES. Any vote by a Shareholder of the Trust may be
made in person or by proxy, provided that no proxy shall be voted at any meeting
unless it shall have been placed on file with the Trustees or their designee
prior to the time the vote is taken. Pursuant to a resolution of a majority of
the Trustees, proxies may be solicited in the name of one or more Trustees or
one or more officers of the Trust. Only Shareholders of record shall be
entitled to vote. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. A proxy with
respect to shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them.
SECTION 10.6 ADDITIONAL PROVISIONS. The By-laws may include further
provisions for Shareholders' votes, meetings and related matters.
SECTION 10.7 REPORTS. The Trustees shall cause to be prepared with
respect to each Series at least annually a report of operations containing a
balance sheet and statement of income and undistributed income of the applicable
Series of the Trust prepared in conformity with generally accepted accounting
principles and an opinion of an independent public accountant on such financial
statements. It is contemplated that separate reports may be prepared for the
various Series. Copies of such reports shall be mailed to all Shareholders of
record of the applicable Series within the time required by the 1940 Act. The
Trustees shall, in addition, furnish to the Shareholders at least semi-annually,
interim reports containing an unaudited balance sheet of the Series as of the
end of such period and an unaudited statement of income and surplus for the
period from the beginning of the current fiscal year to the end of such period.
SECTION 10.8 SHAREHOLDER ACTION BY WRITTEN CONSENT. Any action which
may be taken by Shareholders may be taken
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without a meeting if a majority of Shareholders of each Series entitled to vote
on the matter (or such larger proportion thereof as shall be required by any
express provision of this Declaration) consent to the action in writing and the
written consents are filed with the records of the meetings of Shareholders.
Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
ARTICLE XI
DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS; ETC.
SECTION 11.1 DURATION. Subject to the provisions of Sections 11.2 and
11.3 hereof, this Trust shall continue without limitation of time.
SECTION 11.2 TERMINATION.
(a) The Trust, or any Series thereof, may be terminated by the
affirmative vote of a majority of the Trustees. Upon the termination of the
Trust or any Series:
(i) the Trust or such Series shall carry on no business
except for the purpose of winding up its affairs;
(ii) the Trustees shall proceed to wind up the affairs of
the Trust or such Series and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust or such Series
shall have been wound up, including the power to fulfill or discharge the
contracts of the Trust or such Series, collect its assets, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part of the
remaining Trust Property to one or more persons at public or private sale
for consideration which may consist in whole or in part of cash,
securities or other property of any kind, discharge or pay its
liabilities, and do all other acts appropriate to liquidate its business;
provided that any sale, conveyance, assignment, exchange, transfer or
other disposition of
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all or substantially all the Trust Property shall require approval of the
principal terms of the transaction and the nature and amount of the
consideration by vote or consent of the holders of a majority of the
Shares entitled to vote; and
(iii) after payment or adequately providing for the payment
of all liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Property of any Series, in
cash or in kind or partly each, among the Shareholders of such Series
according to their respective rights.
(b) After termination of the Trust or any Series and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
lodge among the records of the Trust an instrument in writing setting forth the
fact of such termination. Upon termination of the Trust, the Trustees shall
thereupon be discharged from all further liabilities and duties hereunder, and
the rights and interests of all Shareholders shall thereupon cease. Upon
termination of any Series, the Trustees thereunder shall be discharged from any
further liabilities and duties with respect to such Series, and the rights and
interests of all Shareholders of such Series shall thereupon cease.
SECTION 11.3 REORGANIZATION. The Trustees may sell, convey, merge and
transfer the assets of the Trust, or the assets belonging to any one or more
Series, to another trust, partnership, association or corporation organized
under the laws of any state of the United States, or to the Trust to be held as
assets belonging to another Series of the Trust, in exchange for cash, shares or
other securities (including, in the case of a transfer to another Series of the
Trust, Shares of such other Series) with such transfer either (1) being made
subject to, or with the assumption by the transferee of, the liabilities
belonging to each Series the assets of which are so transferred, or (2) not
being made subject to, or not with the assumption of, such liabilities;
provided, however, that no assets belonging to any particular Series shall be so
transferred unless the terms of such transfer shall have first
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been approved at a meeting called for the purpose by a Majority Shareholder Vote
of that Series. Following such transfer, the Trustees shall distribute such
cash, shares or other securities (giving due effect to the assets and
liabilities belonging to and any other differences among the various Series the
assets belonging to which have so been transferred) among the Shareholders of
the Series the assets belonging to which have been so transferred; and if all of
the assets of the Trust have been so transferred, the Trust shall be terminated.
The Trust, or any one or more Series, may, either as the successor,
survivor, or non-survivor, (1) consolidate with one or more other trusts,
partnerships, associations or corporations organized under the laws of the
Commonwealth of Massachusetts or any other state in the United States, to form a
new consolidated trust, partnership, association, or corporation under the laws
of which any one of the constituent entities is organized, or (2) merge into one
or more other trusts, partnerships, associations, or corporation organized under
the laws of the Commonwealth of Massachusetts or any other state of the United
States, or have one or more such trusts, partnerships, associations, or
corporations merged into it, any such consolidation or merger to be upon such
terms and conditions as are specified in an agreement and plan of reorganization
entered into by the Trust, or one or more Series as the case may be, in
connection therewith. Any such consolidation or merger shall require the
approval of a Majority Shareholder Vote of each Series affected thereby. For
each Series of the Trust other than The Fund For Life, the terms "merge" or
"merger" as used herein shall not include the purchase or acquisition of any
assets of any other trust, partnership, association or corporation which is an
investment company organized under the laws of the Commonwealth of Massachusetts
or any other state of the United States.
Shareholders shall have no right to demand payment for their shares or to
any other rights of dissenting shareholders in the event the Trust or any Series
participates in any transaction which would give rise to appraisal or
dissenters' rights by a shareholder of a corporation organized under Chapter
156B of the General Laws of the Commonwealth of Massachusetts.
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SECTION 11.4 AMENDMENT PROCEDURE. All rights granted to the
Shareholders under this Declaration are granted subject to the reservation of
the right to amend this Declaration as herein provided, except that no amendment
shall repeal the limitations on personal liability of any Shareholder or Trustee
or repeal the prohibition of assessment upon the Shareholders without the
express consent of each Shareholder or Trustee involved. Subject to the
foregoing, the provisions of this Declaration (whether or not related to the
rights of Shareholders) may be amended at any time, so long as such amendment
does not adversely affect the rights of any Shareholder with respect to which
such amendment is or purports to be applicable and so long as such amendment is
not in contravention of applicable law, including the 1940 Act, by an instrument
in writing signed by a majority of the then Trustees (or by an officer of the
Trust pursuant to the vote of a majority of such Trustees). Any amendment to
this Declaration that adversely affects the rights of Shareholders may be
adopted at any time by an instrument in writing signed by a majority of the then
Trustees (or by an officer of the Trust pursuant to a vote of a majority of such
Trustees) when authorized to do so by the vote of a majority of the Shares
entitled to vote. Subject to the foregoing, any such amendment shall be
effective as provided in the instrument containing the terms of such amendment
or, if there is no provision therein with respect to effectiveness, upon the
execution of such instrument and of a certificate (which may be a part of such
instrument) executed by a Trustee or officer of the Trust to the effect that
such amendment has been duly adopted.
SECTION 11.5 INCORPORATION. With the approval of the holders of a
majority of the Shares, the Trustees may cause to be organized or assist in
organizing a corporation or corporations under the laws of any jurisdiction or
any other trust, partnership, association or other organization to take over all
of the Trust Property or to carry on any business in which the Trust shall
directly or indirectly have any interest, and to sell, convey and transfer the
Trust Property to any such corporation, trust, association or organization in
exchange for the shares or securities thereof or otherwise, and to lend money
to, subscribe for the Shares or securities of, and enter into any contracts with
any such corporation, trust, partnership, association or organization, or any
corporation,
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trust, partnership, association or organization in which the Trust holds or is
about to acquire shares or any other interest. The Trustees may also cause a
merger or consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring a portion of the Trust Property to such organizations or
entities.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 FILING. This Declaration and any amendment hereto shall be
filed in the office of the Secretary of the Commonwealth of Massachusetts and in
such other places as may be required under the laws of Massachusetts and also
may be filed or recorded in such other places as the Trustees deem appropriate.
Each amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee stating that such action was duly taken in a manner
provided herein, and unless such amendment or such certificate sets forth some
later time for the effectiveness of such amendment, such amendment shall be
effective upon its filing. A restated Declaration, containing the original
Declaration and all amendments theretofore made, may be executed from time to
time by a majority of the Trustees and shall, upon filing with the Secretary of
the Commonwealth of Massachusetts, be conclusive evidence of all amendments
contained therein and may thereafter be referred to in lieu of the original
Declaration and the various amendments thereto.
SECTION 12.2 RESIDENT AGENT. The Trust shall maintain a resident agent
in the Commonwealth of Massachusetts, which agent shall initially be CT
Corporation System, 2 Oliver Street, Boston, Massachusetts 02109. The Trustees
may designate a successor resident agent, provided, however, that such
appointment shall not become effective until written
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notice thereof is delivered to the office of the Secretary of the Commonwealth
of Massachusetts.
SECTION 12.3 GOVERNING LAW. This Declaration is executed by the
Trustees and delivered in the Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said Commonwealth.
SECTION 12.4 COUNTERPARTS. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
SECTION 12.5 RELIANCE BY THIRD PARTIES. Any certificate executed by an
individual who, according to the records of the Trust or of any recording office
in which this Declaration may be recorded, appears to be a Trustee hereunder,
certifying to: (a) the number or identity of Trustees or Shareholders; (b) the
name of the Trust or any Series thereof; (c) the due authorization of the
execution of any instrument or writing; (d) the form of any vote passed at a
meeting of Trustees or Shareholders; (e) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration; (f) the form of any By-laws
adopted by or the identity of any officers elected by the Trustees; (g) the
existence of any fact or facts which in any manner relate to the affairs of the
Trust or any Series; or (h) the establishment of any Series, shall be conclusive
evidence as to the matters so certified in favor of any person dealing with the
Trustees and their successors.
SECTION 12.6 PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the
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Internal Revenue Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any of
the remaining provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
/s/ Terry L. Kendall
-------------------------
Terry L. Kendall
1001 Jefferson Street
Suite 400
Wilmington, DE 19801
/s/ Robert A. Grayson
-------------------------
Robert A. Grayson
108 Loma Media Road
Santa Barbara, CA 93103
/s/ M. Norvel Young
-------------------------
M. Norvel Young
24255 Pacific Coast Highway
Malibu, CA 90263-4507
/s/ Roger B. Vincent
-------------------------
Roger B. Vincent
230 Park Avenue
New York, NY 10169
/s/ John L. Murphy
-------------------------
John L. Murphy
130 Liberty Street
New York, NY 10006
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<PAGE>
11 -- CONSENT OF ERNST & YOUNG LLP
-2-
- - -<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights," "Independent Auditors" and "Financial Statements" and to the
incorporation by reference of our reports dated February 12, 1996 on the
financial statements of the Series comprising The GCG Trust included in this
Registration Statement (Form N-1A No. 33-23512) of The GCG Trust.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
April 30, 1996
<PAGE>
19 -- POWERS OF ATTORNEY
-3-
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being the duly
elected Persident and Chairman of the Board of Trustees and a Trustee of The GCG
Trust (the "Trust") and a duly elected Governor of the Managed Global Account of
Separate Account D (the "Account") of Golden American Life Insurance Company,
constitutes and appoints Myles R. Tashman, and Marilyn Talman, and each of them,
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution for him in his name, place and stead, in any and all
capacities, to sign on behalf of the Trust and the Account registration
statements and applications for exemptive relief, and any and all amendments
thereto, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
affirming all that said attorneys-in-fact and agents, or any of them, or his or
her substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Date: April 12, 1996
/s/ Terry L. Kendall
---------------------------
Terry L. Kendall
Chairman of the Board,
President, Trustee
and Governor
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of The GCG Trust (the "Trust") and a duly elected Governor of
the Managed Global Account of Separate Account D (the "Account") of Golden
American Life Insurance Company, constitutes and appoints Myles R. Tashman, and
Marilyn Talman, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign on behalf of the Trust and
the Account registration statements and applications for exemptive relief, and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and affirming all that said attorneys-in-fact and
agents, or any of them, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Date: April 10, 1996
/s/ Robert A. Grayson
---------------------------
Robert A. Grayson
Trustee and Governor
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of The GCG Trust (the "Trust") and a duly elected Governor of
the Managed Global Account of Separate Account D (the "Account") of Golden
American Life Insurance Company, constitutes and appoints Myles R. Tashman, and
Marilyn Talman, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign on behalf of the Trust and
the Account registration statements and applications for exemptive relief, and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and affirming all that said attorneys-in-fact and
agents, or any of them, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Date: April 23, 1996
/s/ John L. Murphy
---------------------------
John L. Murphy
Trustee and Governor
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of The GCG Trust (the "Trust") and a duly elected Governor of
the Managed Global Account of Separate Account D (the "Account") of Golden
American Life Insurance Company, constitutes and appoints Myles R. Tashman, and
Marilyn Talman, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign on behalf of the Trust and
the Account registration statements and applications for exemptive relief, and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and affirming all that said attorneys-in-fact and
agents, or any of them, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Date: April 10, 1996
/s/ M. Norvel Young
---------------------------
M. Norvel Young
Trustee and Governor
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of The GCG Trust (the "Trust") and a duly elected Governor of
the Managed Global Account of Separate Account D (the "Account") of Golden
American Life Insurance Company, constitutes and appoints Myles R. Tashman, and
Marilyn Talman, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign on behalf of the Trust and
the Account registration statements and applications for exemptive relief, and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and affirming all that said attorneys-in-fact and
agents, or any of them, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Date: April 9, 1996
/s/ Roger B. Vincent
---------------------------
Roger B. Vincent
Trustee and Governor
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being the duly
elected Treasurer of The GCG Trust (the "Trust") constitutes and appoints Myles
R. Tashman, and Marilyn Talman, and each of them, her true and lawful attorneys-
in-fact and agents with full power of substitution and resubstitution for her in
her name, place and stead, in any and all capacities, to sign on behalf of the
Trust and the Account registration statements and applications for exemptive
relief, and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as she
might or could do in person, hereby ratifying and affirming all that said
attorneys-in-fact and agents, or any of them, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Date: April 29, 1996
/s/ Mary Bea Wilkinson
---------------------------
Mary Bea Wilkinson
Treasurer
