<PAGE>
As filed with the Securities and Exchange Commission on February 29, 2000
Registration Nos. 33-23512, 811-5629
FORM N-1A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Registration Statement under the Securities Act of 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 42 [X]
and/or
Registration Statement under the Investment Company Act of 1940 [X]
Amendment No. 43
(Check appropriate box or boxes)
THE GCG TRUST
(Exact Name of Registrant as Specified in Charter)
1475 Dunwoody Drive
West Chester, PA 19380
(Address of Principal Executive Offices)
610-425-3400
(Registrant's Telephone Number, including Area Code)
Marilyn Talman, Esq.
Golden American Life Insurance Company
1475 Dunwoody Drive
West Chester, PA 19380
(Name and Address of Agent for Service)
----------
Approximate Date of Proposed Public Offering
As soon as practical after the effective date of the Registration Statement
It is proposed that this filing will become effective (check appropriate
box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on __________ pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on __________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on __________ pursuant to paragraph (a)(2) 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.
----------
<PAGE>
<PAGE>
PART A
EXPLANATORY NOTE
This Registration Statement contains three separate Prospectuses. The
first prospectus contains all portfolios of The GCG Trust, except for
the Market Manager Series and the Fund For Life Series. Prospectuses
two and three are for the Market Manager Series and the Fund For Life
Series, respectively.
<PAGE>
PROSPECTUS #1
THE GCG TRUST
<PAGE>
THE GCG TRUST
PROSPECTUS
MAY 1, 2000
MONEY MARKET FUND
Liquid Asset Series
BOND FUNDS
Limited Maturity Bond Series
Global Fixed Income Series
BALANCED FUNDS
Fully Managed Series
Total Return Series
STOCK FUNDS
DOMESTIC
Equity Income Series
Investors Series
Value Equity Series
Rising Dividends Series
Managed Global Series
Large Cap Value Series
All Cap Series
Research Series
Capital Appreciation Series
Capital Growth Series
Strategic Equity Series
Large Cap Growth Series
Mid-Cap Growth Series
Small Cap Series
Growth Series
Real Estate Series
Hard Assets Series
INTERNATIONAL/GLOBAL
Developing World Series
Emerging Markets Series
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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.
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------
IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION,
WE REFER TO THE GCG TRUST AS "THE GCG TRUST," AND TO A SERIES OF
THE GCG TRUST INDIVIDUALLY AS A "PORTFOLIO" AND COLLECTIVELY AS THE
"PORTFOLIOS."
<TABLE>
<S> <C> <S> <C>
PAGE PAGE
INTRODUCTION Equity Income
Investing through your Variable Investors
Contract Value Equity
Why Reading this Prospectus is Rising Dividends
Important Managed Global
Types of Funds Large Cap Value
General Risk Factors All Cap
Research
PORTFOLIOS AT A GLANCE Capital Appreciation
Liquid Asset Capital Growth
Limited Maturity Bond Strategic Equity
Global Fixed Income Large Cap Growth
Fully Managed Mid-Cap Growth
Total Return Small Cap
Equity Income Growth
Investors Real Estate
Value Equity Hard Assets
Rising Dividends Developing World
Managed Global Emerging Markets
Large Cap Value
All Cap DESCRIPTION OF THE PORTFOLIOS
Research Liquid Asset
Capital Appreciation Limited Maturity Bond
Capital Growth Global Fixed Income
Strategic Equity Fully Managed
Large Cap Growth Total Return
Mid-Cap Growth Equity Income
Small Cap Investors
Growth Value Equity
Real Estate Rising Dividends
Hard Assets Managed Global
Developing World Large Cap Value
Emerging Markets All Cap
Research
Capital Appreciation
MORE INFORMATION Capital Growth
A Word about Portfolio Diversity Strategic Equity
Additional Information about the Large Cap Growth
Portfolios Mid-Cap Growth
Non-Principal Investments and Small Cap
Strategies Growth
Temporary Defensive Positions Real Estate
Portfolio Turnover Hard Assets
Legal Counsel Developing World
Independent Auditors Emerging Markets
FINANCIAL HIGHLIGHTS OVERALL MANAGEMENT OF THE TRUST
Liquid Asset The Adviser
Limited Maturity Bond Advisory Fee
Global Fixed Income
Fully Managed SHARE PRICE
Total Return
TAXES AND DISTRIBUTIONS
</TABLE>
AN INVESTMENT IN ANY PORTFOLIO OF THE GCG TRUST IS NOT A BANK DEPOSIT
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY.
1
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
INTRODUCTION
- -------------------------------------------------------------------------
INVESTING THROUGH YOUR VARIABLE MONEY MARKET FUNDS. Money market
CONTRACT instruments (also known as cash
Shares of the portfolios of the investments) are debt securities
GCG Trust currently are sold to issued by governments,
segregated asset accounts corporations, banks, or other
("Separate Accounts") of insurance financial institutions.
companies as funding choices for
variable annuity contracts and BOND FUNDS. Bonds are debt
variable life insurance policies securities representing loans
("Variable Contracts"). Assets in from investors. A bond fund's
the Separate Account are invested share price - and therefore the
in shares of the portfolios based value of your investment - can
on your allocation instructions. rise or fall in value because
Not all portfolios described in of changing interest rates or
this prospectus may be available other factors.
under your Variable Contract. You
do not deal directly with the BALANCED FUNDS. A balanced fund
portfolios to purchase or redeem holds a mix of stocks, bonds,
shares. The accompanying Separate and sometimes, cash
Account prospectus describes your investments. A balanced fund
rights as a Variable Contract offers the convenience of
owner. We may sell shares of the investing in both stocks and
portfolios to qualified pension bonds through a single fund.
and retirement plans outside of
the separate account context. STOCK FUNDS. Stocks - which
represent shares of ownership
WHY READING THIS PROSPECTUS IS in a company - generally offer
IMPORTANT the greatest potential for long
This prospectus explains the term growth of principal. Many
investment objective, risks and stocks also provide regular
strategy of each of the portfolios dividends, which are generated
of the GCG Trust. Reading the by corporate profits. While
prospectus will help you to decide stocks have historically
whether a portfolio is the right provided the highest long-term
investment for you. We suggest returns, they have also
that you keep this prospectus and exhibited the greatest short-
the prospectus for the Separate term price fluctuations - so a
Account for future reference. stock fund has a higher risk of
losing value over the short
TYPES OF FUNDS term.
The portfolios are generally
classified among three major asset
classes: stock, bond and money
market.
MONEY MARKET BOND STOCK
FUNDS FUNDS FUNDS
|----------------------------------------------------------|
| LOWER <---------- RISK/RETURN ----------> HIGHER |
|----------------------------------------------------------|
2
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
INTRODUCTION (CONTINUED)
- -------------------------------------------------------------------------
GENERAL RISK FACTORS for shorter-
Investing in the portfolios, as term bonds, moderate for
with an investment in any intermediate-term bonds, and
security, involves risk factors high for longer-term bonds. A
and special considerations. A bond's duration measures its
portfolio's risk is defined sensitivity to changes in
primarily by its principal interest rates. The longer
investment strategies. An the duration, the greater the
investment in a portfolio is not bond's price movement will be
insured against loss of principal. as interest rates change.
As with any mutual fund, there can
be no assurance that a portfolio o CREDIT RISK. A bond issuer
will achieve its investment (debtor) may fail to repay
objective. Investing in shares of interest and principal in a
a portfolio should not be timely manner. The price of a
considered a complete investment security a portfolio holds may
program. The share value of each fall due to changing economic,
portfolio (except for the Liquid political or market conditions
Asset Portfolio) will rise and or disappointing earnings
fall. Although the Liquid Asset results.
Portfolio seeks to preserve the
value of your investment at $1.00 o CALL RISK. During periods of
per share, it is still possible to falling interest rates, a bond
lose money. issuer may "call," or repay,
It is important to keep in mind its high yielding bond before
one of the main axioms of the bond's maturity date.
investing: The higher the risk of Forced to invest the
losing money, the higher the unanticipated proceeds at
potential reward. The lower the lower interest rates, a
risk, the lower the potential portfolio would experience a
reward. As you consider an decline in income.
investment in a portfolio, you
should take into account your o MATURITY RISK. Interest rate
personal tolerance for investment risk will affect the price of
risk. a fixed income security more
if the security has a longer
OVERALL RISK: maturity because changes in
interest rates are
o MANAGER RISK. A portfolio increasingly difficult to
manager of a portfolio may do predict over longer periods of
a mediocre or poor job in time. Fixed income securities
selecting securities. with longer maturities will
therefore be more volatile
RISK RELATED TO STOCK INVESTING: than other fixed income
securities with shorter
o MARKET AND COMPANY RISK. The maturities. Conversely, fixed
price of a security held by a income securities with shorter
portfolio may fall due to maturities will be less
changing economic, political volatile but generally provide
or market conditions or lower returns than fixed
disappointing earnings income securities with longer
results. Stock prices in maturities. The average
general may decline over short maturity of a portfolio's
or even extended periods. The fixed income investments will
stock market tends to be affect the volatility of the
cyclical, with periods when portfolio's share price.
stock prices generally rise
and periods when stock prices Because of these and other risks
generally decline. Further, that may be particular to a
even though the stock market portfolio, your investment could
is cyclical in nature, returns lose or not make any money.
from a particular stock market
segment in which a portfolio
invests may still trail
returns from the overall stock
market.
RISKS RELATED TO BOND INVESTING:
o INCOME RISK. A portfolio's
income may fall due to falling
interest rates. Income risk
is generally the greatest for
short-term bonds, and the
least for long-term bonds.
Changes in interest rates will
affect bond prices as well as
bond income.
o INTEREST RATE RISK. This is the
risk that bond prices overall
will decline over short or
even extended periods due to
rising interest rates.
Interest rate risk is
generally modest
3
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE
- -------------------------------------------------------------------------
LIQUID ASSET PORTFOLIO
INVESTMENT
OBJECTIVE High level of current income consistent with
the preservation of capital and liquidity
PRINCIPAL The Portfolio Manager strives to maintain a
INVESTMENT stable $1 per share net asset value and its
STRATEGY investment strategy focuses on safety of
principal, liquidity and yield, in order of
importance, to achieve this goal. The
management team implements its strategy
through a four-step investment process
designed to ensure adherence to regulatory
requirements.
Step One: The Portfolio Manager
actively maintains a formal Approved
List of high quality companies.
Step Two: Securities of Approved
List issuers that meet maturity
guidelines and are rated in one of the
two highest ratings category (or
determined to be of comparable quality
by the Portfolio Manager) are eligible
for investment.
Step Three: Eligible securities are
reviewed to ensure that an investment
in such securities would not cause the
Portfolio to exceed its
diversification limits.
Step Four: The Portfolio Manager
makes yield curve positioning
decisions based on liquidity
requirements, yield curve analysis and
market expectations of future interest
rates.
Money market funds are highly regulated by
Rule 2a-7 of the Investment Company Act of
1940, which sets forth specific maturity,
quality and diversification guidelines. The
Portfolio must adhere to procedures adopted by
the Board of Trustees pursuant to Rule 2a-7
and to Rule 2a-7 itself. Some of these
limitations include:
o QUALITY. At least 95% of the Portfolio's
investments must be rated in the highest
short-term ratings category and the
Portfolio Manager must make an independent
determination that each investment
represents minimal credit risk to the
Portfolio.
o MATURITY. The average maturity of the
portfolio may not exceed 90 days and the
remaining maturity of any individual security
may not exceed 397 days.
o DIVERSIFICATION. Generally, at the time
of purchase, no more than 5% of total
assets may be invested in the securities
of a single issuer. In addition no more
than 10% of total assets may be subject
to demand features or guarantees from a
single institution. The 10% demand feature
and guarantee restriction is applciable to
75% of total assets.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
LIQUID
ASSET
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
4
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INCOME RISK
o CREDIT RISK o INTEREST RATE RISK
AN INVESTMENT IN THE LIQUID ASSET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH THE PORTFOLIO
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT
AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE PORTFOLIO.
PERFORMANCE The value of your shares in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years, 10 years and since
its inception date. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. ING Investment Management LLC
or its affiliate has managed the Portfolio
since August 13, 1996. Prior to that date,
different firms managed the Portfolio and
performance is attributable to those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
LIQUID ASSET -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
7.75% 5.66% 3.13% 2.64% 3.89% 5.51% 5.01% 5.07% 5.13% 4.74%
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-----------------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10 YEAR 1/24/89 | | Quarter Ended |
| (INCEPTION)| | |
<S> <C> <C> <C> <C> <C> <C>
| Portfolio's Average | | 6/30/89... 2.19% |
| Annual Total Return 4.74% 5.08% 4.82% 5.11% | | |
| | |--------------------|
| | | WORST QUARTER |
| | |--------------------|
| | | Quarter Ended |
| | | 6/30/93... 0.63% |
| | | |
|-----------------------------------------------------------| |--------------------|
</TABLE>
The Portfolio's 7-day yield as of December 31, 1999 was 5.54%. Call
toll free 1-800-366-0066 for the Portfolio's current 7-day yield.
5
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
LIMITED MATURITY BOND PORTFOLIO
INVESTMENT
OBJECTIVE Highest current income consistent with low
risk to principal and liquidity
As a secondary objective, the Portfolio 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.
PRINCIPAL The Portfolio invests primarily in a
INVESTMENT diversified portfolio of limited maturity debt
STRATEGY securities. At the time of purchase, the debt
securities generally will mature in seven
years or less. The average maturity of the
Portfolio generally will not exceed five
years, although, in periods of rapidly rising
interest rates the Portfolio Manager may
shorten maturities to one year or less.
To achieve the Portfolio's objective, the
Portfolio Manager:
o manages the Portfolio's maturities
o analyzes technical data in order to
determine which investment choices offer
the best value
o over-weights or under-weights the sectors
in which the Portfolio may invest relative
to the benchmark based on sector analysis
and market opportunities
o selects securities with positive credit
fundamentals, liquidity and relative value
within sectors
The Portfolio Manager selects debt instruments
from the following broad sectors:
o U.S. Treasury o U.S. Government
securities Agency securities
o corporate securities o mortgage-backed
securities
o asset-backed o money market
securities securities
Eligible security types include corporate
securities, U.S. treasury securities, U.S.
Government Agency securities, variable or
floating rate securities, mortgage-backed
securities, asset-backed securities, dollar-
denominated foreign securities, money market
securities, reverse repurchase agreements,
shares of other investment companies, futures,
options and options on futures, sovereign
debt, supranational organizations and real
estate investment trusts (REITS).
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
LIMITED
MATURITY
BOND
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
6
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that you will lose
RISKS money or not make money. An investment in the Portfolio is
subject to the following principal risks described under
"Introduction - General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o CALL RISK o INCOME RISK
o CREDIT RISK
PERFORMANCE The value of your share in a portfolio will
The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years, 10 years and since
its inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. ING Investment Management LLC
or its affiliate has managed the Portfolio
since August 13, 1996. Prior to that date,
different firms managed the Portfolio and
performance is attributable to those firms.
The performance information does not include
insurance-related charges. If these were
included, performance would be lower. Thus,
you should not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
LIMITED MATURITY BOND -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
7.87% 11.27% 4.84% 6.20% -1.19% 11.72% 4.32% 6.67% 6.86% 1.13%
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-----------------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10 YEAR 1/24/89 | | Quarter Ended |
| (INCEPTION)| | |
<S> <C> <C> <C> <C> <C> <C>
| Portfolio's Average | | 6/30/89... 4.93% |
| Annual Total Return 1.13% 6.08% 5.90% 6.27% | |--------------------|
| Merrill Lynch 1-5 Year | | WORST QUARTER |
| Corporate/Government | |--------------------|
| Bond Index 2.19% 6.86% 7.00% 7.39% | | Quarter Ended |
| | | |
| | | 3/31/94...(1.04)% |
| | | |
|-----------------------------------------------------------| |--------------------|
</TABLE>
The Merrill Lynch 1-5 Year Corporate/Government Bond Index is
comprised of intermediate-term U.S. government securities and
investment-grade corporate debt securities.
7
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
INVESTMENT
OBJECTIVE High total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in high-grade debt
STRATEGY securities, both foreign and domestic, and related
foreign currency transactions. The Portfolio
primarily invests in:
o obligations issued or guaranteed by foreign
national governments, or their agencies,
instrumentalities or political subdivisions
o U.S. Government securities
o debt securities issued or guaranteed by
supranational organizations, considered to be
"government securities"
o non-government foreign and domestic debt
securities, including corporate debt securities,
bank obligations, mortgage-backed or asset-backed
securities, and repurchase agreements
The Portfolio Manager allocates the Portfolio's
investments among those markets, companies and
currencies that offer the most attractive combination
of high income and principal stability.
In evaluating investments for the Portfolio, the
Portfolio Manager analyzes relative yields and the
appreciation potential of securities in particular
markets, world interest rates and monetary trends,
economic, political and financial market conditions in
different countries, credit quality, and the
relationship of individual foreign currencies to the
U.S. dollar. The Portfolio Manager also relies on
internally and externally generated financial,
economic, and credit research to evaluate alternative
investment opportunities.
The Portfolio is non-diversified and, when compared
with other funds, may invest a greater portion of its
assets in a particular issuer. A non-diversified
portfolio has greater exposure to the risk of default
or the poor earnings of the issuer.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
GLOBAL
FIXED
INCOME
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
8
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that you will
RISKS lose money or not make money. An investment in the
Portfolio is subject to the following principal risks
described under "Introduction - General Risk Factors":
o MANAGER RISK o CREDIT RISK
o INCOME RISK o CALL RISK
o INTEREST RATE RISK
An investment in the Portfolio is subject to the
following additional principal risks described under
"Description of the Portfolios - Global Fixed Income
Portfolio":
o FOREIGN INVESTMENT AND CURRENCY RISK
o EMERGING MARKET RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year and since
its inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Baring International Investment
Limited, has managed the Portfolio since August 17,
1998. Prior to that date, a different firm
managed the Portfolioand performance is attributable
to that firm.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
GLOBAL FIXED INCOME -- ANNUAL TOTAL RETURN
Year 1999
(8.62)%
|--------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|--------------------------------------------------| |--------------------|
| 1 YEAR 8/14/98 | | |
| (INCEPTION) | | Quarter Ended |
| Portfolio's Average | | 9/30/99... 1.85% |
| Annual Total Return (8.62)% (.96)% | |--------------------|
| Merrill Lynch Global | | WORST QUARTER |
| Gov't Bond Index II (4.52)% 6.74% | |--------------------|
| | | |
| | | Quarter Ended |
| | | 3/31/99...(5.01)% |
|--------------------------------------------------| |--------------------|
The Merrill Lynch Global Government Bond Index II is comprised
of U.S. Treasury Bills with initial maturities of three months.
9
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
FULLY MANAGED PORTFOLIO
INVESTMENT Over the long term, a high total investment
OBJECTIVE return, consistent with the preservation of
capital and with prudent investment risk
PRINCIPAL The Portfolio invests primarily in the common
INVESTMENT stocks of established companies the Portfolio
STRATEGY Manager believes to have above-average potential
for capital growth. Common stocks typically make
up at least half of the Portfolio's total assets.
The Portfolio pursues an active asset allocation
strategy whereby investments are allocated among
three asset classes - equity securities, debt
securities and money market instruments. The
Portfolio may also invest in other securities,
including corporate and government debt,
convertibles, warrants, preferred stocks, foreign
securities, futures, and options, in pursuit
of its asset allocation strategy.
The Portfolio's approach differs from that of
many other stock funds. The Portfolio Manager
works as hard to reduce risk as to maximize
gains and may seek to realize gains rather than
lose them in market declines. In addition, the
Portfolio Manager searches for the best
risk/reward values among all types of
securities. The portion of the Portfolio
invested in a particular type of security,
such as common stocks, results largely from
case-by-case investment decisions, and the
size of the Portfolio's cash reserve may
reflect the Portfolio Manager's ability to
find companies that meet valuation criteria
rather than his market outlook.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o CALL RISK o INCOME RISK
o MARKET AND COMPANY o CREDIT RISK
RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Fully Managed Portfolio":
o VALUE INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
FULLY
MANAGED
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
14
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years, 10 years and since
its inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. T. Rowe Price Associates,
Inc. has managed the Portfolio since January
1, 1995. Prior to that date, a different firm
managed the Portfolioand performance is attributable
to those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
FULLY MANAGED -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-3.18% 28.93% 6.23% 7.59% -7.27% 20.80% 16.36% 15.27% 5.89% 6.92%
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-----------------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10 YEAR 1/24/89 | | Quarter Ended |
| (INCEPTION)| | |
<S> <C> <C> <C> <C> <C> <C>
| Portfolio's Average | | 6/30/99... 10.77% |
| Annual Total Return 6.92% 12.90% 9.27% 8.83% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 28.54% 18.19% 18.74% | |--------------------|
| Lehman Brothers Inter- | | Quarter Ended |
| mediate Government/ | | |
| Corporate Bond Index (2.15)% 7.61% 7.65% 8.17% | | 9/30/90...(10.81)%|
| 60% S&P/40% Lehman | | |
| Index 11.76% 20.17% 13.98% 14.51% | |--------------------|
| |
|-----------------------------------------------------------|
</TABLE>
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks. The Lehman Brothers
Intermediate Government/Corporate Bond Index
comprises of intermediate-term U.S. government
securities and investment-grade corporate debt
securities.
15
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
TOTAL RETURN PORTFOLIO
INVESTMENT Above-average income (compared to a portfolio
OBJECTIVE entirely invested in equity securities)
consistent with the prudent employment of
capital. A secondary goal is the reasonable
opportunity for growth of capital and income.
PRINCIPAL
INVESTMENT The Portfolio is a "balanced fund," and
STRATEGY invests in a combination of equity and fixed
income securities. The Portfolio normally
invests:
o at least 40%, but not more than 75%, of
its assets in common stocks and related
equity securities
o at least 25% of its assets in non-
convertible fixed income securities
EQUITY PORTION. The Portfolio Manager uses a
bottom-up, as opposed to a top-down,
investment style in managing the Portfolio.
This means that securities are selected based
on fundamental analysis (such as analysis of
earnings, cash flows, competitive position and
management's abilities) performed by the
Portfolio Manager and its group of equity
research analysts and not selected based on
the industry in which they belong.
While the Portfolio may invest in all types of
equity securities, the Portfolio Manager
generally purchases equity securities of
companies that it believes are undervalued in
the market relative to their long-term
potential. The equity securities of these
companies may be undervalued because they are
temporarily out of favor in the market or the
market has overlooked them. The Portfolio
focuses on undervalued equity securities
issued by companies with relatively large
market capitalizations (i.e., market
capitalizations of $5 billion or more).
FIXED INCOME PORTION. The Portfolio invests
in securities that pay a fixed interest rate,
which include:
o U.S. government o corporate bonds
securities
o mortgage-backed and asset-backed
securities
In selecting fixed income investments for the
Portfolio, the Portfolio Manager assesses the
three-month outlook for various segments of
the fixed income markets.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
TOTAL
RETURN
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
10
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
The Portfolio may invest up to 20% of its assets
in foreign securities, including securities of
companies in emerging or developing markets, and
up to 20% of its assets in lower rated nonconvertible
fixed income securities and comparable unrated
securities. The Portfolio may invest with no
limitation in mortgage pass-through securities
and American Depositary Receipts.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money.
An investment in the Portfolio is subject to
the following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o INCOME RISK o CREDIT RISK
o CALL RISK o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Total Return Portfolio":
o ALLOCATION RISK o UNDERVALUED SECURITIES RISK
o CONVERTIBLE o HIGH YIELD BOND RISK
SECURITIES RISK
o EMERGING MARKET o FOREIGN INVESTMENT AND
RISK CURRENCY RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year and since its inception
date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Massachusetts Financial Services
Company, has managed the Portfolio since August 17,
1998. Prior to that date, a different firm
managed the Portfolio and performance is
attributable to those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
TOTAL RETURN -- ANNUAL TOTAL RETURN
Year 1999
3.38%
|------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|------------------------------------------------| |--------------------|
| 1 YEAR 8/14/98 | | Quarter Ended |
| (INCEPTION) | | 12/31/98... 6.90% |
| Portfolio's Average | | |
| Annual Total Return 3.38% 7.51% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 22.65% | |--------------------|
| Lehman Brothers Inter- | | Quarter Ended |
| mediate Government/ | | 9/30/99.. (4.82)% |
| Corporate Bond Index (2.15)% 1.93% | | |
| 60% S&P/40% Lehman | |--------------------|
| Index 11.76% 21.28% |
|------------------------------------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks. The Lehman Brothers
Intermediate Government/Corporate Bond Index
comprises of intermediate-term U.S. government
securities and investment-grade corporate debt
securities.
11
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
INVESTMENT
OBJECTIVE Substantial dividend income as well as long-
term growth of capital
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its assets in the common stocks of well-
STRATEGY established companies paying above-average
dividends. The Portfolio Manager typically
employs a "value" approach in selecting
investments. The Portfolio Manager's in-house
research team seeks companies that appear to
be undervalued by various measures and may be
temporarily out of favor, but have good
prospects for capital appreciation and
dividend growth.
In selecting investments, the Portfolio
Manager generally looks for companies with the
following:
o an established operating history
o above-average dividend yield relative to
the S&P 500
o low price/earnings ratio relative to the
S&P 500
o a sound balance sheet and other positive
financial characteristics
o low stock price relative to a company's
underlying value as measured by assets,
cash flow or business franchises
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Equity Income Portfolio":
o VALUE INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
EQUITY
INCOME
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
12
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years, 10 years and since
its inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. T. Rowe Price Associates,
Inc. has managed the Portfolio since March 1,
1999. Prior to that date, different firms
managed the Portfolioand performance is
attributable to those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
EQUITY INCOME -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
4.74% 20.02% 1.88% 11.13% -1.18% 18.93% 8.77% 17.44% 8.26% (.72)%
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-----------------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10 YEAR 1/24/89 | | Quarter Ended |
| (INCEPTION)| | |
<S> <C> <C> <C> <C> <C> <C>
| Portfolio's Average | | 3/31/91... 8.42% |
| Annual Total Return (.72)% 10.31% 8.67% 8.75% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 28.54% 18.19% 18.74% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/99...(8.63)% |
|-----------------------------------------------------------| |--------------------|
</TABLE>
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks.
13
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE
- -------------------------------------------------------------------------
INVESTORS PORTFOLIO
INVESTMENT
OBJECTIVE Seek long-term growth of capital. Current income
is a secondary objective
PRINCIPAL The Portfolio invests primarily in equity securities of
INVESTMENT U.S. companies. The Portfolio may also invest in other
STRATEGY equity securities. To a lesser degree, the Portfolio invests
in income producing securities such as debt securities.
The Portfolio Manager emphasizes individual security selection
while spreading the Portfolio's investment across industries,
which may help to reduce risk. The Portfolio Manager focuses
on established large capitalization companies, defined by the
Portfolio Manager as companies with over $5 billion in market
capitalization, seeking to identify those companies with solid
growth potential at reasonable values. The Portfolio Manager
employs fundamental analysis to analyze each company in detail,
ranking its management, strategy and competitive market position.
In selecting individual companies for investment, the Portfolio
Manager looks for the following:
o Long-term history of performance
o Competitive market position
o Competitive products and services
o Strong cash flow
o High return on equity
o Strong financial condition
o Experienced and effective management
o Global scope
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
INVESTORS
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
4
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment in the Portfolio involves the possibility that
RISKS you will lose money or not make money. An investment in the
Portfolio is subject to the following principal risks
described under "Introduction -- General Risk Factors":
o Manager Risk
o Market and Company Risk
o Call Risk
o Income Risk
o Interest Rate Risk
o Credit Risk
o Maturity Risk
An investment in the Portfolio is subject to the following
additional principal risk described under "Description of
the Portfolios -- Investors Portfolio."
o Growth Investing Risk
PERFORMANCE The value of your share in the Portfolio will fluctuate
depending on its investment performance. Since the Investors
Portfolio became available to investors on February 1, 2000,
performance information on previous full years is not
available.
5
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation. Dividend income is a
secondary objective.
PRINCIPAL The Portfolio normally invests primarily in
INVESTMENT common stocks of domestic and foreign issuers
STRATEGY that meet quantitative standards relating to
financial soundness and high intrinsic value
relative to price.
In selecting equity securities, the Portfolio
Manager identifies stocks trading at a
significant discount to their underlying
intrinsic value that fall into at least one of
three basic categories:
o "Pure" value opportunities -- stocks that
appear attractive relative to the broader
market
o "Relative" value opportunities -- stocks
that trade at a discount to the valuation
parameters historically applied to them or
their peer group
o "Event-driven" value opportunities --
stocks whose underlying value may be
recognized as a result of a realized or
anticipated event
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Value Equity Portfolio":
o VALUE INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
VALUE
EQUITY
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
22
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Eagle Asset Management, Inc.
has managed the Portfolio since its inception.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
VALUE EQUITY -- ANNUAL TOTAL RETURN
Year 1995 1996 1997 1998 1999
35.21% 10.62% 27.28% 1.55% 0.51%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 1/3/95 | | Quarter Ended |
| (INCEPTION)| | 12/31/98... 17.34% |
| Portfolio's Average | | |
| Annual Total Return 0.51% 14.24% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 28.54% | |--------------------|
| | | Quarter Ended |
| | | 9/30/98..(13.99)% |
|-------------------------------------------------| |--------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks.
23
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
RISING DIVIDENDS PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation. A secondary objective
is dividend income.
PRINCIPAL
INVESTMENT The Rising Dividends Portfolio invests in high-
STRATEGY quality equity securities, most of which meet
all of the following quality criteria:
o regular dividend increases during the last
10 years
o at least 35% of earnings reinvested
annually
o credit rating of "A" to "AAA" or
equivalent
In selecting equity securities, the Portfolio
Manager screens databases to create a universe
of companies that meet the preceding criteria.
The Portfolio Manager then fundamentally
analyzes the securities. This research
involves study of competitive industry
conditions, discussions with company
management, spreadsheet analysis, and
valuation projections. A proprietary computer
model compares expected rates of return for
each equity security in the universe. In
deciding whether to purchase a security, the
Portfolio Manager appraises a company's
fundamental strengths and relative
attractiveness based on its expected return.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Rising Dividends Portfolio":
o MANAGEMENT TECHNIQUE RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
RISING
DIVIDENDS
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
16
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Kayne Anderson Investment
Management, LLC has managed the Portfolio
since its inception.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
RISING DIVIDENDS -- ANNUAL TOTAL RETURN
Year 1994 1995 1996 1997 1998 1999
0.59% 31.06% 20.65% 29.82% 14.13% 15.88%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10/4/93 | | Quarter Ended |
| (INCEPTION)| | |
| Portfolio's Average | | 12/31/98... 17.29% |
| Annual Total Return 15.88% 22.11% 18.05% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 28.54% 22.95% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/98..(14.88)% |
| | | |
|-------------------------------------------------| |--------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks.
17
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
MANAGED GLOBAL PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation. Current income is only
an incidental consideration.
PRINCIPAL The Portfolio invests primarily in common
INVESTMENT stocks traded in securities markets throughout
STRATEGY the world. The Portfolio generally invests at
least 65% of its assets in at least three
different countries, one of which may be the
United States.
The Portfolio may invest in any type of
company, large or small, with earnings showing
a relatively strong growth trend, or in a
company in which significant further growth is
not anticipated but whose securities are
thought to be undervalued. The Portfolio may
also invest in small and relatively less well
known companies.
The Portfolio is non-diversified and, when
compared with other funds, may invest a
greater portion of its assets in a particular
issuer. A non-diversified portfolio has
greater exposure to the risk of default or the
poor earnings of the issuer.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Managed Global Portfolio":
o EMERGING MARKET RISK
o SMALL COMPANY RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
MANAGED
GLOBAL
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
42
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Capital Guardian Trust Company
has managed the Portfolio since February 1, 2000.
Prior to that date, different firms managed the
Portfolio and performance is attributable to
those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
MANAGED GLOBAL -- ANNUAL TOTAL RETURN
Year 1993 1994 1995 1996 1997 1998 1999
6.59% -13.21% 7.56% 12.27% 12.17% 29.31% 63.30%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10/21/92 | | Quarter Ended |
| (INCEPTION)| | 12/31/99... 47.69% |
| Portfolio's Average | | |
| Annual Total Return 63.30% 23.36% 14.50% | |--------------------|
| Morgan Stanley Capital | | WORST QUARTER |
| International All | |--------------------|
| Country World Free | | Quarter Ended |
| Index 26.82% 19.19% 17.80% | | |
| | | 9/30/98...(12.36)%|
|-------------------------------------------------| |--------------------|
The Morgan Stanley Capital International All
Country World Free Index is comprised of
government and investment-grade corporate debt
securities with remaining maturities of one to
five years.
43
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
LARGE CAP VALUE PORTFOLIO
Investment
Objective Seek long-term growth of capital and income
Principal The Portfolio Manager seeks to achieve the Portfolio's
Investment investment objective by investing, under normal market
Strategy conditions, primarily in equity and equity-related
securities of companies with market capitalization
greater than $1 billion at the time of purchase.
In selecting investments, greater consideration is
given to potential appreciation and future dividends
than to current income. The Portfolio may hold American
Depository Receipts and other U.S. registered securities
of foreign issuers which are denominated in U.S. dollars.
Principal Any investment in the Portfolio involves the possibility
Risks that you will lose money or not make money. An investment
in the Portfolio is subject to the following principal
risks described under "Introduction -- General Risk Factors":
o Manager Risk
o Market and Company Risk
An investment in the Portfolio is subject to the following
additional principal risk described under "Description of
the Portfolios -- Large Cap Value Portfolio".
o Growth Investment Risk
o Mid-Cap Company Risk
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
LARGE
CAP
VALUE
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
8
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE An investment in the Portfolio will fluctuate depending
on its investment performance. Since the Large Cap Value
Portfolio became available to investors on February 1,
2000, performance information for previous calender years
is not available.
9
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
ALL-CAP PORTFOLIO
INVESTMENT Capital Appreciation through investment in securities which
OBJECTIVE the Portfolio Manager believes have above-average capital
appreciation potential
PRINCIPAL The Portfolio invests primarily in equity securities
INVESTMENT of U.S. companies of any size. The Portfolio Manager
STRATEGY emphasizes individual security selection while
spreading the Portfolio's investments across industries,
which may help to reduce risk. The Portfolio Manager seeks
to identify those companies which offer the greatest
potential for capital appreciation through careful fundamental
analysis of each company and its financial characteristics.
In selecting individual companies for investment, the Portfolio
Manager looks for the following:
o Share prices that appear to undervalue the company's
assets or do not adequately reflect factors such as
favorable industry trends, lack of investor recognition
or the short-term nature of earnings' declines
o Special situations such as existing or possible changes
in management, corporate policies, capitalization or
regulatory environment which may boost earnings or the
market price of the company's shares
o Growth potential due to technological advances, new
products or services, new methods of marketing or
production, changes in demand or other
o Significant new developments which may enhance future
earnings.
The Portfolio is non-diversified and, when compared with other
funds, may invest a larger portion of its assets in a particular
issuer. A non-diversified portfolio has greater exposure to the
risks of default or the poor earnings of any such issuer.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
ALL-CAP
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
10
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment in the Portfolio involves the possibility
RISKS that you will lose money or not make money. An investment
in the Portfolio is subject to the following principal risks
described under "Introduction -- General Risk Factors":
o Manager Risk
o Market and Company Risk
An investment in the Portfolio is subject to the following
additional principal risk described under "Description of the
Portfolios -- All Cap Portfolio":
o Growth Investing Risk
o Small Company Risk
o Mid-cap Company Risk
o Undervalued Securities Risk
PERFORMANCE An investment in the Portfolio will fluctuate depending on its
investment performance. Since the All Cap Portfolio became
available to investors on February 1, 2000, performance
information for previous calender years is not available.
11
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
RESEARCH PORTFOLIO
INVESTMENT
OBJECTIVE Long-term growth of capital and future income
PRINCIPAL The Portfolio normally invests at least 80% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stock,
convertible securities and depositary
receipts). The Portfolio focuses on companies
that the Portfolio Manager believes have
favorable prospects for long-term growth,
attractive valuations based on current and
expected earnings or cash flow, dominant or
growing market share and superior management.
The Portfolio may invest in companies of any
size. The Portfolio's investments may also
include foreign securities, and securities
traded on securities exchanges or in the over-
the-counter markets.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the
following additional principal risks described
under "Description of the Portfolios-Research
Portfolio":
o OTC INVESTMENT RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
RESEARCH
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
24
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year and since its inception
date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Massachusetts Financial Services
Company has managed the Portfolio since August 17,
1998.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
RESEARCH PORTFOLIO -- ANNUAL TOTAL RETURN
Year 1999
24.23%
|--------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|--------------------------------------------| |--------------------|
| 1 YEAR 8/17/98 | | Quarter Ended |
| (INCEPTION)| | |
| Portfolio's Average | | 12/31/99... 21.71% |
| Annual Total Return 24.23% 29.10% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 22.65% | |--------------------|
| Russell Mid-Cap Index 18.23% 17.18 | | Quarter Ended |
| | | |
| | | 9/30/90...(6.62)% |
|--------------------------------------------| |--------------------|
The Standard & Poor's 500 Index is comprised of 500 U.S.
stocks. The Russell Mid-Cap Index consists of the 800
smallest companies in the Russell 1000 Index.
25
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital growth
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities the Portfolio Manager believes to
STRATEGY be undervalued relative to the Portfolio
Manager's appraisal of the current or
projected earnings of the companies issuing
the securities, or relative to current market
values of assets owned by the companies
issuing the securities or relative to the
equity markets generally.
The Portfolio Manager focuses on undervalued
equity securities of:
o out-of-favor cyclical growth companies
o established growth companies that are
undervalued compared to historical
relative valuation parameters
o companies where there is early but
tangible evidence of improving prospects
that are not yet reflected in the price of
the company's equity securities
o companies whose equity securities are
selling at prices that do not reflect the
current market value of their assets and
where there is reason to expect
realization of this potential in the form
of increased equity values
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Capital Appreciation Portfolio":
o VALUE INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
CAPITAL
APPRECIATION
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
34
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. A I M Capital Management, Inc.
has managed the Portfolio since April 1, 1999.
Prior to that date, different firms managed the
Portfolio and performance is attributable to
those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
CAPITAL APPRECIATION -- ANNUAL TOTAL RETURN
Year 1993 1994 1995 1996 1997 1998 1999
8.31% -1.59% 30.16% 20.26% 28.95% 12.68% 24.64%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 5/4/92 | | Quarter Ended |
| (INCEPTION)| | 12/31/99... 17.50% |
| Portfolio's Average | | |
| Annual Total Return 24.64% 23.17% 17.10% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 28.54% 20.56% | |--------------------|
| | | Quarter Ended |
| | | 9/30/98..(13.12)% |
| | | |
|-------------------------------------------------| |--------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks.
35
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
CAPITAL GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Long-term total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in common
STRATEGY stocks of companies where the potential for
change (earnings acceleration) appears
significant.
The Portfolio Manager applies a growth-
oriented investment philosophy defined by its:
o Early recognition of change
o Value is created through the dynamics of
changing economic, industry and company
fundamentals
o The Portfolio Manager's willingness to
invest on incomplete information
o Judgment about the future, not merely
extrapolation of the past
o Invest in one to two year relative
earnings strength at an early stage and at
a reasonable price
o COMMITMENT TO FUNDAMENTAL RESEARCH
o Twenty-one fundamental analysts covering
U.S. companies
o EMPHASIS ON STOCK SELECTION
o Emphasis on companies and industries where
the potential for change (earnings
acceleration) is significant
o Remain fully invested
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
CAPITAL
GROWTH
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
18
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Capital Growth Portfolio":
o GROWTH INVESTING RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, and since its inception
date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Alliance Capital Management
L.P. has managed the Portfolio since March 1,
1999. Prior to that date, a different firm
managed the Portfolio and performance is
attributable to those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
CAPITAL GROWTH -- ANNUAL TOTAL RETURN
Year 1999
25.56%
|--------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|--------------------------------------------| |--------------------|
| 1 YEAR 8/17/98 | | Quarter Ended |
| (INCEPTION)| | |
| Portfolio's Average | | 12/31/99...25.08% |
| Annual Total Return 25.56% 26.50% | |--------------------|
| Standard & Poor's | | WORST QUARTER |
| Mid-Cap 400 Index 21.03% 23.54% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/99...(9.05)% |
|--------------------------------------------| |--------------------|
The Standard & Poor's Mid-Cap 400 Index is comprised
of 400 mid-cap U.S. Stocks.
19
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
STRATEGIC EQUITY PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests principally in common
INVESTMENT stocks of medium-sized and small-sized growth
STRATEGY companies. The Portfolio Manager focuses on
companies it believes are likely to benefit
from new or innovative products, services or
processes as well as those that have
experienced above-average, long-term growth in
earnings and have excellent prospects for
future growth.
The Portfolio primarily comprises of
securities of two basic categories of
companies: (a) "core" companies, which the
Portfolio Manager considers to have
experienced above-average and consistent long-
term growth in earnings and to have excellent
prospects for outstanding future growth, and
(b) "earnings acceleration" companies that the
Portfolio Manager believes are currently
enjoying a dramatic increase in profits.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios
-- Strategic Equity Portfolio":
o GROWTH INVESTING RISK
o SMALL COMPANY RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
STRATEGIC
EQUITY
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
32
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. A I M Capital Management, Inc.
has managed the Portfolio since March 1, 1999.
Prior to that date, a different firm managed
the Portfolio and performance is attributable
to those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
STRATEGIC EQUITY -- ANNUAL TOTAL RETURN
Year 1996 1997 1998 1999
19.39% 23.16% 0.84% 56.24%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 10/2/95 | | Quarter Ended |
| (INCEPTION)| | 12/31/99... 39.19% |
| Portfolio's Average | | |
| Annual Total Return 56.24% 21.97% | |--------------------|
| Russell Midcap Index 18.23% 18.57% | | WORST QUARTER |
| Russell 2000 Index 21.26% 13.63% | |--------------------|
| | | Quarter Ended |
| | | 9/30/98..(17.96)% |
| | | |
|-------------------------------------------------| |--------------------|
The Russell Midcap Index is consisted of the
800 smallest companies in the Russell 1000
Index, which contains the 1,000 largest
companies in the U.S. The Russell 2000 Index
represents the 2,000 smallest companies in the
Russell 3000 Index, which contains the 3,000
largest U.S. companies, based on total market
capitalization.
33
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
LARGE CAP GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Seek long-term growth of capital through investments
primarily in common stocks of established companies
with above average growth prospects. Dividend income
from investments will be incidental.
PRINCIPAL The portfolio manager looks for the following when
INVESTMENT considering investments for the Large Cap Growth
STRATEGY Portfolio:
o Growth in earnings and sales
o High return on equity
o Other strong financial data
o Attractive value in the opinion of the
Portfolio Manager
The Portfolio manager believes that companies with
these characteristics generally enjoy a unique market
niche, a promising new product profile, and /or
superior management.
PRINCIPAL Stock in which the Portfolio will invest have
RISKS historically been more volatile than the broad
stock market. During periods of general market
declines, it should be expected that the Portfolio
will decline more than the market indices.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
LARGE
CAP
GROWTH
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
6
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
Any investment in the Portfolio involves the possibility
that you will lose or not make money. An investment in
the Portfolio is subject to the following principal risk
described under "Introduction - General Risk Factors":
o Manager Risk
o Market and Company Risk
An investment in the Portfolio is subject to the following
additional principal risk described under "Description of
the Portfolios - Large Cap Growth Portfolio":
o Growth Investment Risk
o Foreign Investment and Currency Risk
o Undervalued Securities Risk
An investment in the Portfolio will fluctuate depending
on its investment performance. Since the Large Cap Growth
Portfolio became available to investors after January 1,
2000, performance information for previous calendar years
is not available.
6
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
MID-CAP GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Long-term growth of capital
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its assets in common stocks and related equity
STRATEGY securities (such as preferred stock,
convertible securities and depositary
receipts) of companies with medium market
capitalizations (or "mid-cap") which the
Portfolio Manager believes have above-average
growth potential.
The Portfolio Manager defines mid-cap
companies as companies with market
capitalizations equaling or exceeding $250
million but not exceeding the top range of the
Russell Midcap/tm/ Growth Index at the time of
the Portfolio's investment.
Growth companies are companies that the
Portfolio Manager considers well-run and
poised for growth. The Portfolio Manager
looks particularly for companies which
demonstrate:
o a strong franchise, strong cash flows and
a recurring revenue stream
o a solid industry position, where there is
potential for high profit margins and
substantial barriers to new entry in the
industry
o a strong management team with a clearly
defined strategy
o a catalyst that may accelerate growth
The Portfolio Manager uses a bottom-up, as
opposed to a top-down, investment style in
managing the Portfolio. This means that
securities are selected based on fundamental
analysis (such as an analysis of earnings, cash
flows, competitive position and management
abilities) performed by the Portfolio Manager
and its group of equity research analysts and
generally not selected based on the industry
in which they belong.
The Portfolio is non-diversified and, when
compared with other funds, may invest a
greater portion of its assets in a particular
issuer. A non-diversified portfolio has
greater exposure to the risk of default or the
poor earnings of the issuer.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
MID-CAP
GROWTH
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
26
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Mid-Cap Growth Portfolio":
o MID-CAP COMPANY RISK
o OTC INVESTMENT RISK
o EMERGING MARKETS RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Massachusetts Financial Services
Company has managed the Portfolio since August 17,
1998.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
MID CAP GROWTH -- ANNUAL TOTAL RETURN
Year 1999
79.05%
|------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|------------------------------------------------| |--------------------|
| 1 YEAR 8/17/98 | | Quarter Ended |
| (INCEPTION) | | 12/31/99... 41.28% |
| Portfolio's Average | | |
| Annual Total Return 79.05% 69.91% | |--------------------|
| Russell Mid-Cap Index 18.23% 17.18 | | WORST QUARTER |
| Russell 2000 Index 21.26% 15.39% | |--------------------|
| | | Quarter Ended |
| | | 3/31/99... .72% |
| | | |
|------------------------------------------------| |--------------------|
The Russell Midcap Index is consisted of the
800 smallest companies in the Russell 1000
Index, which contains the 1,000 largest
companies in the U.S. The Russell 2000 Index
represents the 2,000 smallest companies in the
Russell 3000 Index, which contains the 3,000
largest U.S. companies, based on total market
capitalization.
27
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
SMALL CAP PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of small capitalization ("small-
STRATEGY cap") companies. The Portfolio Manager
considers small cap companies to be companies
that have total market capitalization within
the range of companies included in the
o Russell 2000 Growth Index
o Standard & Poor's Small Cap 600 Index
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Small Cap Portfolio":
o SMALL CAP COMPANY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
SMALL
CAP
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
36
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Capital Guardian Trust Company
has managed the Portfolio since February 1, 2000.
Prior to that date, a different firm managed the
Portfolio and performance is attributable to
those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
SMALL CAP -- ANNUAL TOTAL RETURN
Year 1996 1997 1998 1999
20.10% 10.32% 20.98% 50.61%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 1/3/96 | | Quarter Ended |
| (INCEPTION)| | 12/31/99... 33.90% |
| Portfolio's Average | | |
| Annual Total Return 50.61% 24.69% | |--------------------|
| Russell 2000 Index 21.26% 16.15% | | WORST QUARTER |
| | |--------------------|
| | | Quarter Ended |
| | | 9/30/98..(19.52)% |
| | | |
|-------------------------------------------------| |--------------------|
The Russell 2000 Index represents the 2,000
smallest companies in the Russell 3000 Index,
which contains the 3,000 largest U.S.
companies, based on total market
capitalization.
37
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests primarily in common
INVESTMENT stocks of growth companies that have favorable
STRATEGY relationships between price/earnings ratios
and growth rates in
sectors offering the potential for above-
average returns.
The Portfolio invests primarily in common
stocks the Portfolio Manager believes will
appreciate in value. The Portfolio Manager
generally takes a "bottom up" approach to
selecting companies. In other words, it seeks
to identify individual companies with earnings
growth potential that may not be recognized by
the market at large. It makes this assessment
by looking at companies one at a time,
regardless of size, country of organization,
place of principal business activity, or other
similar selection criteria. Income is not a
significant consideration when choosing
investments for the Portfolio.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Growth Portfolio":
o GROWTH INVESTING RISK
o SMALL COMPANY RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
o HIGH YIELD BOND RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
GROWTH
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
20
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, and since its inception
date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Janus Capital Corporation
has managed the Portfolio since March 1, 1999.
Prior to that date, a different firm managed
the Portfolio and performance is attributable
to those firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
GROWTH PORTFOLIO -- ANNUAL TOTAL RETURN
Year 1999
78.13%
|--------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|--------------------------------------------| |--------------------|
| 1 YEAR 8/17/98 | | Quarter Ended |
| (INCEPTION)| | |
| Portfolio's Average | | 12/31/99...41.31% |
| Annual Total Return 78.13% 67.67% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 22.65% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/99...3.58% |
|--------------------------------------------| |--------------------|
The Standard & Poor's 500 Index is comprised of 500 U.S. Stocks.
21
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
REAL ESTATE PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation. Current income is a
secondary objective.
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of companies in the real estate
STRATEGY industry that are listed on national exchanges
or the National Association of Securities
Dealers Automated Quotation System ("NASDAQ").
The Portfolio Manager selects securities
generally for long-term investment.
The Portfolio invests the majority of its
assets in companies that have at least 50% of
their assets in, or that derive at least 50%
of their revenues from, the following sectors
of the real estate industry:
o ownership (including listed real estate
investment trusts)
o construction and development
o asset sales
o property management or sale
o other related real estate services
The Portfolio may invest more than 25% of its
assets in any of the above sectors.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios
-- Real Estate Portfolio":
o REAL ESTATE o INDUSTRY CONCENTRATION
RISK RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
REAL
ESTATE
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
38
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The average annual total
returns below include reinvestment of
dividends and distributions. The accompanying
table shows the Portfolio's average annual
total return for 1 year, 5 years, 10 years and since
its inception date as compared to the applicable
market index. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. The Prudential Investment
Corporation has managed the Portfolio since
May 1, 2000. Prior to that date, a different
firm managed the Portfolio and performance is
attributable to that firms.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
REAL ESTATE -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-20.78% 34.06% 13.87% 17.27% 6.34% 16.59% 35.30% 22.79% (13.45%) (3.81)%
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-----------------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10 YEAR 1/24/89 | | Quarter Ended |
| (INCEPTION)| | |
<S> <C> <C> <C> <C> <C> <C>
| Portfolio's Average | | 3/31/91... 23.44% |
| Annual Total Return (3.81)% 10.03% 9.29 8.35% | |--------------------|
| Wilshire Real Estate | | WORST QUARTER |
| Securities Index (3.19)% 8.24% 4.13 3.88% | |--------------------|
| | | Quarter Ended |
| | | 3/30/90..(15.18)% |
| | | |
|-----------------------------------------------------------| |--------------------|
</TABLE>
The Wilshire Real Estate Securities Index
consists of real estate investment trusts
(REITs) and real estate operating companies
(REOCs).
39
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
HARD ASSETS PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in hard asset
INVESTMENT securities. Hard asset securities include
STRATEGY equity and debt securities of hard asset
companies and securities, including structured
notes, whose value is linked to the price of a
hard asset commodity or a commodity index.
Hard asset companies are companies that are
directly or indirectly engaged significantly
in the exploration, development, production or
distribution of one or more of the following:
o precious metals
o ferrous and non-ferrous metals
o integrated oil
o exploration/production oil
o gas, other hydrocarbons
o forrest products
o agricultural commodities
o other basic materials that can be priced
by a market
The Portfolio may invest in any of the above to
a maximum of 50% in any one of the above sectors.
The Portfolio's investment strategy is based
on the belief that hard asset securities can
protect against eroding monetary values or a
rise in activity which consumes more of these
commodities.
The Portfolio is non-diversified and, when
compared with other funds, may invest a greater
portion of its assets in a particular issuer.
A non-diversified portoflio has greater exposure
to the risk of default or the poor earnings of
the issuer.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
HARD
ASSETS
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
40
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject
to the following principal risks
described under "Introduction -- General Risk
Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
In addition, an investment in the Portfolio is
subject to the following principal risks
described under "Description of the Portfolios
-- Hard Assets Portfolio":
o HARD ASSET RISK o INDUSTRY CONCENTRATION
RISK
o SECTOR CONCENTRATION o FOREIGN INVESTMENT AND
RISK CURRENCY RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years, 10 years and since
its inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Baring International
Investment Limited has managed the Portfolio
since March 1, 1999. Prior to that date, a
different firm managed the Portfolio and
performance is attributable to that firm.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
HARD ASSETS -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-13.84% 4.70% -9.81% 49.93% 2.53% 10.69% 33.17% 6.22% -29.58% 23.36%
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-----------------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10 YEAR 1/24/89 | | Quarter Ended |
| (INCEPTION)| | |
<S> <C> <C> <C> <C> <C> <C>
| Portfolio's Average | | 12/31/93... 21.80% |
| Annual Total Return 23.36% 6.35% 5.46% 6.66% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 21.03% 28.54% 18.19% 18.74% | |--------------------|
| Russell 2000 Index 21.26% 16.69% 13.40% 13.31% | | Quarter Ended |
| | | 9/30/98...(19.01)%|
| | | |
|-----------------------------------------------------------| |--------------------|
</TABLE>
The Standard & Poor's Index is comprised of
500 U.S. stocks. The Russell 2000 Index
represents the 2,000 smallest companies in the
Russell 3000 Index, which contains the 3,000
largest U.S. companies, based on total market
capitalization.
41
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
DEVELOPING WORLD PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Developing World Portfolio invests
INVESTMENT primarily in emerging market companies. The
STRATEGY Portfolio normally invests in at least six
"emerging market countries" with no
more than 35% of its assets in any one
country. Emerging market countries are those
that are indentified as such in the Morgan
Stanley Capital International Emerging Markets
Free Index, or the International Finance
Corporation Emerging Market Index, or by the
Portfolio Manager because they have a developing
economy or because their markets have begun a
process of change and are growing in size and/or
sophistication. A list of such countries is set
forth under "Description of the Portfolios --
Developing World Portfolio."
The Portfolio Manager's philosophy is based on the
belief that superior long term results come from
identifying unrecognised growth investment opportunities
in countries and companies.
The Portfolio Manager's investment process seeks to
deliver superior risk adjusted returns by evaluating key
investment drivers at both the country and company level.
As a result of research into the key drivers of
Emerging market performance we have defined an
investment framework consisting of five critical drivers -
Growth, Liquidity, Currency, Management and Valuation.
Structured fundamental research takes place at the country
and company level using the discipline of the investment
framework. It is the structured fundamental research
that drives both the country and company selection decision
making.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Developing World Portfolio":
o EMERGING MARKET RISK
o MANAGEMENT TECHNIQUE RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
DEVELOPING
WORLD
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
44
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year and since its inception
date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Baring International Investment
Limited has managed the Portfolio since March 1,
1999. Prior to that date, a different firm
managed the Portfolio and performance is
attributable to that firm.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
DEVELOPING WORLD -- ANNUAL TOTAL RETURN
Year 1999
61.66%
|--------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|--------------------------------------------------| |--------------------|
| 1 YEAR 2/18/98 | | Quarter Ended |
| (INCEPTION) | | 12/31/99... 31.50%|
| Portfolio's Average | | |
| Annual Total Return 61.66% 9.87% | |--------------------|
| Morgan Stanley Capital | | WORST QUARTER |
| International Emerging | |--------------------|
| Markets Free Index 66.41% 11.45% | | Quarter Ended |
| | | 6/30/98...(20.81)%|
|--------------------------------------------------| |--------------------|
The Morgan Stanley Capital International
Emerging Markets Free Index is comprised of
equity securities in emerging markets.
45
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of companies in at least six
STRATEGY different emerging market countries. The
Portfolio's investment philosophy is to
capitalize on emerging capital markets in
developing nations and other nations in which
economic and political factors may produce
above average growth rates.
Emerging market countries are those that are
identified as such in the Morgan Stanley
Capital International Emerging Markets Free
Index or the International Finance Corporation
Emerging Market Index, or by the Portfolio
Manager because they have a developing economy
or because their markets have begun a process
of change and are growing in size and/or
sophistication.
The Portfolio Manager's philosophy is based on the
belief that superior long term results come from
identifying unrecognized growth investment
opportunities in countries and companies.
The Portfolio Manager's investment process seeks
to deliver superior risk adjusted returns by evaluating
key investment drivers at both the country and company
level.
As a result of research into the key drivers
of Emerging market performance the portfolio manager
defined an investment framework consisting of five
critical drivers - Growth, Liquidity, Currency,
Management and Valuation. Structured fundamental
research takes place at the country and company level
using the discipline of the investment framework.
It is the structured fundamental research that drives
both the country and company selection decision making.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios
-- Emerging Markets Portfolio":
o EMERGING MARKET RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
EMERGING
MARKETS
L G L L M
L M F F T E V R M C A C C S C C S R H D E
A B I M R I I E D G V C R A G E G G C G E A W M
<<<------------------------------------------------------------------------>>>
<< xXx>>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
46
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Baring International Investment
Limited has managed the Portfolio since March 15,
2000. Prior to that date, a different firm
managed the Portfolio and performance is attributable
to that firm.
The performance information does not include
insurance-related charges. If these were included,
performance would be lower. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
EMERGING MARKETS -- ANNUAL TOTAL RETURN
Year 1994 1995 1996 1997 1998 1999
-15.18% -10.11% 7.28% -9.37% -24.09% 85.30%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 10/4/93| | Quarter Ended |
| (INCEPTION)| | 12/31/99... 41.30% |
| Portfolio's Average | | |
| Annual Total Return 85.30% 4.22% 4.26% | |--------------------|
| Morgan Stanley Capital | | WORST QUARTER |
| International Emerging | |--------------------|
| Markets Free Index 66.41% 2.00% 5.00% | | Quarter Ended |
| | | 9/30/98..(23.43)% |
| | | |
|-------------------------------------------------| |--------------------|
The Morgan Stanley Capital International
Emerging Markets Free Index is comprised of
equity securities in emerging markets.
47
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
MORE INFORMATION
- -------------------------------------------------------------------------
A WORD Each portfolio in this prospectus, unless
ABOUT specifically noted in the portfolio's
PORTFOLIO investment objective, is diversified, as
DIVERSITY defined in the Investment Company Act of 1940.
A diversified portfolio may not, as to 75% of
its total assets, invest more than 5% of its
total assets in any one issuer and may not
purchase more than 10% of the outstanding
voting securities of any one issuer (other
than U.S. Government securities). The
investment objective and certain of the
investment restrictions of each portfolio in
this prospectus are fundamental. This means
they may not be modified or changed without a
vote of the shareholders.
ADDITIONAL A Statement of Additional Information is made
INFORMATION a part of this prospectus. It identifies and
ABOUT THE discusses non-principal investment strategies
PORTFOLIOS associated risks of each portfolio, as well as
investment restrictions, secondary or
temporary investments and associated risks,
a description of how the bond rating system
works and other information that may be
helpful to you in your decision to invest.
You may obtain a copy without charge by
calling our Customer Service Center at
1-800-344-6864, or visiting the Securities
and Exchange Commission's website
(http://www.sec.gov).
NON-PRINCIPAL This prospectus does not describe various
INVESTMENTS types of securities, strategies and practices
AND which are available to, but are not the
STRATEGIES principal focus of, a particular portfolio.
Such non-principal investment and strategies
are discussed in the Statement of Additional
Information.
TEMPORARY This prospectus does not describe temporary
DEFENSIVE defensive positions. A portfolio may depart
POSOTIONS from its principal investment strategies by
temporarily investing for defensive purposes
when adverse market, economic or political
conditions exist. While a portfolio invests
defensively, it may not be able to pursue its
investment objective. A portfolio's defensive
investment position may not be effective in
protecting its value. The types of defensive
positions in which a portfolio may engage are
identified and discussed, together with their
risks, in the Statement of Additional
Information.
PORTFOLIO Before investing in a portfolio, you should
TURNOVER review its portfolio turnover rate for an
indication of the potential effect of
transaction costs on the portfolio's future
returns. In general, the greater the volume
of buying and selling by the portfolio, the
greater the impact that brokerage commissions
and other transaction costs will have on its
return.
Portfolio turnover rate is calculated by
dividing the value of the lesser of purchases
or sales of portfolio securities for the year
by the monthly average of the value of
portfolio securities owned by the portfolio
during the year. Securities whose maturities
at the time of purchase were one year or less
are excluded. A 100% portfolio turnover rate
would occur, for example, if a portfolio sold
and replaced securities valued at 100% of its
total net assets within a one-year period.
The portfolio turnover rates for each
portfolio are presented in the Financial
Highlights.
LEGAL Sutherland Asbill & Brennan LLP, located at
COUNSEL 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004.
INDEPENDENT Ernst & Young LLP, located at Two Commerce Square,
AUDITORS Suite 4000, 2001 Market Street, Philadelphia,
Pennsylvania 19103.
48
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------
The following financial highlights tables are intended to help you
understand each of the portfolio's financial performance for the past
5 years (or, if shorter, for the period of the portfolio's
operations). Certain information reflects financial results for a
single portfolio share. The total returns in the tables represent the
rate that an investor would have earned or lost on an investment in
the portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Ernst & Young
LLP, independent auditors, whose report, along with a portfolio's
financial statements, are included in the annual report, which is
available upon request.
<TABLE>
<CAPTION>
LIQUID ASSET PORTFOLIO *
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................... 0.046 0.050 0.050 0.049 0.054
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.046) (0.050) (0.050) (0.049) (0.054)
-------- -------- ------- ------- -------
Net asset value, end of period .......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= ======= =======
Total return ............................ 4.74% 5.13% 5.07% 5.01% 5.51%
======== ======== ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $579,848 $211,730 $59,453 $39,096 $38,589
Ratio of operating expenses to average
net assets ............................ 0.56% 0.59% 0.61% 0.61% 0.61%
Ratio of net investment income to
average net assets .................... 4.71% 4.92% 4.99% 4.89% 5.39%
</TABLE>
- ----------------
* On January 2, 1998, ING Investment Management, LLC ("IIM") became
the Portfolio Manager of the Series. From August 13, 1996 to
January 1, 1998, Equitable Investment Services, Inc., an affiliate
of IIM, was the Portfolio Manager of the Series. Prior to August 13,
1996, the Series had been advised by other Portfolio Mangers.
<TABLE>
<CAPTION>
LIMITED MATURITY BOND PORTFOLIO *
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97# 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 10.68 $ 10.31 $ 10.43 $ 11.15 $ 9.98
------- ------- ------- ------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................... 0.48 0.24 0.60 0.59 0.60
Net realized and unrealized gain/(loss)
on investments and foreign
currencies ............................ (0.36) 0.47 0.09 (0.13) 0.57
------- ------- ------- ------- -------
Total from investment operations ........ 0.12 0.71 0.69 0.46 1.17
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.38) (0.34) (0.81) (1.15) --
Distributions from capital gains ........ -- -- -- (0.03) --
------- ------- ------- ------- -------
Total distributions ..................... (0.38) (0.34) (0.81) (1.18) --
------- ------- ------- ------- -------
Net asset value, end of period .......... $ 10.42 $ 10.68 $ 10.31 $ 10.43 $ 11.15
======= ======= ======= ======= =======
Total return ............................ 1.13% 6.86% 6.67% 4.32% 11.72%
======= ======= ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $207,109 $ 148,426 $53,839 $81,317 $90,081
Ratio of operating expenses to average
net assets ............................ 0.57% 0.60% 0.61% 0.61% 0.61%
Ratio of net investment income to
average net assets .................... 5.29% 5.15% 5.71% 5.33% 5.58%
Portfolio turnover rate ................. 128% 52% 81% 250% 302%
</TABLE>
- ----------------
* On January 2, 1998, ING Investment Management, LLC ("IIM") became the
Portfolio Manager of the Series. From August 13, 1996 to January 1,
1998, Equitable Investment Services, Inc., an affiliate of IIM, was the
Portfolio Manager of the Series. Prior to August 13, 1996, the Series
had been advised by other Portfolio Mangers.
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
50
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -----------------------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO*
- -----------------------------------------------------------------------------------------------
YEAR ENDED
- -----------------------------------------------------------------------------------------------
12/31/99 12/31/98*#
-------- ----------
<S> <C> <C>
Net asset value, beginning of period ............................ $ 11.17 $ 10.47
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........................................... 0.34 0.09
Net realized and unrealized gain on investments and foreign
currencies .................................................... (1.30) 0.74
------- -------
Total from investment operations ................................ (0.96) 0.83
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income ............................ (0.14) (0.09)
Dividends in excess of net investment income .................... -- (0.04)
Distributions from capital gains ................................ -- --
Distributions in excess of capital gains ........................ (0.01) --
------- -------
Total distributions ............................................. (0.15) (0.13)
------- -------
Net asset value, end of period .................................. $ 10.06 $ 11.17
======= =======
Total return .................................................... (8.62)% 7.99%++
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............................ $30,371 $21,932
Ratio of operating expenses to average net assets ............... 1.60% 1.74%+
Ratio of net investment loss to average net assets .............. 3.17% 2.37%+
Portfolio turnover rate ......................................... 87% 25%
</TABLE>
- ----------------
* The Global Fixed Income Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average share
method, which more appropriately represents the per share data for the
period.
<TABLE>
<CAPTION>
FULLY MANAGED PORTFOLIO*
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 15.23 $ 15.73 $ 14.82 $ 13.79 $ 11.70
-------- -------- -------- -------- --------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................... 0.50 0.36 0.39 0.56 0.45
Net realized and unrealized gain/(loss)
on investments and foreign
currencies ............................ 0.53 0.55 1.86 1.69 1.98
-------- -------- -------- -------- --------
Total from investment operations ........ 1.03 0.91 2.25 2.25 2.43
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.40) (0.36) (0.41) (0.56) (0.34)
Distributions from capital gains ........ (0.81) (1.05) (0.93) (0.66) --
-------- -------- -------- -------- --------
Total distributions ..................... (1.21) (1.41) (1.34) (1.22) (0.34)
-------- -------- -------- -------- --------
Net asset value, end of period .......... $ 15.05 $ 15.23 $ 15.73 $ 14.82 $ 13.79
======== ======== ======== ======== ========
Total return ............................ 6.92% 5.89% 15.27% 16.36% 20.80%
======== ======== ======== ======== ========
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $287,909 $246,196 $169,987 $136,660 $118,589
Ratio of operating expenses to average
net assets ............................ 0.97% 0.98% 0.99% 1.00% 1.01%
Ratio of net investment income to
average net assets .................... 3.45% 2.83% 2.67% 3.83% 3.41%
Portfolio turnover rate ................. 36% 44% 48% 45% 113%
</TABLE>
- ----------------
* Since January 1, 1995, T. Rowe Price Associates, Inc. has served as
Portfolio Manager for the Fully Managed Portfolio. Prior to that
date, a different firm served as Portfolio Manager.
51
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO*
- ----------------------------------------------------------------------------------------------
YEAR ENDED
- ----------------------------------------------------------------------------------------------
12/31/99 12/31/98*#
-------- ----------
<S> <C> <C>
Net asset value, beginning of period ............................ $ 15.80 $ 14.88
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........................................... 0.42 0.17
Net realized and unrealized gain on investments and foreign
currencies .................................................... 0.11 0.86
-------- --------
Total from investment operations ................................ 0.53 1.03
-------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income ............................ (0.31) (0.11)
Distributions from capital gains................................. (0.22) --
-------- --------
Total distributions ............................................. (0.53) (0.11)
-------- --------
Net asset value, end of period .................................. $ 15.80 $ 15.80
======== ========
Total return .................................................... 3.38% 6.90%++
======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............................ $675,754 $453,093
Ratio of operating expenses to average net assets ............... 0.91% 0.98%+
Ratio of net investment income to average net assets ............ 3.04% 2.95%+
Portfolio turnover rate ......................................... 81% 37%
</TABLE>
- ----------------
* The Total Return Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average share
method, which more appropriately represents the per share data for the
period.
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO*
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ... $ 12.67 $ 13.09 $ 12.41 $ 12.52 $ 11.33
-------- -------- -------- -------- --------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income .................. 0.27 0.49 0.57 0.56 0.58
Net realized and unrealized gain/
(loss) on investments and foreign
currencies ........................... (0.39) 0.58 1.58 0.52 1.56
-------- -------- -------- -------- --------
Total from investment operations ....... (0.12) 1.07 2.15 1.08 2.14
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income ... (0.29) (0.50) (0.55) (0.58) (0.45)
Distributions from capital gains ....... (1.02) (0.99) (0.92) (0.61) (0.50)
-------- -------- -------- -------- --------
Total distributions .................... (1.31) (1.49) (1.47) (1.19) (0.95)
-------- -------- -------- -------- --------
Net asset value, end of period ......... $ 11.24 $ 12.67 $ 13.09 $ 12.41 $ 12.52
======== ======== ======== ======== ========
Total return ........................... (0.72)% 8.26% 17.44% 8.77% 18.93%
======== ======== ======== ======== ========
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ... $277,354 $278,074 $264,599 $272,791 $307,691
Ratio of operating expenses to average
net assets ........................... 0.96% 0.98% 0.99% 1.00% 1.01%
Ratio of net investment income to
average net assets ................... 2.19% 3.63% 3.88% 3.86% 4.42%
Portfolio turnover rate ................ 122% 61% 79% 158% 187%
</TABLE>
- ------------------
* Since March 1, 1999, T. Rowe Price Associates, Inc. has served as
the Portfolio Manager of the Portfolio. Prior to that date a
different firm served as Portfolio Manager. Along with this change
was a name change from the Multiple Allocation Portfolio to the Equity
Income Portfolio.
52
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE EQUITY PORTFOLIO*
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- -----------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95*
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........... $ 15.88 $ 16.13 $ 13.92 $ 13.18 $ 10.00
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .......................... 0.17 0.19 0.16 0.22 0.08
Net realized and unrealized gain on investments
and foreign currencies ....................... (0.09) 0.06 3.63 1.18 3.44
-------- -------- ------- ------- -------
Total from investment operations ............... 0.08 0.25 3.79 1.40 3.52
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income ........... (0.15) (0.18) (0.18) (0.19) (0.06)
Distributions from capital gains ............... (0.29) (0.32) (1.40) (0.47) (0.28)
-------- -------- ------- ------- -------
Total distributions ............................ (0.44) (0.50) (1.58) (0.66) (0.34)
-------- -------- ------- ------- -------
Net asset value, end of period ................. $ 15.52 $ 15.88 $ 16.13 $ 13.92 $ 13.18
======== ======== ======= ======= =======
Total return ................................... 0.51% 1.55% 27.28% 10.62% 35.21%++
======== ======== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $141,595 $129,784 $80,048 $44,620 $28,830
Ratio of operating expenses to average net
assets ....................................... 0.96% 0.98% 0.99% 1.00% 1.01%+
Ratio of net investment income to average net
assets ....................................... 1.11% 1.49% 1.31% 1.80% 1.53%+
Portfolio turnover rate ........................ 62% 124% 128% 131% 86%
</TABLE>
- ----------------
* The Value Equity Portfolio commenced operations on January 3, 1995.
+ Annualized
++ Non-annualized
<TABLE>
<CAPTION>
RISING DIVIDENDS PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96# 12/31/95
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 22.01 $ 20.04 $ 15.81 $ 13.30 $ 10.22
-------- -------- -------- -------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................... 0.08 0.10 0.14 0.14 0.13
Net realized and unrealized gain/(loss)
on investments and foreign
currencies ............................ 3.41 2.74 4.57 2.61 3.04
-------- -------- -------- -------- -------
Total from investment operations ........ 3.49 2.84 4.71 2.75 3.17
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.07) (0.10) (0.13) (0.13) (0.09)
Distributions from capital gains ........ (0.59) (0.77) (0.35) (0.11) --
-------- -------- -------- -------- -------
Total distributions ..................... (0.66) (0.87) (0.48) (0.24) (0.09)
-------- -------- -------- -------- -------
Net asset value, end of period .......... $ 24.84 $ 22.01 $ 20.04 $ 15.81 $ 13.30
======== ======== ======== ======== =======
Total return ............................ 15.88% 14.13% 29.82% 20.65% 31.06%
======== ======== ======== ======== =======
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $899,753 $574,843 $252,191 $126,239 $81,210
Ratio of operating expenses to average
net assets ............................ 0.96% 0.98% 0.99% 1.00% 1.01%
Ratio of net investment income to
average net assets .................... 0.40% 0.72% 0.96% 0.99% 1.24%
Portfolio turnover rate ................. 27% 34% 26% 15% 43%
</TABLE>
- ------------------
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
53
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
MANAGED GLOBAL PORTFOLIO *
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96**# 12/31/95#
-------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 14.19 $ 11.46 $ 11.13 $ 9.96 $ 9.26
-------- -------- -------- ------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income/(loss) ............ (0.03) (0.02) 0.02 0.04 0.05
Net realized and unrealized gain/
(loss) on investments and
foreign currencies .................... 8.82 3.37 1.33 1.18 0.65
-------- -------- -------- ------- -------
Total from investment operations ........ 8.79 3.35 1.35 1.22 0.70
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .... -- (0.05) (0.17) -- --
Dividends in excess of net investment
income ................................ -- -- (0.07) -- --
Distributions from capital gains ........ (3.02) (0.57) (0.78) (0.05) --
-------- -------- -------- ------- -------
Total distributions ..................... (3.02) (0.62) (1.02) (0.05) --
-------- -------- -------- ------- -------
Net asset value, end of period .......... $ 19.96 $ 14.19 $ 11.46 $ 11.13 $ 9.96
======== ======== ======== ======= =======
Total return ............................ 63.30% 29.31% 12.17% 12.27% 7.56%
======== ======== ======== ======= =======
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $184,486 $134,078 $105,305 $86,376 $72,375
Ratio of operating expenses to
average net assets .................... 1.25% 1.26% 1.36% 1.26% 1.26%
Decrease reflected in above expense
ratio due to expense limitations ...... -- -- -- -- 0.09%
Ratio of net investment income to
average net assets .................... (0.19)% (0.17)% 0.06% 0.39% 0.51%
Portfolio turnover rate ................. 168% 173% 199% 141% 44%
</TABLE>
- ----------------
* Since March 3, 1997, Putnam Investment Management, Inc. has served as
Portfolio Manager of the Portfolio. Prior to that date, different firms
served as Portfolio Manager.
** On September 3, 1996, the Managed Global Account of Separate Account D
of Golden American Life Insurance Company was reorganized into the Trust.
Net investment income and net realized gains earned prior to September 3,
1996, are not subject to Internal Revenue Code distribution requirements
for regulated investment companies. Financial highlights from prior
periods have been restated to account for the entity as if it had
been a regulated investment company since the commencement of operations.
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
<TABLE>
<CAPTION
RESEARCH PORTFOLIO*
- --------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------
12/31/99 12/31/98*#
--------- ----------
<S> <C> <C>
Net asset value, beginning of period ............................ $ 20.31 $ 17.75
--------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........................................... 0.01 0.02
Net realized and unrealized gain on investments and foreign
currencies .................................................... 4.90 2.56
-------- --------
Total from investment operations ................................ 4.91 2.58
-------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income ............................ (0.01) (0.01)
Distributions in excess of net investment income ................ -- (0.01)
-------- --------
Distributions from capital gains ................................ (0.40) --
-------- --------
Total distributions ............................................. (0.41) (0.02)
-------- --------
Net asset value, end of period .................................. $ 24.81 $ 20.31
======== ========
Total return .................................................... 24.23% 14.54%++
======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............................ $1,014,656 $613,771
Ratio of operating expenses to average net assets ............... 0.91% 0.94%+
Ratio of net investment income to average net assets ............ 0.02% 0.23%+
Portfolio turnover rate ......................................... 89% 35%
</TABLE>
- ----------------
* The Research Series commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average share
method, which more appropriately represents the per share data for the
period.
54
<PAGE>
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO*
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 18.09 $ 17.65 $ 15.06 $ 13.51 $ 11.34
-------- -------- -------- -------- --------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................... (0.01) 0.15 0.16 0.16 0.19
Net realized and unrealized gain/(loss)
on investments and foreign
currencies ............................ 4.38 2.07 4.19 2.57 3.22
-------- -------- -------- -------- --------
Total from investment operations ........ 4.37 2.22 4.35 2.73 3.41
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.03) (0.15) (0.16) (0.17) (0.15)
Distributions from capital gains ........ (2.41) (1.63) (1.60) (1.01) (1.09)
-------- -------- -------- -------- --------
Total distributions ..................... (2.44) (1.78) (1.76) (1.18) (1.24)
-------- -------- -------- -------- --------
Net asset value, end of period .......... $ 20.02 $ 18.09 $ 17.65 $ 15.06 $ 13.51
======== ======== ======== ======== ========
Total return ............................ 24.64% 12.68% 28.95% 20.26% 30.16%
======== ======== ======== ======== ========
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $411,898 $263,313 $193,986 $148,752 $122,227
Ratio of operating expenses to average
net assets ............................ 0.96% 0.98% 0.99% 1.00% 1.01%
Ratio of net investment income to
average net assets .................... (0.05)% 0.95% 0.95% 1.12% 1.53%
Portfolio turnover rate ................. 126% 64% 51% 64% 98%
</TABLE>
- ------------------
* Since April 1, 1999, A I M Capital Management, Inc. has served as the
Portfolio Manager for the Capital Appreciation Portfolio. Prior to that
date, a different firm served as Portfolio Manager.
<TABLE>
<CAPTION>
CAPITAL GROWTH PORTFOLIO(*)(**)
- ---------------------------------------------------------------------------------------------
YEAR ENDED
- ---------------------------------------------------------------------------------------------
12/31/99 12/31/98*#
-------- ----------
<S> <C> <C>
Net asset value, beginning of period ............................ $ 15.62 $ 14.24
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........................................... -- 0.09
Net realized and unrealized gain on investments and foreign
currencies .................................................... 3.96 1.36
-------- --------
Total from investment operations ................................ 3.96 1.45
-------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income ............................ (0.02) (0.07)
Distributions in excess of net investment income ................ (0.01) --
Distributions from capital gains ................................ (1.03) --
-------- --------
Total distributions ............................................. (1.06) (0.07)
-------- --------
Net asset value, end of period .................................. $ 18.52 $ 15.62
======== ========
Total return .................................................... 25.56% 10.19%++
======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............................ $567,628 $298,839
Ratio of operating expenses to average net assets ............... 1.05% 1.08%+
Ratio of net investment loss to average net assets .............. 0.00% 1.86%+
Portfolio turnover rate ......................................... 185% 92%
- ----------------
</TABLE>
* The Capital Growth Portfolio commenced operations on August 14, 1998.
** Since March 1, 1999, Alliance Capital Management, L.P. has served as
Portfolio Manager for the Capital Growth Portfolio. Prior to that
date, a different firm served as Portfolio Manager. Prior to July 1,
1999, the Capital Growth Portfolio was named the Growth & Income
Portfolio.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share data
for the period.
55
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRATEGIC EQUITY PORTFOLIO*
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96## 12/31/95*
-------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........... $ 12.82 $ 13.63 $ 11.68 $ 10.01 $10.00
------- ------- ------- ------- ------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income .......................... (0.03) 0.16 0.20 0.23 0.06
Net realized and unrealized gain/(loss) on
investments and
foreign currencies ........................... 7.24 (0.07) 2.49 1.71 (0.03)#
------- ------- ------- ------- ------
Total from investment operations ............... 7.21 0.09 2.69 1.94 0.03
------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Dividends from net investment income ........... (0.02) (0.16) (0.19) (0.14) (0.02)
Distributions from capital gains ............... (0.06) (0.59) (0.55) (0.13) --
Distributions in excess of capital gains ....... -- (0.15) -- -- --
------- ------- ------- ------- ------
Total distributions ............................ (0.08) (0.90) (0.74) (0.27) (0.02)
------- ------- ------- ------- ------
Net asset value, end of period ................. $ 19.95 $ 12.82 $ 13.63 $ 11.68 $10.01
======= ======= ======= ======= ======
Total return ................................... 56.24% 0.84% 23.16% 19.39% 0.33%++
======= ======= ======= ======= ======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $205,799 $73,261 $51,789 $30,423 $8,067
Ratio of operating expenses to average net
assets ....................................... 0.96% 0.99% 0.99% 1.00% 1.00%+
Ratio of net investment income to average net
assets ....................................... (0.14)% 1.46% 1.88% 2.05% 4.04%+
Portfolio turnover rate ........................ 176% 139% 105% 133% 29%
</TABLE>
- ---------------
* The Strategic Equity Portfolio commenced operations on October 2, 1995.
** Since March 1, 1999, A I M Capital Management, Inc. has served as
Portfolio Manager for the Strategic Equity Portfolio. Prior to that
date, a different firm served as Portfolio Manager.
+ 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 Portfolio shares.
## Per share numbers have been calculated using the monthly average share
method, which more appropriately represents the per share data for the
period.
<TABLE>
<CAPTION>
MID-CAP GROWTH PORTFOLIO*
- ------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------
12/31/99 12/31/98*#
-------- ----------
<S> <C> <C>
Net asset value, beginning of period ............................ $ 18.10 $ 15.68
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........................................... (0.03) 0.01
Net realized and unrealized gain on investments and foreign
currencies .................................................... 14.22 2.52
-------- --------
Total from investment operations ................................ 14.19 2.53
-------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income ............................ -- (0.01)
Distributions from capital gains ................................ (2.70) (0.10)
-------- --------
Total distributions ............................................. (2.70) (0.11)
-------- --------
Net asset value, end of period .................................. $ 29.59 $ 18.10
======== ========
Total return .................................................... 79.05% 16.12%++
======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............................ $781,807 $252,022
Ratio of operating expenses to average net assets ............... 0.91% 0.95%+
Ratio of net investment income to average net assets ............ (0.21)% 0.15%+
Portfolio turnover rate ......................................... 159% 55%
</TABLE>
- ----------------
* The Mid-Cap Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share data
for the period.
56
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP PORTFOLIO*
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .................... $ 16.03 $ 13.25 $ 12.01 $ 10.00
-------- -------- ------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss ..................................... (0.07) (0.03) (0.03) (0.01)
Net realized and unrealized gain on investments and
foreign currencies .................................... 8.17 2.81 1.27 2.02
-------- -------- ------- -------
Total from investment operations ........................ 8.10 2.78 1.24 2.01
-------- -------- ------- -------
LESS DISTRIBUTIONS:
Distributions from capital gains ........................ (0.69) -- -- --
-------- -------- ------- -------
Net asset value, end of period .......................... $ 23.44 $ 16.03 $ 13.25 $ 12.01
======== ======== ======= =======
Total return ............................................ 50.61% 20.98% 10.32% 20.10%++
======== ======== ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .................... $367,637 $147,696 $66,396 $34,365
Ratio of operating expenses to average net assets ....... 0.96% 0.99% 0.99% 0.99%++
Ratio of net investment loss to average net assets ...... (0.49)% (0.32)% (0.34)% (0.08)%++
Portfolio turnover rate ................................. 132% 133% 130% 117%
</TABLE>
- ---------------
* The Small Cap Portfolio commenced operations on January 3, 1996.
+ Annualized
++ Non-annualized
<TABLE>
<CAPTION>
GROWTH PORTFOLIO(*)(**)
- ---------------------------------------------------------------------------------------------
YEAR ENDED
- ---------------------------------------------------------------------------------------------
12/31/99 12/31/98#
--------- ----------
<S> <C> <C>
Net asset value, beginning of period ............................ $ 15.62 $ 13.63
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss ............................................. (0.03) (0.03)
Net realized and unrealized gain on investments and foreign
currencies .................................................... 12.23 2.02
-------- --------
Total from investment operations ................................ 12.20 1.99
-------- --------
Distributions from capital gains ................................ (0.33) --
-------- --------
Net asset value, end of period .................................. $ 27.49 $ 15.62
======== ========
Total return .................................................... 78.13% 14.60%++
======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............................ $1,416,872 $231,216
Ratio of operating expenses to average net assets ............... 1.04% 1.09%+
Ratio of net investment loss to average net assets .............. (0.40)% (0.58)%+
Portfolio turnover rate ......................................... 166% 88%
- ----------------
* The Growth Portfolio commenced operations on August 14, 1998.
** Since March 1, 1999, Janus Capital Corporation has served as Portfolio
Manager for the Growth Portfolio. Prior to that date, a different firm
served as Portfolio Manager. Along with this change was a name change
from the Value + Growth Portfolio to the Growth Portfolio.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average share
method, which more appropriately represents the per share data for the
period.
</TABLE>
57
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
REAL ESTATE PORTFOLIO *
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
---------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 13.58 $ 18.27 $ 15.98 $ 12.63 $ 11.29
------- ------- ------- ------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................... 0.84 0.83 0.69 0.70 0.75
Net realized and unrealized gain/
(loss) on investments and foreign
currencies ............................ (1.39) (3.34) 2.93 3.70 1.12
------- -------- ------- ------- -------
Total from investment operations ........ (0.55) (2.51) 3.62 4.40 1.87
------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.54) (0.66) (0.63) (0.77) (0.53)
Distributions from capital gains ........ (0.37) (1.52) (0.70) (0.28) --
------- -------- ------- ------- -------
Total distributions ..................... (0.91) (2.18) (1.33) (1.05) (0.53)
------- -------- ------- ------- -------
Net asset value, end of period .......... $ 12.12 $ 13.58 $ 18.27 $ 15.98 $ 12.63
======= ======= ======= ======= =======
Total return ............................ (3.81)% (13.45)% 22.79% 35.30% 16.59%
======= ======= ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $56,906 $69,911 $75,530 $51,135 $34,975
Ratio of operating expenses to average
net assets ............................ 0.96% 0.99% 0.99% 1.00% 1.01%
Ratio of net investment income to
average net assets .................... 5.61% 5.26% 4.49% 5.53% 5.79%
Portfolio turnover rate ................. 36% 29% 41% 31% 53%
</TABLE>
- ----------------
* Since January 1, 1995, EII Realty Securities, Inc. has served as
Portfolio Manager for the Real Estate Portfolio. Prior to that date,
a different firm served as Portfolio Manager.
<TABLE>
<CAPTION>
HARD ASSETS PORTFOLIO*
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 9.60 $ 15.05 $ 17.85 $ 15.04 $ 13.88
------- ------- ------- ------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................... 0.12 0.26 0.14 0.05 0.15
Net realized and unrealized gain/(loss)
on investments and foreign
currencies ............................. 2.12 (4.73) 0.99 4.92 1.34
------- ------- ------- ------- -------
Total from investment operations ........ 2.24 (4.47) 1.13 4.97 1.49
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.08) (0.26) (0.13) (0.07) (0.13)
Distributions from capital gains ........ -- (0.72) (3.80) (2.09) (0.20)
------- ------- ------- ------- -------
Total distributions ..................... (0.08) (0.98) (3.93) (2.16) (0.33)
------- ------- ------- ------- -------
Net asset value, end of period .......... $ 11.76 $ 9.60 $ 15.05 $ 17.85 $ 15.04
======= ======= ======= ======= =======
Total return ............................ 23.36% (29.58)% 6.22% 33.17% 10.69%
======= ======= ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $40,291 $30,530 $46,229 $43,903 $27,147
Ratio of operating expenses to average net
assets ................................ .96% 1.00% 0.99% 1.00% 1.01%
Ratio of net investment income to average
net assets ............................ 1.07% 1.99% 0.76% 0.34% 0.89%
Portfolio turnover rate ................. 204% 178% 124% 96% 24%
</TABLE>
- ----------------
* Prior to January 23, 1997, the Hard Assets Portfolio was named the
Natural Resources Series. Since March 1, 1999, Baring International
Investment Limited has served as Portfolio Manager for the Hard Assets
Portfolio. Prior to that date, a different firm served as Portfolio
Manager.
58
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEVELOPING WORLD PORTFOLIO(*)(**)
- ---------------------------------------------------------------------------------------------------
YEAR ENDED
- ---------------------------------------------------------------------------------------------------
12/31/99# 12/31/98*#
--------- ----------
<S> <C> <C>
Net asset value, beginning of period ............................. $ 7.37 $ 10.00
------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ............................................ 0.08 0.04
Net realized and unrealized loss on investments and
foreign currencies ............................................. 4.44 (2.67)
------- -------
Total from investment operations ................................. 4.52 (2.63)
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income ............................. (0.10) --
Dividends in excess of net investment income ..................... (0.03) --
Distributions from capital gains ................................. (0.20) --
------- -------
Total distributions .............................................. (0.33) --
------- -------
Net asset value, end of period ................................... $ 11.56 $ 7.37
======= =======
Total return ..................................................... 61.66% (26.27)%++
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............................. $62,616 $ 8,797
Ratio of operating expenses to average net assets ................ 1.75% 1.83%+
Ratio of net investment income to average net assets ............. 0.85% 0.69%+
Portfolio turnover rate .......................................... 135% 67%
</TABLE>
- ----------------
* The Developing World Portfolio commenced operations on February 18, 1998.
** Since March 1, 1999, Baring International Investment Limited has served as
Portfolio Manager for the Developing World Portfolio. Prior to that date,
a different firm served as the Portfolio Manager.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
<TABLE>
<CAPTION>
EMERGING MARKETS PORTFOLIO*
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 6.68 $ 8.80 $ 9.72 $ 9.06 $ 10.08
------- ------- ------- ------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income/(loss) ............ 0.07 0.06 (0.01) 0.04 0.04
Net realized and unrealized gain/(loss) on
investments and foreign
currencies ............................ 5.62 (2.18) (0.90) 0.62 (1.06)
------- ------- ------- ------- -------
Total from investment operations ........ 5.69 (2.12) (0.91) 0.66 (1.02)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.08) -- (0.01) -- --
Distributions from capital gains ........ (0.01) -- -- -- --
Return of capital ....................... (0.03) -- -- -- --
------- ------- ------- ------- -------
Total distributions ..................... (0.12) -- (0.01) -- (0.00)
------- ------- ------- ------- -------
Net asset value, end of period .......... $ 12.25 $ 6.68 $ 8.80 $ 9.72 $ 9.06
======= ======= ======= ======= =======
Total return ............................ 85.30% (24.09)% (9.37)% 7.28% (10.11)%
======= ======= ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .... $44,949 $26,028 $39,436 $51,510 $47,974
Ratio of operating expenses to average net
assets ................................ 1.75% 1.83% 1.80% 1.55% 1.53%
Ratio of net investment income/(loss) to
average net assets .................... 0.82% 0.83% (0.09)% 0.38% 0.40%
Portfolio turnover rate ................. 183% 108% 170% 136% 141%
</TABLE>
- ----------------
* Since March 3, 1997, Putnam Investment Management, Inc. has served as
Portfolio Manager for the Emerging Markets Portfolio. Prior to that
date, a different firm served as Portfolio Manager.
# Per share numbers have been calculated using the monthly average share
method, which more appropriately represents the per share data for the
period.
59
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
- -------------------------------------------------------------------------
LIQUID ASSET PORTFOLIO
PORTFOLIO
MANAGER ING Investment Management LLC
INVESTMENT
OBJECTIVE High level of current income consistent with the
preservation of capital and liquidity
PRINCIPAL The Portfolio Manager strives to maintain a
INVESTMENT stable $1 per share net asset value and its
STRATEGY investment strategy focuses on safety of
principal, liquidity and yield, in order of
importance, to achieve this goal. The Portfolio
Manager implements its strategy through a
four-step investment process also designed to
ensure adherence to regulatory requirements.
Step One: The Portfolio Manager actively
maintains a formal Approved List of high
quality companies
Step Two: Securities of Approved List issuers
that meet maturity guidelines and are
rated in one of the two highest ratings
category (or determined to be of
comparable quality by the Portfolio
Manager) are eligible for investment
Step Three: Eligible securities are reviewed
to ensure that an investment in such
securities would not cause the Portfolio
to exceed its diversification limits
Step Four: The Portfolio Manager makes yield
curve positioning decisions based on
liquidity requirements, yield curve
analysis and market expectations of
future interest rates
Money market funds are highly regulated by Rule
2a-7 of the Investment Company Act of 1940, which
sets forth specific maturity, quality and
diversification guidelines. The Portfolio must
adhere to procedures adopted by the Board of
Trustees pursuant to Rule 2a-7 and to Rule 2a-7
itself. Some of these limitations include:
o QUALITY. At least 95% of the Portfolio's
investments must be rated in the highest
short-term ratings category (or determined to
be of comparable quality by the Portfolio
Manager) and the Portfolio Manager must make
an independent determination that each
investment represents minimal credit risk to
the Portfolio.
o MATURITY. The average maturity of the
Portfolio's securities may not exceed 90 days
and the maturity of any individual security
may not exceed 397 days.
o DIVERSIFICATION. At the time of purchase, no
more than 5% of total assets may be invested
in the securities of a single issuer. In
addition, no more than 10% of total assets
may be subject to demand features or guarantees
from a single institution. The 10% demand
feature and guarantee restriction is applicable
to 75% of total assets.
The Portfolio may invest in U.S.
dollar-denominated money market instruments
including:
o U.S. Treasury and U.S. Government Agency
securities
o fully collateralized repurchase agreements
o bank obligations, including certificates of
deposit, time deposits, and bankers'
acceptances
61
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
o commercial paper
o asset-backed securities
o variable or floating rate securities,
including variable rate demand obligations
o short-term corporate debt securities other
than commercial paper
o U.S. dollar-denominated foreign securities
o shares of other investment companies
Some of the securities purchased may be
considered illiquid and thus subject to a
restriction of 10% of total assets.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o INCOME RISK
o CREDIT RISK
o INTEREST RATE RISK
AN INVESTMENT IN THE LIQUID ASSET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THE PORTFOLIO MANAGER CANNOT
ASSURE YOU THAT THE PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE $1 SHARE PRICE.
MORE ING Investment Management LLC (or investment
ON THE advisers acquired by ING Investment Management LLC)
PORTFOLIO ("ING Investment") have managed the Portfolio since
MANAGER August, 1996. ING Investment Management is engaged
in the business of providing investment advice to
affiliated insurance and investment companies and
institutional clients possessing portfolios,
which, as of December 31, 1999, were valued at
approximately $27.6 billion. The address of ING
Investment is 5780 Powers Ferry Road, N.W., Suite
300, Atlanta, Georgia 30327. ING Investment is
a subsidiary of ING Groep N.V. and is affiliated
with Directed Services, Inc.
The Portfolio is managed by a team of three
investment professionals led by Ms. Jennifer J.
Thompson, CFA. Ms. Thompson has been employed by
ING Investment as an investment professional
since 1998 and has seven years investment
experience.
ING Investment also manages the Limited Maturity
Bond Portfolio.
62
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
LIMITED MATURITY BOND PORTFOLIO
PORTFOLIO
MANAGER ING Investment Management, LLC
INVESTMENT
OBJECTIVE Highest current income consistent with low risk
to principal and liquidity.
PRINCIPAL As a secondary objective, the Portfolio seeks to
INVESTMENT enhance its total return through capital
STRATEGY 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 invests primarily in a diversified
portfolio of limited maturity debt securities.
These short-to-intermediate-term debt securities
have remaining maturities of seven years or less.
The dollar-weighted average maturity of the
Portfolio generally will not exceed five years
and in periods of rapidly rising interest rates
may be shortened to one year or less.
The Portfolio Manager utilizes the following
decision making process to achieve the
Portfolio's objectives:
o Active Duration Management. The average
duration of the portfolio is actively managed
relative to the benchmark's average duration.
In rising rate environments, the average
duration will tend to be equal to or less
than the benchmark and in falling rate
environments, the average duration will be
longer than the benchmark.
o Yield Curve Analysis. The yield curve shape
is assessed to identify the risk/reward
trade-off of maturity decisions and market
expectations of future interest rates.
o Sector Selection. Sectors are overweighted
or underweighted relative to the benchmark
based on sector analysis and market
opportunities. Sectors are broadly defined
to include U.S. Treasury securities, U.S.
Government Agency securities, corporate
securities, mortgage-backed securities,
asset-backed securities and money market
securities. The Portfolio Manager may
further evaluate groupings within sectors
such as various industry groups within the
corporate securities sector (e.g., finance,
industrials, utilities, etc.).
o Security Selection. The Portfolio Manager
emphasizes individual securities with
positive credit fundamentals, liquidity and
relative value within their respective
sectors are emphasized.
The Portfolio invests in non-government
securities only if rated Baa3 or better by
Moody's or BBB- or better by Standard & Poor's
(S&P) or, if not rated by Moody's or S&P, if the
Portfolio Manager determines that they are of
comparable quality. Money market securities must
be rated tier one or tier two by Moody's (P-1 or
P-2) or S&P (A-1+, A-1 or A-2), or determined to
be of comparable quality by the Portfolio
Manager. For a description of bond ratings,
please refer to the Statement of Additional
Information.
Various security types are eligible for
investment including:
o corporate securities o mortgage-backed
securities
o asset-backed o variable and floating
securities rate securities
63
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
o U.S. treasury securities and U.S. Government
Agency securities
o money market securities such as commercial
paper, certificates of deposit and bankers'
acceptances
o repurchase agreements and reverse repurchase
agreements
o U.S. dollar-denominated foreign securities
o shares of other investment companies
o futures contracts, options and options on
futures contracts
o sovereign debt
o supranational organizations
o real estate investment trusts (REITS)
In addition, private placements of debt
securities (which are often restricted
securities) are eligible for purchase along with
other illiquid securities, subject to appropriate
limits.
The Portfolio may borrow up to 10% of the value
of its net assets. This amount may be increased
to 25% for temporary purposes.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INCOME RISK
o CREDIT RISK o INTEREST RATE RISK
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE ING Investment Management LLC ("ING Investment")
ON THE (or investment advisers acquired by ING
PORTFOLIO Investment Management) has managed the Portfolio
MANAGER since August 13, 1996. ING Investment Management
is engaged in the business of providing
investment advice to affiliated insurance and
investment companies and institutional clients
possessing portfolios, which, as of December 31,
1999, were valued at approximately $27.6 billion.
ING Investment is a subsidiary of ING Groep N.V.
and is affiliated with Directed Services, Inc.
The address of ING Investment is 5780 Powers
Ferry Road, N.W., Suite 300, Atlanta, Georgia
30327.
The Portfolio is managed by a team of three
investment professionals led by Ms. Jennifer J.
Thompson, CFA. Ms. Thompson has been employed by
ING Investment as an investment professional
since 1998 and has seven years investment
experience.
ING Investment also manages the Liquid Asset
Portfolio.
64
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
PORTFOLIO
MANAGER Baring International Investment Limited
INVESTMENT
OBJECTIVE High total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in high-grade
STRATEGY fixed income securities, both foreign and
domestic. The Portfolio normally primarily
invests in:
o obligations issued or guaranteed by foreign
national governments, or their agencies,
instrumentalities or political subsidiaries
o U.S. Government securities
o debt securities issued or guaranteed by
supranational organizations, considered to be
"government securities"
o non-government foreign and domestic debt
securities, including corporate debt
securities, bank obligations, mortgage-backed
or asset-backed securities, and repurchase
agreements
The Portfolio may invest in securities issued in
any currency and may hold foreign currencies
normally in at least six different countries,
including the U.S., although the Portfolio may at
times invest all of its assets in a single
country. The Portfolio's assets will be invested
principally within, or in the currencies of:
o Australia o United States
o Canada o Scandinavia
o Japan o Western Europe
o New Zealand o European Community
When U.S. securities offer superior opportunities
for achieving the Portfolio's investment
objective, the Portfolio may invest substantially
all of its assets in securities of U.S. issuers
or securities denominated in U.S. dollars. The
Portfolio may also acquire securities and
currency in less developed and developing
countries.
The Portfolio may invest in debt securities of
any type of issuer, including foreign and
domestic corporations, the 100 largest foreign
commercial banks in terms of total assets, and
other business organizations, domestic and
foreign governments and their political
subdivisions, including the U.S. Government, its
agencies, and authorities or instrumentalities.
The Portfolio may invest in debt securities with
varying maturities, which generally will not
exceed 10 years. The average maturity of the
Portfolio's debt portfolio will be shorter when
interest rates worldwide or in a particular
country are expected to rise, and longer when
interest rates are expected to fall. The
majority of the Portfolio's investments are rated
within the three highest rating categories of
Standard & Poor's (AAA, AA, A) or Moody's (Aaa,
Aa or A) or if unrated, considered by the
Portfolio Manager to be of equivalent quality.
For a description of bond ratings, please refer
to the Statement of Additional Information.
65
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
The Portfolio Manager allocates the Portfolio's
investments among those markets, companies and
currencies that offer the most attractive
combination of high income and principal
stability. In evaluating investments for the
Portfolio, the Portfolio Manager analyzes
relative yields and the appreciation potential of
securities in particular markets, world interest
rates and monetary trends, economic, political
and financial market conditions in different
countries, credit quality, and the relationship
of individual foreign currencies to the U.S.
dollar. The Portfolio Manager also relies on
internally and externally generated financial,
economic, and credit research to evaluate
alternative investment opportunities.
Frequency of portfolio turnover will not be a
limiting factor if the Portfolio Manager
considers it advantageous to purchase or sell
securities. The Portfolio Manager anticipates
that the portfolio turnover rate generally will
not exceed 300%. A higher rate of portfolio
turnover may result in correspondingly higher
portfolio transaction costs that would have to be
borne directly by the Portfolio and ultimately by
the shareholders.
The Portfolio is non-diversified and, when
compared with other funds, may invest a greater
portion of its assets in a particular issuer. A
non-diversified portfolio has greater exposure to
the risk of default or the poor earning of the
issuer.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o CREDIT RISK
o INCOME RISK o CALL RISK
o INTEREST RATE RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies 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 Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar Terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
o EMERGING MARKET RISK. 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 after investments in those
currencies by the Portfolio. Inflation and
rapid fluctuations in inflation rates
66
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
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 (may
be unable to transfer currency from a given
country); or creation of government monopolies.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Baring International Investment Limited ("Baring
ON THE International") has managed the Portfolio since
PORTFOLIO the Portfolio's inception. Baring International
MANAGER is a subsidiary of Baring Asset Management
Holdings Limited ("Baring"). Baring is the
parent of the world-wide group of investment
management companies that operate under the
collective name "Baring Asset Management" and is
owned by ING Groep N.V., a publicly traded
company based in the Netherlands with worldwide
insurance and banking subsidiaries. The address
of Baring International is 155 Bishopsgate,
London.
Baring Asset Management provides global
investment management services to U.S. investment
companies and maintains major investment offices
in Boston, London, Hong Kong and Tokyo. Baring's
predecessor corporation was founded in 1762.
Baring Asset Management provides advisory
services to institutional investors, offshore
investment companies, insurance companies and
private clients. As of December 31, 1999, Baring
Asset Management managed approximately $56.2
billion of assets.
The following person at Baring International is
responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Paul Thursby Investment Manager
Mr. Thursby has been an Investment Manager
with Baring International since 1991 and
has over 20 years of investment experience.
Baring International also manages the Hard Assets
Portfolio, the Emerging Markets Portfolio and the
Developing World Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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FULLY MANAGED PORTFOLIO
PORTFOLIO
MANAGER T. Rowe Price Associates, Inc.
INVESTMENT
OBJECTIVE Over the long-term, a high total investment
return, consistent with the preservation of
capital and with prudent investment risk.
PRINCIPAL The Portfolio pursues an active asset allocation
INVESTMENT strategy whereby investments are allocated among
STRATEGY three asset classes - equity securities, debt
securities and money market instruments. The
Portfolio invests primarily in the common
stocks of established companies the Portfolio
Manager believes to have above-average
potential for capital growth. Common stocks
typically compose at least half of the Portfolio's
total assets. The remaining assets are generally
invested in other securities, including
corporate and government debt, convertibles,
warrants, preferred stocks, foreign
securities, futures, and options, in pursuit
of its asset allocation strategy.
The Portfolio's common stocks generally fall into
one of two categories:
o the larger category comprises long-term core
holdings whose purchase prices, when bought,
are considered low in terms of company assets,
earnings, or other factors
o the smaller category comprises opportunistic
investments whose prices are expected by the
Portfolio Manager to rise in the short term
but not necessarily over the long term.
Since the Portfolio Manager attempts to
prevent losses as well as achieve gains, it
typically uses a value approach in selecting
investments. Its in-house research team
seeks to identify companies that seem
undervalued by various measures, such as
price/book value, and may be temporarily out
of favor, but have good prospects for capital
appreciation. The Portfolio Manager may
establish relatively large positions in
companies it finds particularly attractive
The Portfolio's approach differs from that of
many other stock funds. The Portfolio Manager
works as hard to reduce risk as to maximize gains
and may realize gains rather than lose them in
market declines. In addition, the Portfolio
Manager searches for the best risk/reward values
among all types of securities. The portion of
the Portfolio invested in a particular type of
security, such as common stocks, results largely
from case-by-case investment decisions, and the
size of the Portfolio's cash reserve may reflect
the Portfolio Manager's ability to find companies
that meet valuation criteria rather than his
market outlook.
The Portfolio may sell securities for a variety
of reasons, such as to secure gains, limit
losses, or redeploy assets into more promising
opportunities.
DEBT SECURITIES. Debt securities, including
convertible bonds, may often constitute between
25% and 50% of the Portfolio's overall portfolio.
The Portfolio may purchase debt securities of any
maturity. 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 15% of the
Portfolio's assets in debt securities that are
rated below investment-grade or, if not rated, of
equivalent quality. For a description of bond
ratings, please refer to the Statement of
Additional Information.
MONEY MARKET INSTRUMENTS. If there are remaining
assets available for investment, the Portfolio
Manager may invest the balance in any of the
following money market instruments with remaining
maturities not exceeding one year:
(1) shares of the Reserve Investment Fund, an
internally managed money market fund of
T. Rowe Price
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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(2) U.S. government obligations
(3) negotiable certificates of deposit, bankers'
acceptances and fixed time deposits and
other obligations of domestic banks that have
more than $1 billion in assets and are
members of the Federal Reserve System or are
examined by the Comptroller of the Currency
whose deposits are insured by the Federal
Deposit Insurance Corporation
(4) commercial paper rated at the date of purchase
in the two highest rating categories
(5) repurchase agreements
The Portfolio also may invest in short-term U.S.
dollar denominated obligations of foreign banks
if, at the time of purchase, such banks have more
than $1 billion in assets.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
A sizable cash or fixed income position
may hinder the fund from participating fully in a
strong, rapidly rising bull market. In addition,
significant exposure to bonds increases the risk that
the fund's share value could be hurt by rising
interest rates or credit downgrades or deaults.
Convertible securities are also exposed to price
fluctuations of the company's stock.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o CALL RISK o INCOME RISK
o MARKET AND COMPANY o CREDIT RISK
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o VALUE INVESTING RISK. A particular risk of
the Portfolio's value or "contrarian"
approach is that some holdings may not
recover and provide the capital growth
anticipated or a stock judged to be
undervalued may actually be appropriately
priced. If the Portfolio has large
holdings in a relatively small number of
companies, disappointing performance by those
companies will have a more adverse impact on
the Portfolio than would be the case with a
more diversified fund.
The Portfolio Manager's opportunistic trading
approach and willingness realize gains could result
in higher taxable capital gain distributions than
other stock funds. A sizable cash or fixed income
position may hinder the fund from participating
fully in a strong, rapidly rising bull market.
In addition, significant exposure to bonds inreases
the risk that the fund's share value could be hurt by
rising interest rates or credit downgrades or defaults.
Convertible securities are also exposed to price
fluctuations of the company's stock.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE T. Rowe Price Associates, Inc. has managed the
ON THE Portfolio since January, 1995. T. Rowe Price was
PORTFOLIO founded in 1937 by the late Thomas Rowe Price, Jr.
MANAGER As of December 31, 1999, the firm and its affiliates
managed over $179 billion in assets. The
address of T. Rowe Price is 100 East Pratt Street,
Baltimore, Maryland 21202.
The Portfolio is managed by an Investment
Advisory Committee. Richard P. Howard,
the Committee Chair, has day-to-day
responsibility for managing the Portfolio
and works with the Committee in developing and
executing the Portfolio's investment program.
Mr. Howard has been Chairman of the Committee
since 1995. He joined T. Rowe Price in 1982 and
has been managing investments since 1989.
T. Rowe Price also manages the Equity Income
Portfolio.
74
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
TOTAL RETURN PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Above-average income (compared to a portfolio
entirely invested in equity securities)
consistent with the prudent employment of
capital. A secondary goal is the reasonable
opportunity for growth of capital and income.
PRINCIPAL
INVESTMENT The Portfolio is a "balanced fund," and invests
STRATEGY in a combination of equity and fixedincome
securities. Under normal market conditions, the
Portfolio invests:
o at least 40%, but not more than 75%, of its
assets in common stocks and related
securities (referred to as equity securities)
such as preferred stock, bonds, warrants or
rights convertible into stock, and depositary
receipts for those securities
o at least 25% of its net assets in non-
convertible fixed income securities.
The Portfolio may vary the percentage of its
assets invested in any one type of security
(within the limits described above) based on the
Portfolio Manager's interpretation of economic
and money market conditions, fiscal and monetary
policy and underlying security values.
EQUITY PORTION. The Portfolio Manager uses a
bottom-up, as opposed to a top-down, investment
style in managing the Portfolio. This means that
securities are selected based on fundamental
analysis (such as an analysis of earnings, cash
flows, competitive position and management abilities)
performed by the Portfolio Manager and its
group of equity research analysts and
generally not selected based on the industry in
which they belong.
While the Portfolio may invest in all types of
equity securities, the Portfolio Manager
generally purchases equity securities of
companies that the Portfolio Manager believes are
undervalued in the market relative to their long-
term potential. The Portfolio Manager deems
equity securities of companies to be undervalued
where:
o they are viewed by the Portfolio Manager as
being temporarily out of favor in the market
due to any of the following:
o a decline in the market
o poor economic conditions
o developments that have affected or may affect
the issuer of the securities
or the issuer's industry
o the market has overlooked them
Undervalued equity securities generally have low
price-to-book, price-to-sales and/or price-to-
earnings ratios. The Portfolio focuses on
undervalued equity securities issued by companies
with relatively large market capitalizations
(i.e., market capitalizations of $5 billion or
more).
As noted above, the Portfolio's investments in
equity securities include convertible securities.
A convertible security is a security that may be
converted within a specified
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
period of time into
a certain amount of common stock of the same or a
different issuer. A convertible security
generally provides:
o a fixed income stream
o the opportunity, through its conversion
feature, to participate in an increase in the
market price of the underlying common stock.
FIXED INCOME PORTION. The Portfolio invests in
securities that pay a fixed interest rate,
including:
o U.S. government securities, which are bonds
or other debt obligations issued by, or whose
principal and interest payments are
guaranteed by, the U.S. government or one of
its agencies or instrumentalities,
o mortgage-backed and asset-backed securities,
which represent interest in a pool of assets
such as mortgage loans, car loan receivables,
or credit card receivables. These
investments entitle the Portfolio to a share
of the principal and interest payments made
on the underlying mortgage, car loan, or
credit card. For example, if the Portfolio
invests in a pool that includes your mortgage
loan, a share of the principal and interest
payments on your mortgage would pass to the
Portfolio, and
o corporate bonds, which are bonds or other
debt obligations issued by corporations or
other similar entities.
In selecting fixed income investments for the
Portfolio, the Portfolio Manager considers the
views of its group of fixed income portfolio
managers and research analysts. This group
periodically assesses the three-month outlook for
various segments of the fixed income markets.
This three-month "horizon" outlook is used as a
tool in making or adjusting the Portfolio's asset
allocations to various segments of the fixed
income markets. In assessing the credit quality
of fixed-income securities, the Portfolio Manager
does not rely solely on the credit ratings
assigned by credit rating agencies, but rather
performs its own independent credit analysis.
The Portfolio may invest up to 20% of its assets
in foreign securities, including securities of
companies in emerging or developing markets, and
up to 20% of its assets in lower rated
nonconvertible fixed income securities and
comparable unrated securities. The Portfolio may
invest with no limitation in mortgage pass-through
securities and American Depositary Receipts.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o INCOME RISK o CREDIT RISK
o CALL RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o ALLOCATION RISK. The Portfolio will allocate
its investments between equity and fixed
income securities, and among various segments
of the fixed income markets, based upon
judgements made by the Portfolio Manager.
The Portfolio could miss attractive
investment opportunities by underweighting
markets where there are
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
significant returns,
and could lose value by overweighting markets
where there are significant declines.
o CONVERTIBLE SECURITIES RISK. Convertible
securities, like fixed income securities,
tend to increase in value when interest rates
decline and decrease in value when interest
rates rise. The market value of a
convertible security also tends to increase
as the market value of the underlying stock
rises and decrease as the market value of the
underlying stock declines.
o EMERGING MARKET RISK. 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 after investments in those
currencies by the Portfolio. 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 (may
be unable to transfer currency from a given
country); or creation of government monopolies.
o UNDERVALUED SECURITIES RISK. Prices of
securities react to the economic condition of
the company that issued the security. The
Portfolio equity investments in an issuer may
rise and fall based on the issuer's actual
and anticipated earnings, changes in
management and the potential for takeovers
and acquisitions. The Portfolio Manager
invests in securities that are undervalued
based on its belief that the market value of
these securities will rise due to anticipated
events and investor perceptions. If these
events do not occur or are delayed, or if
investor perceptions about the securities do
not improve, the market price of these
securities may not rise or may fall.
o HIGH YIELD BOND RISK. High yield bonds
(commonly referred to "junk bonds") generally
provide greater income and increased
opportunity for capital appreciation than
investments in higher quality debt
securities, but they also typically have
greater potential price volatility and
principal and income risk. High yield bonds
are not considered investment grade.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies 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 Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTFOLIO MFS is America's oldest mutual fund organization.
MANAGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
subsidiary of Sun Life Assurance Company of
Canada (referred to as "Sun Life"). Sun Life, a
mutual life insurance company, is one of the
largest international life insurance companies
and has been operating in the U.S. since 1895.
As of December 31, 1999, MFS managed net assets
of approximately $136.72 billion (approximately
$109.5 billion in equity securities and $10.7
billion in securities of foreign issuers and
foreign denominated securities of U.S. issuers)
on behalf of approximately 3.7 million investor
accounts. The address of MFS is 500 Boylston
Street, Boston, Massachusetts 02116.
The Portfolio is managed by a portfolio management
team consisting of five members. David M. Calabro,
a Senior Vice President of MFS, heads the portfolio
management team and manages the common stock portion
of the Portfolio. Mr. Calabro has been employed by
MFS as a portfolio manager since 1992.
MFS also manages the Mid-Cap Growth Portfolio and
the Research Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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EQUITY INCOME PORTFOLIO
PORTFOLIO
MANAGER T. Rowe Price Associates, Inc.
INVESTMENT Substantial dividend income as well as long-term
OBJECTIVE growth of capital.
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its assets in the common stocks of well-
STRATEGY established companies paying above-average
dividends. The Portfolio Manager typically
employs a "value" approach in selecting
investments. The Portfolio Manager's in-house
research team seeks companies that appear to be
undervalued by various measures and may be
temporarily out of favor, but have good prospects
for capital appreciation and dividend growth.
In selecting investments, the Portfolio Manager
generally looks for companies with the following:
o an established operating history.
o above-average dividend yield relative to the
S&P 500.
o low price/earnings ratio relative to the S&P
500.
o a sound balance sheet and other positive
financial characteristics.
o low stock price relative to a company's
underlying value as measured by assets, cash
flow or business franchises.
While most of the Portfolio's assets will be
invested in U.S. common stocks, it may also
invest in other securities, including foreign
securities, debt securities, futures and options,
in keeping with its objectives. The Portfolio
may also invest in shares of the Reserve
Investment Fund, an internally managed money
market fund of T. Rowe Price.
The Portfolio's emphasis on stocks of established
companies paying high dividends and its potential
investments in fixed income securities may limit
its potential for appreciation in a broad market
advance. Such securities may also be hurt when
interest rates rise sharply. Also, a company may
reduce or eliminate its dividend.
The Portfolio may sell securities for a variety
of reasons, such as to secure gains, limit
losses, or redeploy assets into more promising
opportunities.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following principal additional risk:
o VALUE INVESTING RISK. A particular risk of
the Portfolio's value or "contrarian"
approach is that some holdings may not
recover and provide the capital growth
anticipated or a stock judged to be
undervalued may actually be appropriately
priced. If the Portfolio has large
holdings in a relatively small number of
companies, disappointing performance by those
companies will have a more adverse impact on
the Portfolio than would be the case with a
more diversified fund.
This prospectus does not describe all of the risks
of every technique, strategy or temporary defensive
position that the Portfolio may use. For such
information, please refer to the Statement of
Additional Information.
The Porfolio's emphasis on stocks of established
companies paying high dividends and its potential
investments in fixed income securities may limit its
potential for appreciation in a broad market advance.
Such securities may also be hurt when interest
rates rise sharply. Also, a company may reduce or
eliminate its dividend.
MORE T. Rowe Price Associates, Inc. has managed the
ON THE Portfolio since March 1, 1999. Prior to that,
PORTFOLIO different firms at different times served as
MANAGER portfolio manager. T. Rowe Price was founded in
1937 by the late Thomas Rowe Price, Jr. As of
December 31, 1999, the firm and its affiliates
managed over $179 billion in assets.
The address of T. Rowe Price is 100 East Pratt
Street, Baltimore, Maryland 21202.
71
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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The Portfolio is managed by an Investment
Advisory Committee. Brian Rogers, as
Committee Chair, has day-to-day
responsibility for managing the Portfolio and
works with the Committee in developing and
executing the Portfolio's investment program.
Mr. Rogers has been Chairman of the Committee
since March 1999. He joined T. Rowe Price in
1982.
T. Rowe Price also manages the Fully Managed
Portfolio.
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DESCRIPTION OF THE PORTFOLIOS
- -------------------------------------------------------------------------
INVESTORS PORTFOLIO
PORTFOLIO
MANAGER Salomon Brothers Asset Management, Inc.
INVESTMENT
OBJECTIVE Seek long-term growth of capital. Current income is a
secondary objective.
PRINCIPAL The Portfolio invests primarily in equity securities
INVESTMENT of U.S. companies. The Portfolio may also invest in other
STRATEGY equity securities. To a lesser degree, the Portfolio invests in
income producing securities such as debt securities.
The Portfolio Manager emphasizes individual security selection
while spreading the Portfolio's investments across industries,
which may help to reduce risk. The Portfolio Manager focuses on
established large capitalization companies, defined by the
Portfolio Manager as companies with over $5 billion in market
capitalization, seeking to identify those companies with solid
growth potential at reasonable values. The Portfolio Manager
employs fundamental analysis to analyze each company in detail,
ranking its management, strategy and competitive market position.
In selecting individual companies for investment, the Portfolio
Manager looks for the following:
o Long-term history of performance
o Competitive market position
o Competitive products and services
o Strong cash flow
o High return on equity
o Strong financial condition
o Experienced and effective management
o Global scope
Investment ideas are subjected to extensive, fundamental analysis,
focusing on four key criteria:
o Operating characteristics
o Financial character
o Quality of management
o Valuation
Only companies that pass the Portfolio Manager's strict, in-depth
research and debate are eligible for purchase. The Portfolio
Manager's bottom-up approach focuses on creating an information
advantage through a thorough understanding of company
fundamentals.
14
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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PRINCIPAL Any investment in the Portfolio is subject to the following
RISKS principal risks described under "Introduction -- General Risk
Factors":
o Manager Risk
o Market and Company Risk
o Call Risk
o Income Risk
o Interest Rate Risk
o Credit Risk
o Maturity Risk
An investment in the Portfolio is subject to the following
additional principal risk:
o Growth Investing Risk. Growth stocks may be more
volatile than other stocks because they are more sensitive
to investor perceptions of the issuing company's growth
potential. Growth-oriented funds will typically
underperform when value investing is in favor.
This prospectus does not describe all of the risks of every
technique, strategy or temporary defensive position that the
Portfolio Manager may use. For such information, please refer
to the Statement of Additional Information.
MORE ON Salomon Brothers Asset Management, Inc. (SBAM) is a full-service,
THE global investment management organization and is wholly owned by
PORTFOLIO Salomon Smith Barney Holdings Inc., which is a subsidiary of
MANAGER Citigroup Inc. SBAM has been registered as a U.S. Investment
Advisor since 1989. As of December 31, 1999, SBAM manages over
$30 billion in assets, including a wide spectrum of equity and
fixed income products for both institutional and private investors,
including corporations, pension funds, public funds, central banks,
insurance companies, supranational organizations, endowments
and foundations. The headquarters of SBAM is located at 7 World
Trade Center New York City, NY 10048. Additionally, the firm
maintains investment management offices in Frankfurt, London,
Hong Kong and Tokyo.
Name Position and Recent Business Experience
---- ---------------------------------------
Ross Margolies Managing Director and Senior Portfolio Manager
Mr. Margolies has been working with insurance
companies throughout his career, including in
his previous positions at Lehman Brothers and
Prudential Securities. Prior to working for
SBAM, he served as Vice President in various
investment management positions for three years
at Guy Carpenter Corporation, one of the
world's largest reinsurance brokerage
companies. Mr. Margolies began his career at
SBAM management in 1994, also working in
various investment management positions.
John Cunningham Senior Portfolio Manager and Director
Mr. Cunningham joined SBAM in 1995 and has
ten years experience in the industry. Prior
to becoming a Portfolio Manager, Mr. Cunningham
was an investment banker in the Global power
group at Salomon Brothers Inc. Mr. Cunningham
has served in various investment management
positions during his tenure at SBAM.
14
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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VALUE EQUITY PORTFOLIO
PORTFOLIO
MANAGER Eagle Asset Management, Inc.
INVESTMENT
OBJECTIVE Capital appreciation. Dividend income is a
secondary objective.
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of domestic and foreign issuers that
STRATEGY meet quantitative standards relating to financial
soundness and high intrinsic value relative to
price. The principal strategies used to select
the investments include:
(i) A three-step process to identify possible
value opportunities:
o Screening the universe of equity securities
for five key variables: low price-to-book
ratios; low price-to-sales ratios; low price-
to earnings ratios; attractive relative
dividend yield; and relative price-to-
earnings ratios
o Performing in-depth fundamental research on
individual companies including their industry
outlook and trends, strategy, management
strength, and financial stability
o Using a discounted free cash flow model to
identify securities that are trading at a
significant discount to their estimated
intrinsic value
(ii) Identifying stocks trading at a significant
discount to their underlying intrinsic value and
which fall into at least one of three basic
categories:
o "Pure" value opportunities: stocks that
appear attractive relative to the broader
market
o "Relative" value opportunities: stocks that
trade at a discount to the valuation
parameters that the market has historically
applied to them or their peer group
o "Event-driven" value opportunities: stocks
whose underlying value may be recognized as a
result of a realized or anticipated event
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o VALUE INVESTING RISK. A particular risk of
the Portfolio's value or "contrarian"
approach is that some holdings may not
recover and provide the capital growth
anticipated or a stock judged to be
undervalued may actually be appropriately
priced. If the Portfolio has large
holdings in a relatively small number of
companies, disappointing performance by those
companies will have a more adverse impact on
the Portfolio than would be the case with a
more diversified fund.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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MORE ON Eagle Asset Management, Inc. ("Eagle Asset") has
THE managed the Portfolio since its inception. Eagle
PORTFOLIO Asset is in the business of managing
MANAGER institutional client accounts and individual
accounts on a discretionary basis. Eagle Asset
is a subsidiary of Raymond James Financial, Inc.,
a publicly traded company whose shares are listed
on the New York Stock Exchange. As of December
31, 1999, Eagle Asset had approximately $6.3
billion in client assets under management. The
address of Eagle Asset is 880 Carillon Parkway,
St. Petersburg, Florida 33716.
The following person at Eagle Asset is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Address
---- ------------------------------------
Edward Cowart Managing Director and Portfolio Manager
Mr. Cowart assumed responsibility for
the day-to-day investment decisions of
the Value Equity Portfolio on August 17,
1999. Prior to that, he served as
Managing Director for a major investment
advisor since 1990. He has 27 years of
investment experience and is a Certified
Financial Analyst.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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RISING DIVIDENDS PORTFOLIO
PORTFOLIO
MANAGER Kayne Anderson Investment Management, LLC
INVESTMENT
OBJECTIVE Capital appreciation. A secondary objective is
dividend income.
PRINCIPAL The Portfolio invests in high-quality equity
INVESTMENT securities, most of which meet all of the
STRATEGY following quality criteria:
o regular dividend increases during the last 10
years
o at least 35% of earnings reinvested annually
o credit rating of "A" to "AAA" or its
equivalent
There may be, from time to time, other high-quality
securities in the Portfolio which meet most, but
not all, of the criteria, but which the Portfolio
Manager deems a suitable investment. In addition
to common stocks, the Portfolio may invest in
securities convertible into common stocks, or
rights or warrants to subscribe for or purchase
common stocks.
In selecting equity securities, the Portfolio
Manager screens databases to create a universe of
companies that meet the preceding criteria. The
Portfolio Manager then fundamentally analyzes the
securities. This research involves study of
competitive industry conditions, discussions with
company management, spreadsheet analysis, and
valuation projections. A proprietary computer
model compares expected rates of return for each
equity security in the universe. In deciding
whether to purchase a security, the Portfolio
Manager appraises a company's fundamental
strengths and relative attractiveness based on
its expected return.
The Portfolio generally holds at least 25 to 30
different securities. These securities are
diversified by industry. The security selection
discipline also avoids over-concentration in any
single sector or company.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o MANAGEMENT TECHNIQUE RISK. The Portfolio is
managed based on proprietary computer models
and techniques developed by the Portfolio
Manager. The Portfolio Manager cannot assure
you that such management techniques will correctly
predict earnings growth, or enable the Portfolio to
achieve its investment objective.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
75
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
MORE The Portfolio has been managed by Kayne Anderson
ON THE Investment Management, LLC or its predecessor
PORTFOLIO since the Portfolio's inception. Kayne Anderson
MANAGER has been in the business of furnishing investment
advice to institutional and private clients since
1984, when founded by Richard A. Kayne and John
E. Anderson. As of December 31, 1999, Kayne
Anderson managed portfolios amounting to
approximately $5.3 billion. The address of Kayne
Anderson is 1800 Avenue of the Stars, Suite 200,
Los Angeles, California 90067.
The following persons at Kayne Anderson are
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Allan M. Rudnick Chief Investment Officer and Portfolio
Manager
Mr. Rudnick has served as Chief
Investment Officer for Kayne Anderson
since 1989, and as President since 1999.
Paul Wayne Director of Research and Portfolio Manager
Mr. Wayne has been employed by Kayne
Anderson since 1992.
76
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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MANAGED GLOBAL PORTFOLIO
PORTFOLIO
MANAGER Capital Guardian Trust Company
INVESTMENT
OBJECTIVE Capital appreciation. Current income is only an
incidental consideration.
PRINCIPAL The Portfolio invests primarily in common stocks
INVESTMENT traded in securities markets throughout the
STRATEGY world. The Portfolio may invest up to 100% of
its total assets in securities traded in
securities markets outside the United States.
The Portfolio generally invests at least 65% of
its total assets in at least three different
countries, one of which may be the United States.
In unusual market circumstances where the
Portfolio Manager believes that foreign investing
may be unduly risky, all of the Portfolio's
assets may be invested in the United States. The
Portfolio may hold a portion of its assets in
cash or money market instruments.
The Portfolio may invest in any type of company,
large or small, with earnings showing relatively
strong growth trend, or in a company in which
significant further growth is not anticipated but
whose securities are thought to be undervalued.
The Portfolio may also invest in small and
relatively less well known companies.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o EMERGING MARKET RISK. 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 after investments in those
currencies by the Portfolio. 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 (may be unable to
transfer currency from a given country); or
creation of government monopolies.
103
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
o SMALL COMPANY RISK. Investing in securities
of small companies may involve greater risks
than investments in larger, more established
issuers. Smaller companies may have limited
product lines, markets or financial
resources. Their securities may trade less
frequently and in more limited volume than
the securities of larger, amore established
companies. In addition, smaller companies
are typically subject to greater changes in
earnings and business prospects than are
larger companies. Consequently, the prices
of small company stocks tend to rise and fall
in value more than other stocks. Although
investing in small companies offers potential
for above-average returns, the companies may
not "succeed, and the value of stock shares
could decline significantly.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies 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 Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE ON Capital Guardian Trust ("Capital Guardian"), located at
THE 333 South Hope Street, Los Angeles, CA 90071, began management
PORTFOLIO of the Portfolio on February 1, 2000. Capital Guardian
MANAGER is a wholly owned subsidiary of Capital Group International,
Inc. which is located at the same address as Capital Guardian.
Capital Guardian has been providing investment management
services since 1968 and manages over $123 billion
in assets as of December 31, 1999. Capital Guardian is a
Trust Company and, therefore, is not required to register
as an investment advisor pursuant to provisions of the
Investment Advisors Act of 1940.
18
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
The following persons at Capital Guardian are primarily
responsible for the day-to-day investment decisions of
the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
David I. Fisher Mr. Fisher is Chairman of the Board of
Capital Group International, Inc. with
portfolio management responsibilities
for Capital Guardian Trust Company, and
joined the Capital Guardian Trust
organization in 1969.
Eugene P. Stein Mr. Stein is an Executive Vice President
of Capital Guardian Trust Company, and
joined the Capital Guardian Trust
organization in 1972.
Christopher A. Reed Mr. Reed is a Vice President of Capital
International Research, Inc. with
portfolio management responsibilities
for Capital Guardian Trust Company,
and joined the Capital Guardian Trust
organization in 1993.
Michael R. Erickson Mr. Erickson is a Senior Vice President
and portfolio manager for Capital
Guardian Trust Company, and joined the
Capital Guardian Trust organization in
1986.
Richard N. Havas Mr. Haves is a Senior Vice President and
a portfolio manager with research
responsibilities for the Capital Guardian
Trust Company, and joined the Capital
Guardian Trust organization in 1985.
Nancy J. Kyle Ms. Kyle is a Senior Vice President of
Capital Guardian Trust Company, and
joined the Capital Guardian Trust
organization in 1990.
Robert Ronus Mr. Ronus is President of Capital
Guardian Trust Company, and joined the
Capital Guardian Trust organization
in 1972.
Lionel M. Sauvage Mr. Sauvage is a Senior Vice President
of Capital Guardian Trust Company, and
joined the Capital Guardian Trust
organization in 1986.
Nilly Sikorsky Ms. Sikorsky is President and Managing
Director of Capital international with
portfolio management responsibilities
for Capital Guardian Trust Company,
and joined the Capital Guardian Trust
organization in 1962.
Rudolf M. Staehelin Mr. Staehelin is a Senior Vice President
and Director of Capital international
Research, Inc. with portfolio management
responsibilities for Capital Guardian
Trust Company, and joined the Capital
Guardian Trust organization in 1981.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
LARGE CAP VALUE PORTFOLIO
Portfolio
Manager Capital Guardian Trust Company
Investment
Objective Seek long-term growth of capital and income
Principal The Portfolio Manager seeks to achieve the Portfolio's
Investment investment objective by investing, under normal market
Strategy conditions, primarily in equity and equity-related
securities of companies with market capitalization greater
than $1 billion at the time of purchase.
In selecting investments, greater consideration is given
to potential appreciation and future dividends than to current
income. The portfolio may hold American Depository Receipts
and other U.S. registered securities of foreign issuers which
are denominated in U.S. dollars.
PRINCIPAL Any investment in the Portfolio involves the possibility
RISKS that you will lose money or not make money. An investment
in the Portfolio is subject to the following principal
risks described under "Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the following
additional principal risks:
o GROWTH INVESTMENT RISK. Growth stocks may be more
volatile than other stocks because they are more
sensitive to investor perceptions of the issuing
company's growth potential. Growth-oriented funds
will typically underperform when value investing
is in favor.
o MID-CAP COMPANY RISK. Investment in securities of
mid-cap companies entails greater risks than investments
in larger, more established companies. Mid-cap companies
tend to have more narrow product lines, more limited
financial recourses and more limited trading market for
their stocks, as compared with larger companies. As a
result, their stock prices may decline significantly as
market conditions change.
This prospectus does not describe all of the risks of every
technique, strategy or temporary defensive position that the
Portfolio may use. For such information, please refer to the
Statement of Additional Information.
MORE ON Capital Guardian Trust ("Capital Guardian"), located at
THE 333 South Hope Street, Los Angeles, CA 90071, began management
PORTFOLIO of the Portfolio on February 1, 2000. Capital Guardian
MANAGER is a wholly owned subsidiary of Capital Group International,
Inc. which is located at the same address as Capital Guardian.
Capital Guardian has been providing investment management
services since 1968 and manages over $123 billion in
assets as of December 31, 1999. Capital Guardian is a
Trust Company and, therefore, is not required to register
as an investment advisor pursuant to provisions of the
Investment Advisors Act of 1940.
18
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
The following persons at Capital Guardian are primarily
responsible for the day-to-day investment decisions of
the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Donnalisa P. Barum Ms. Barum is a Senior Vice President and
Portfolio Manager. She joined the Capital
Guardian Organization in 1986 where she
served in various portfolio management
positions.
Michael R. Erickson Mr. Erickson is a Senior Vice President
and Portfolio Manager. He joined the
Capital Guardian organization in 1987
where he served in various investment
management capacities.
David Fisher Mr. Fisher is Chairman of the Board of
Capital Guardian Group International,
Inc. and Capital Guardian. He joined
the Gapital Guardian organization in
1969 where he served in various
portfolio management positions.
Theodore R. Samuels Mr. Samuels is a Senior Vice President
and Director for Capital Guardian, as
well as a Director of Capital
International Research, Inc. He joined
the Capital Guardian organization in 1981
where he served in various portfolio
management positions.
Eugene P. Stein Mr. Stein is Executive Vice President,
a Director, a portfolio manager, and
Chairman of the Investment Committee
for Capital Guardian. He joined the
Capital Guardian organization in 1972
where he served in various portfolio
manager positions.
Terry Berkemeier Mr. Berkemeier is a Vice President of
Capital International Research, Inc.
(an affiliate of Capital Guardian) with
U.S. equity portfolio management
responsibility in Capital Guardian.
He joined the Capial Guardian
Organization in 1992.
19
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- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
ALL CAP PORTFOLIO
PORTFOLIO
MANAGER Salomon Brothers Asset Management, Inc.
INVESTMENT Capital Appreciation through investment in securities
OBJECTIVE which the Portfolio Manager believes have above-average
capital appreciation potential
PRINCIPAL
INVESTMENT The Portfolio invests primarily in equity securities of
STRATEGY U.S. companies.
The Portfolio Manager emphasizes individual security
selection while spreading the Portfolio's investments
across industries, which may help to reduce risk. The Portfolio
Manager seeks to identify those companies that offer the greatest
potential for capital appreciation through careful fundamental
analysis of each company and its financial characteristics. The
Portfolio Manager evaluates companies of all sizes.
In selecting individual companies for investment, the Portfolio
Manager looks for the following:
o Share prices that appear to undervalue the company's
assets or do not adequately reflect factors such as
favorable industry trends, lack of investor recognition
or the short-term nature of earnings declines
o Special situations such as existing or possible changes
in management, corporate policies, capitalization or
regulatory environment which may boost earnings or the
market price of the company's shares
o Growth potential due to technological advances, new
products or services, new methods of marketing or
production, changes in demand or other significant new
developments which may enhance future earnings
Equity investments may involve added risks. Investors could lose
money on their investment in the Portfolio.
The Portfolio is non-diversified and, when compared with other
funds, may invest a portion of its assets in a particular issuer.
A non-diversified portfolio has greater exposure to the risk of
default or the poor earnings of the issuer.
The Portfolio may engage in active and frequent trading to
achieve its principal investment strategies. Frequent trading
increases transaction costs, which may affect the Portfolio's
performance.
PRINCIPAL Any investment in the Portfolio involves the possibility that
RISKS you will lose money or not make money. An investment in the
Portfolio is subject to the following principal risks described
under "Introduction -- General Risk Factors":
o Manager Risk
o Market and Company Risk
20
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
An investment in the Portfolio is subject to the following
additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be more
volatile than other stocks because they are more
sensitive to investor perceptions of the issuing
company's growth potential. Growth-oriented funds
will typically underperform when value investing
is in favor.
o SMALL COMPANY RISK. Investing in securities of small
companies may involve greater risks than investing in
larger, more established issuers. Smaller companies
may have limited product lines, markets or financial
resources. Their securities may trade less frequently
and in more limited volume than the securities of
larger, more established companies. In addition,
smaller companies are typically subject to greater
changes in earnings and business prospects than are
larger companies. Consequently, the prices of small
company stocks tend to rise and fall in value more
than other stocks. Although investing in small
companies offers potential for above-average returns,
the companies may not succeed, and the value of stock
shares could decline significantly.
o MID-CAP COMPANY RISK. Investment in securities of
mid-cap companies entails greater risks than investments
in larger, more established companies. Mid-cap companies
tend to have more narrow product lines, more limited
financial resources and a more limited trading market
for their stocks, as compared with larger companies.
As a result, their stock prices may decline significantly
as market conditions change.
o UNDERVALUED SECURITIES RISK. Prices of securities react
to the economic condition of the company that issued the
security. The Portfolio's equity investments in an issuer
may rise and fall based on the issuer's actual and
anticipated earnings, changes in management and the
potential for takeovers and acquisitions. The Portfolio
Manager invests in securities that are undervalued based
on its belief that the market value of these securities
will rise due to anticipated events and investor
perceptions. If these events do not occur or are delayed,
or if investor perceptions about the securities do not
improve, the market price of these securities may not
rise or may fall.
This prospectus does not describe all of the risks of every
technique, strategy or temporary defensive position that the
Portfolio may use. For such information, please refer to the
Statement Additional Information.
MORE ON Salomon Brothers Asset Management, Inc. (SBAM) is a full-
THE services, global investment management organization and
PORTFOLIO is a wholly-owned by Salomon Smith Barney Holdings Inc.,
MANAGER which is a subsidiary of Citigroup Inc. SBAM was registered
as a U.S. investment advisor in 1989. As of December 31,
1999, SBAM manages over $30 billion in assets, including a
wide spectrum of equity and fixed income products for both
institutional and private investors, including corporations,
pension funds, public funds, central banks, insurance
companies, supranational organizations, endowments and
foundations. The headquarters of SBAM is located at 7 World
Trade Center New York, NY 10048. Additionally, the firm
maintains investment management offices in Frankfurt, London,
Hong Kong and Tokyo.
21
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
Name Position and Recent Business Experience
---- ---------------------------------------
Ross Margolies Managing Director and Senior Portfolio Manager
Mr. Margolies has been working with insurance
companies throughout his career, including in
his previous positions at Lehman Brothers and
Prudential Securities. Prior to working for
SBAM, he served as Vice President in various
investment management positions for three years
at Guy Carpenter Corporation, one of the
world's largest reinsurance brokerage
companies. Mr. Margolies began his career at
SBAM management in 1994, also working in
various investment management positions.
Robert Donahue Director and Co-Portfolio Manager
Mr. Donahue has been employed by SBAM since 1987
and has managed various mutual funds and private
accounts during that time.
22
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
RESEARCH PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Long-term growth of capital and future income
PRINCIPAL The Portfolio normally invests at least 80% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stocks, convertible
securities and depositary receipts). The
Portfolio focuses on companies that the Portfolio
Manager believes have favorable prospects for
long-term growth, attractive valuations based on
current and expected earnings or cash flow,
dominant or growing market share and superior
management. The Portfolio may invest in
companies of any size. The Portfolio's
investments may include securities traded on
securities exchanges or in the over-the-counter
markets.
A committee of investment research analysts
selects portfolio securities for the Portfolio.
This committee includes investment analysts
employed by the Portfolio Manager and its
affiliate. The committee allocates the
Portfolio's assets among various industries.
Individual analysts then select what they view as
the securities best suited to achieve the
Portfolio's investment objective within their
assigned industry responsibility.
The Portfolio may invest in foreign equity
securities (including emerging market securities),
and may have exposure to foreign
currencies through its investment in these
securities, its direct holdings of foreign
currencies or through its use of foreign currency
exchange contracts for the purchase or sale of a
fixed quantity of foreign currency at a future
date.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o OTC INVESTMENT RISK. Investing in securities
traded on the over-the-counter (OTC)
securities market can involve greater risk
than is customarily associated with investing
in securities traded on the New York or
American Stock Exchanges since OTC securities
are generally securities of companies that
are smaller or newer than those listed on the
New York or American Stock Exchange. For
example, these companies often have limited
product lines, markets, or financial
resources, may be dependent for management on
one or a few key persons, and can be more
susceptible to losses. Also, their securities
may be thinly traded (and therefore have to
be sold at a discount from current prices or
sold in small lots over an extended period of
time), may be followed by fewer investment
research analysts and may be subject to wider
price swings and thus may create a greater
risk of loss than securities of larger
capitalization or established companies.
Shares of the Portfolio, therefore, are
subject to greater fluctuation in value than
83
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
shares of a conservative equity fund or of a
growth fund that invests entirely in proven
growth stocks.
o FOREIGN INVESTMENT RISK. In many foreign
countries there is less publicly available
information about companies 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 Portfolio may
encounter difficulties or be unable to pursue
legal remedies or obtain judgments in foreign
courts.
The
values of foreign investments may be affected by
changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTFOLIO MFS is America's oldest mutual fund organization.
MAMANGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
subsidiary of Sun Life Assurance Company of
Canada ("Sun Life"). Sun Life, a mutual life
insurance company, is one of the largest
international life insurance companies and has
been operating in the U.S. since 1895. As of
December 31, 1999, MFS managed net assets of
approximately $136.72 billion (approximately
$109.5 billion in equity securities and $10.7
billion in securities of foreign issuers and
foreign denominated securities of U.S. issuers)
on behalf of approximately 3.7 million investor
accounts. The address of MFS is 500 Boylston
Street, Boston, Massachusetts 02116.
The Portfolio is managed by a committee of
research analysts employed by MFS and MFS' investment
advisory affiliates.
MFS also manages the Mid-Cap Growth Portfolio and
the Total Return Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
PORTFOLIO
MANAGER A I M Capital Management Group, Inc.
INVESTMENT
OBJECTIVE Long-term capital growth
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities the Portfolio Manager believes to be
STRATEGY undervalued relative to the Portfolio Manager's
appraisal of the current or projected earnings of
the companies issuing the securities, or relative
to current market values of assets owned by the
companies issuing the securities or relative to
the equity markets generally.
The Portfolio also may invest in preferred stocks
and debt instruments that are consistent with its
investment objective. Although the Portfolio may
receive income from these investments, they will
be purchased for their potential for growth of
capital and not for their ability to generate
income. The Portfolio also may invest up to 25%
of its assets in foreign securities.
The Portfolio Manager focuses on undervalued
equity securities of:
o out-of-favor cyclical growth companies
o established growth companies that are
undervalued compared to historical relative
valuation parameters
o companies where there is early but tangible
evidence of improving prospects that are not
yet reflected in the price of the company's
equity securities
o companies whose equity securities are selling
at prices that do not reflect the current
market value of their assets and where there
is reason to expect realization of this
potential in the form of increased equity
values
The Portfolio Manager usually sells a particular
security when it believes the company no longer
fits into any of the above categories.
In anticipation of or in response to adverse
market conditions or for cash management
purposes, the Portfolio may hold all or a portion
of its assets in cash, money market securities,
bonds or other debt securities. As a result, the
Portfolio may not achieve its investment
objective.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o VALUE INVESTING RISK. A particular risk of
the Portfolio's value or "contrarian"
approach is that some holdings may not
recover and provide the capital growth
anticipated or a stock judged to be
undervalued may actually be appropriately
priced. If the Portfolio has large
holdings in a relatively small number of
companies, disappointing performance by those
companies will have a more adverse impact on
the Portfolio than would be the case with a
more diversified fund.
94
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE A I M Management, Inc. ("A I M Capital") has
ON THE managed the Portfolio since April 1, 1999.
PORTFOLIO A I M Capital is an indirect subsidiary of
MANAGER AMVESCAP, one of the world's largest independent
investment companies. As of December 31, 1999,
A I M Capital and its immediate parent, A I M
Advisors, Inc., managed approximately $161
billion in assets. The address of A I M Capital
is 11 Greenway Plaza, Houston, TX 77046.
The following persons at A I M Capital are
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Joel E. Dobberpuhl Senior Portfolio Manager
Mr. Dubberpuhl has been associated with
A I M Capital and/or its affiliate since
1990.
Robert A. Shelton Portfolio Manager
Mr. Shelton has been associated with A I M
Capital and/or its affiliates since
1995. Prior to 1995, he was a financial
analyst for CS First Boston.
Evan G. Harrel Senior Portfolio Manager
Mr. Harrel has been associated with A I M
Capital and/or its affiliates since
1998. From 1994 to 1998, he was Vice
President of Van Kamper American Asset
Management, Inc. and a portfolio manager
of various growth and equity funds.
A I M Capital also manages the Strategic Equity
Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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CAPITAL GROWTH PORTFOLIO
PORTFOLIO
MANAGER Alliance Capital Management L.P.
INVESTMENT
OBJECTIVE Long-term total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in common stocks
STRATEGY of companies where the potential for change
(earnings acceleration) is significant.
The Portfolio Manager applies a growth-oriented
investment philosophy defined by its:
o EARLY RECOGNITION OF CHANGE
o Value is created through the dynamics of
changing economic, industry and company
fundamentals
o The Portfolio Manager's willingness to invest
on incomplete information
o Judgment about the future, not merely
extrapolation of the past
o Invest in one to two year relative earnings
strength at an early stage and at a
reasonable price
o COMMITMENT TO FUNDAMENTAL RESEARCH
o Twenty-one fundamental analysts covering U.S.
companies
o EMPHASIS ON STOCK SELECTION
o Emphasis on companies and industries where
the potential for change (earnings
acceleration) is significant
o Remain fully invested
Although the Portfolio will focus on companies
with market capitalizations of up to $5 billion,
the Portfolio remains flexible and may invest in
securities of larger companies. The Portfolio
may also engage in short sales of securities it
expects to decline in price. The Portfolio may
invest a substantial portion of its assets in
securities issued by small, small-cap and mid-cap
companies. These companies may offer greater
opportunities for share price increase than
larger companies. Equity and debt securities in
which the Portfolio normally invests include
common and preferred stocks, convertible
securities, bonds, and notes.
The Portfolio may invest in:
o foreign securities (including in emerging or
developing markets)
o foreign currencies, options
o lower-quality, high yielding debt securities
(commonly called "junk bonds")
o "zero-coupon" bonds
o "payment-in-kind" bonds
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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At times the Portfolio may invest more than 25%
of its assets in securities of issuers in one or
more market sectors such as, for example, the
technology sector. A market sector may be made
up of companies in a number of related
industries. The Portfolio would only overweight
its investments in a particular market sector if
the investment return available from such
overweighing in that sector justifies any
additional risk associated with heavily investing
in that sector.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
under "Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o GROWTH INVESTING RISK. Growth stocks may be
more volatile than other stocks because they
are more sensitive to investor perceptions of
the issuing company's growth potential.
Growth-oriented funds will typically
underperform when value investing is in
favor.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
Alliance Capital Management L.P. has managed the
Portfolio since March 1,1999.
MORE Alliance Capital Management Corporation, its
ON THE general partner, is an indirect subsidiary of The
PORTFOLIO Equitable Life Assurance Society of the United
MANAGER States. Alliance Capital is a professional
investment management firm that provides advisory
services to individual and institutional
investors. As of December 31, 1999, Alliance
Capital managed approximately $368 billion of
assets. The address of Alliance Capital is 1345
Avenue of the Americas, New York, New York 10105.
The following person at Alliance Capital is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Alden Stewart Executive Vice President and Portfolio Manager
Mr. Stewart has been employed by Alliance
Capital since 1971.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
STRATEGIC EQUITY PORTFOLIO
PORTFOLIO
MANAGER A I M Capital Management, Inc.
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests principally in common
INVESTMENT stocks of medium- and small-sized growth
STRATEGY companies. The Portfolio Manager focuses on
companies it believes are likely to benefit from
new or innovative products, services or processes
as well as those that have experienced above-
average, long-term growth in earnings and have
excellent prospects for future growth. The
Portfolio Manager usually sells a particular
security when any of those factors materially
changes. As a result of the Portfolio's
investment strategy, the market prices of many of
the securities purchased and held by the
Portfolio may fluctuate widely. Any income
received from securities held by the Portfolio is
incidental.
The Portfolio comprises primarily of securities
of two basic categories of companies: (a) "core"
companies, which the Portfolio Manager considers
to have experienced above-average and consistent
long-term growth in earnings and to have
excellent prospects for outstanding future
growth, and (b) "earnings acceleration" companies
that the Portfolio Manager believes are currently
enjoying a dramatic increase in profits.
The Portfolio's strategy does not preclude
investment in large, seasoned companies that the
Portfolio Manager believes possess superior
potential returns similar to companies with
formative growth profiles. The Portfolio also
invests in established smaller companies (under
$500 million in market capitalization) which
offer exceptional value based upon substantially
above-average earnings growth potential relative
to market value.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be
more volatile than other stocks because they
are more sensitive to investor perceptions of
the issuing company's growth potential.
Growth-oriented funds will typically
underperform when value investing is in
favor.
o SMALL COMPANY RISK. Investing in securities
of small companies may involve greater risks
than investing in larger, more established
issuers. Smaller companies may have limited
product lines, markets or financial
resources. Their securities may trade less
frequently and in more limited volume than
the securities of larger, more established
companies. In addition, smaller companies
are typically subject to greater changes in
earnings and business prospects than are
larger companies. Consequently, the prices
of small company stocks tend to rise and fall
in value more than other stocks. Although
investing in small companies offers potential
for above-average returns, the companies may
not succeed, and the value of stock shares
could decline significantly.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies 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 Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgements in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE A I M Capital Management, Inc. ("A I M Capital")
ON THE has managed the Portfolio since March 1, 1999.
PORTFOLIO A I M Capital is an indirect subsidiary of
MANAGER AMVESCAP, one of the world's largest independent
investment companies. As of December 31, 1999,
A I M Capital and its immediate parent, A I M
Advisors, Inc., managed approximately $161
billion in assets. The address of A I M Capital
is 11 Greenway Plaza, Houston, Texas 77046.
The following persons at A I M Capital are
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Robert M. Kippes Senior Portfolio Manager
Mr. Kippes has been associated with A I M
Capital and/or its affiliates since
1989.
Charles D. Scavone Senior Portfolio Manager
Mr. Scavone has been associated with A I M
Capital and/or its affiliates since
1996. From 1994 to 1996, he was Associate
Portfolio Manager for Van Kamper Capital
Asset Management, Inc.
David P. Barnard Senior Portfolio Manager
Mr. Barnard has been associated with A I M
Capital since 1982.
Kenneth A. Zschappel Senior Portfolio Manager
Mr. Zschappel has been associated with
A I M Capital and/or its affiliates
since 1990.
Christopher Perras Portfolio Manager
Mr. Perras has been associated with AIM
Capital and/or its affiliates since 1999.
From 1997 to 1999, he was an equity analyst
at Van Wagoner Capital Management. From
1995 to 1997, he was Associate Portfolio
Manager for Van Kampen American Capital
Asset Management, Inc.
Steven A. Brase Portfolio Manager
Mr. Brase has been associated with AIM
Capital since 1998. From 1995 to 1998,
he was Associate Portfolio Manager and
Partner for Bricoleur Capital Management,
Inc.
Brant H. DeMuth Senior Portfolio Manager
Mr. DeMuth has been associated with AIM
Capital since 1996. From 1992 to 1996,
he was Portfolio Manager for Colorado's
Public Employee's Retirement Association.
A I M Capital also manages the Capital Appreciation Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
LARGE CAP GROWTH PORTFOLIO
PORTFOLIO
MANAGER
INVESTMENT Seek long-term growth of capital through investments
OBJECTIVE primarily in common stocks of established companies
with above average growth prospects. Dividend income
from investments will be incidental.
PRINCIPAL Under normal market conditions, at least 65% of the
INVESTMENT Portfolio will be invested in common stocks and
STRATEGY preferred stocks of companies that exceed $1 billion
in market capitalization. The Portfolio may also
invest in securities of companies that are undergoing
changes in management or product and marketing dynamics
that have not been reflected in reported earnings.
Additionally, the Portfolio may invest in foreign
securities.
The portfolio manager looks for the following when
considering investments for the Large Cap Growth
Portfolio:
o Growth in earnings and sales
o High return on equity
o Other strong financial data
o Attractive value in the opinion of the
Portfolio Manager
The Portfolio Manager believes that companies with
these characteristics generally enjoy a unique market
niche, a promising new product profile, and /or superior
management.
PRINCIPAL Stock in which the Portfolio will invest have
RISKS historically been more volatile than the broad stock
market. During periods of general market declines,
it should be expected that the Portfolio will decline
more than the market indices.
Any investment in the Portfolio involves the possibility
that you will lose or not make money. An investment in
the Portfolio is subject to the following principal risk
described under "Introduction - General Risk Factors":
o Manager Risk
o Market and Company Risk
An investment in the Portfolio is subject to the
following additional principal risk described under
"Description of the Portfolios - Large Cap Growth
Portfolio":
o Growth Investing Risk. Growth stocks may be more
volatile than other stocks because they are more
sensitive to investor perceptions of the issuing
company's growth potential. Growth-oriented funds
will typically underperform when value investing
is in favor.
o Foreign Investment and Currency Risk. In many
foreign countries there is less publicly available
information about companies 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 Portfolio may encounter difficulties or be
unable to pursue legal remedies or obtain judgments
in foreign courts.
The values of foreign investments may be affected by
changes in currency rates or exchange control regulations.
If the local currency gains strength against the U.S.
dollar, the value of the foreign security increases in
U.S. dollar terms. Conversely, if the local currency
weakens against the U.S. dollar, the value of the
foreign security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depository receipts, also are subject to
currency risk based on their related investments.
o Undervalued Securities Risk. Prices of securities
react to the economic condition of the company that
issued the security. The Portfolio equity
investments in an issuer may rise and fall based
on the issuer's actual and anticipated earnings,
changes in management and the potential for
takeovers and acquisitions. The Portfolio Manager
invests in securities that are undervalued based
on its belief that the market value of these
securities will rise due to anticipated events
and investor perceptions. If these events do
not occur or are delayed, or if investor perceptions
about the securities do not improve, the market
price of these securities may not rise or may fall.
This prospectus does not describe all of the risks of
every technique, strategy or temporary defensive position
that the Portfolio may use. For such information, please
refer to the Statement Additional Information.
MORE ON THE
PORTFOLIO
MANAGER
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
MID-CAP GROWTH PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Long-term growth of capital
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stocks, convertible
securities and depositary receipts) of companies
with medium market capitalizations (or "mid-cap")
which the Portfolio Manager believes have above-
average growth potential.
The Portfolio Manager defines mid-cap companies
as companies with market capitalizations equaling
or exceeding $250 million but not exceeding the
top range of the Russell Midcap Growth Index at
the time of the Portfolio's investment. The
Index is a widely recognized, unmanaged index
that consists of the 800 companies in the
Russell 1,000 Index, which contains the 1,000
largest companies in the United States. Companies
whose capitalization falls below $250 million or
exceeds the top of the Russell Midcap Growth
Index range after purchase continue to be
considered mid-cap companies for purposes of the
Portfolio's 65% investment policy. As of April
30, 1999, the top of the Russell Midcap Growth
Index was $47 billion. The Portfolio's
investments may include securities listed on a
securities exchange or traded in the over-the-
counter markets.
Growth companies are companies that the Portfolio
Manager considers well-run and poised for growth.
The Portfolio Manager looks particularly for
companies which demonstrate:
o a strong franchise, strong cash flows and a
recurring revenue stream
o a solid industry position, where there is
potential for high profit margins and
substantial barriers to new entry in the industry
o a strong management team with a clearly
defined strategy
o a catalyst that may accelerate growth
The Portfolio uses a bottom-up, as opposed to a
top-down, investment style in managing the
Portfolio. This means that securities are
selected based on fundamental analysis (such as
an analysis of earnings, cash flows, competitive
position and management's abilities) performed
by the Portfolio Manager and its group of equity
research analysts and not selected based on the
industry in which they belong.
The Portfolio may invest in foreign securities
(including emerging markets securities), and may
have exposure to foreign currencies through its
investment in these securities, its direct
holdings of foreign currencies or through its use
of foreign currency exchange contracts for the
purchase or sale of a fixed quantity of foreign
currency at a future date.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
The Portfolio is non-diversified and, when
compared with other funds, may invest a greater
portion of its assets in a particular issuer. A
non-diversified portfolio has greater exposure to
the risk of default or the poor earnings of the
issuer.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o MID-CAP COMPANY RISK. Investment in
securities of mid-cap companies entails
greater risks than investments in larger,
more established companies. Mid-cap
companies tend to have more narrow product
lines, more limited financial resources and a
more limited trading market for their stocks,
as compared with larger companies. As a
result, their stock prices may decline
significantly as market conditions change.
o OTC INVESTMENT RISK. Investing in securities
traded on the over-the-counter ("OTC")
securities market can involve greater risk
than is customarily associated with investing
in securities traded on the New York or
American Stock Exchanges since OTC securities
are generally securities of companies which
are smaller or newer than those listed on the
New York or American Stock Exchange. For
example, these companies often have limited
product lines, markets, or financial
resources, may be dependent for management on
one or a few key persons, and can be more
susceptible to losses. Also, their securities
may be thinly traded (and therefore have to
be sold at a discount from current prices or
sold in small lots over an extended period of
time), may be followed by fewer investment
research analysts and may be subject to wider
price swings and thus may create a greater
risk of loss than securities of larger
capitalization or established companies.
Therefore, shares of the Portfolio are
subject to greater fluctuation in value than
shares of a conservative equity fund or of a
growth fund which invests entirely in proven
growth stocks.
o EMERGING MARKETS RISK. 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 after the Portfolio investments in
those currencies. 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 (may
be unable to transfer currency from a given
country); or creation of government monopolies.
o FOREIGN INVESTMENT AND CURRENCY RISK. In many
foreign countries there is less publicly
available information about companies 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.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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Further, the Portfolio may encounter difficulties
or be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTOFLIO MFS is America's oldest mutual fund organization.
MANAGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
subsidiary of Sun Life Assurance Company of
Canada ("Sun Life"). Sun Life, a mutual life
insurance company, is one of the largest
international life insurance companies and has
been operating in the U.S. since 1895. As of
December 31, 1999, MFS managed net assets of
approximately $136.72 billion (approximately $109.5
billion in equity securities and $10.7 billion in
securities of foreign issuers and foreign
denominated securities of U.S. issuers) on behalf
of approximately $4.2 million investor accounts.
The address of MFS is 500 Boylston Street,
Boston, Massachusetts 02116.
The following person at MFS are primarily
responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Mark Regan Senior Vice President of MFS
Mr. Regan has been employed as a
portfolio manager by MFS since 1989.
David E. Vice President of MFS
Sette-Ducati
Mr. Sette-Ducati has been employed as a
portfolio manager by MFS since 1995.
MFS also manages the Research Portfolio and the
Total Return Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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SMALL CAP PORTFOLIO
PORTFOLIO
MANAGER Capital Guardian Trust Company
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL
INVESTMENT The Portfolio invests primarily in equity
STRATEGY securities of companies that have total market
capitalization within the range of companies
included in:
o Russell 2000 Growth Index
o Standard & Poor's Small Cap 600 Index
Both indexes are broad indexes of small
capitalization stocks. As of December 31, 1998,
the range of market capitalization companies in
the Russell Index was $4.42 million to $3.21
billion, the range of the market capitalization
companies in the S&P 600 Index was $18 million to
$3.34 billion, and the combined range was $4.42
million to $3.34 billion. The Portfolio may
invest up to 35% of its assets in companies
outside this combined range.
Equity securities in which the Portfolio may
invest include common or preferred stocks, or
securities convertible into or exchangeable for
equity securities, such as warrants and rights.
The Portfolio invests 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 because of 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.
The Portfolio may also hold up to 15% of its
assets in money market instruments and repurchase
agreements.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o SMALL CAP COMPANY RISK. Investing in
securities of small cap companies may involve
greater risks than investments in larger,
more established issuers. Smaller companies
may have limited product lines, markets or
financial resources. Their securities may
trade less frequently and in more limited
volume than the securities of larger, more
established companies. In addition, smaller
companies are typically subject to greater
changes in earnings and business prospects
than are larger companies. Consequently, the
prices of small company stocks tend to rise
and fall in value more than other stocks.
Although investing in small cap companies
offers potential for above-average returns,
the companies may not succeed and the value
of stock shares could decline significantly.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE ON Capital Guardian Trust ("Capital Guardian"), located at
THE 333 South Hope Street, Los Angeles, CA 90071, began management
PORTFOLIO of the Portfolio on February 1, 2000. Capital Guardian
MANAGER is a wholly owned subsidiary of Capital Group International,
Inc. which is located at the same address as Capital Guardian.
Capital Guardian has been providing investment management
services since 1968 and manages over $123 billion
in assets as of December 31, 1999. Capital Guardian is a
Trust Company and, therefore, is not required to register
as an investment advisor pursuant to provisions of the
Investment Advisors Act of 1940.
The following persons at Capital Guardian are primarily
responsible for the day-to-day investment decisions of
the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Michael R. Ericksen Mr Erickson is a Senior Vice President
and portfolio manager for Capital
Guardian Trust Company, and joined the
Capital Guardian Trust organization in
1986.
James S. Kang Mr. Kang is a Vice President for Capital
International Research, Inc. with research
and portfolio management responsibilities
with Capital Guardian Trust Company, and
joined the Capital Guardian Trust
organization in 1987.
Robert G. Kirby Mr Kirby is a Chairman Emeritus and a
portfolio manager of Capital Guardian
Trust Company, and was a founding officer
of the Capital Guardian Trust organization
in 1968.
Karen A. Miller Ms. Miller is a Vice President for Capital
International Research, Inc. with portfolio
management responsibilities for Capital
Guardian Trust Company, and joined the
Capital Guardian Trust organization in
1990.
Lawrence R. Solomon Mr Solomon is a Senior Vice President and
Director of Capital International Research,
Inc. with portfolio management
responsibilities for Capital Guardian Trust
Company, and joined the Capital Guardian
Trust organization in 1984.
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GROWTH PORTFOLIO
PORTFOLIO
MANAGER Janus Capital Corporation
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests primarily in common stocks
INVESTMENT of growth companies that have favorable
STRATEGY relationships between price/earnings ratios and
growth rates in sectors offering the potential
for above-average returns.
The Portfolio invests substantially in common
stocks the Portfolio Manager believes will
appreciate in value. The Portfolio Manager
generally takes a "bottom up" approach to
selecting companies. In other words, it seeks to
identify individual companies with earnings
growth potential that may not be recognized by
the market at large. It makes this assessment by
looking at companies one at a time, regardless of
size, country of organization, place of principal
business activity, or other similar selection
criteria. Income is not a significant
consideration when choosing investments for the
Portfolio.
The Portfolio may invest in companies of any size
and may invest a substantial portion of its
assets in securities issued by small and medium
size companies.
The Portfolio may also invest in:
o foreign securities (including in emerging or
developing markets)
o forward foreign currency contracts, futures
and options
o debt securities (including up to 35% in high-
yield/high-risk bonds)
When the Portfolio Manager believes that market
conditions are unfavorable for profitable
investing, or it is otherwise unable to locate
attractive investment opportunities, the
Portfolio's cash or similar investments may
increase. In other words, the Portfolio does not
always stay fully invested in stocks and bonds.
Cash or similar investments generally are a
residual--they represent the assets that remain
after the Portfolio Manager has committed
available assets to desirable investment
opportunities. Frequency of portfolio turnover
will not be a limiting factor if the Portfolio
Manager considers it advantageous to purchase or
sell securities. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be
more volatile than other stocks because they
are more sensitive to investor perceptions of
the issuing company's growth potential.
Growth-oriented funds will typically
underperform when value investing is in
favor.
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o SMALL COMPANY RISK. Investing in securities
of small companies may involve greater risks
than investing in larger, more established
issuers. Smaller companies may have limited
product lines, markets or financial
resources. Their securities may trade less
frequently and in more limited volume than
the securities of larger, more established
companies. In addition, smaller companies
are typically subject to greater changes in
earnings and business prospects than are
larger companies. Consequently, the prices
of small company stocks tend to rise and fall
in value more than other stocks. Although
investing in small companies offers potential
for above-average returns, the companies may
not succeed, and the value of stock shares
could decline significantly.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies 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 Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
o HIGH YIELD BOND RISK. High yield bonds
(commonly referred to "junk bonds") generally
provide greater income and increased
opportunity for capital appreciation than
investments in higher quality debt
securities, but they also typically have
greater potential price volatility and
principal and income risk. High yield bonds
are not considered investment grade.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Janus Capital Corporation has managed the
ON THE Portfolio since March 1, 1999. Janus Capital has
PORTFOLIO been an investment adviser since 1970, and
MANAGER provides advisory services to managed accounts
and investment companies. As of December 31,
1999, Janus Capital managed approximately $248.8
billion in assets. The address of Janus Capital
is 100 Fillmore Street, Denver, Colorado 80206.
The following person at Janus Capital is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Warren M. Lammert Executive Vice President
Mr. Lammert has been employed by Janus
Capital since 1987 and has managed
various other mutual funds and private
accounts during that time.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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REAL ESTATE PORTFOLIO
PORTFOLIO
MANAGER Prudential Real Estate Securities Investors
INVESTMENT
OBJECTIVE Capital appreciation. Current income is a
secondary objective.
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of companies in the real estate
STRATEGY industry that are listed on national exchanges or
the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). The
Portfolio Manager selects securities generally
for long-term investment.
The Portfolio invests the majority of its assets
in companies that have at least 50% of their
assets in, or that derive at least 50% of their
revenues from, the following sectors of the real
estate industry:
o ownership (including listed real estate
investment trusts)
o construction and development
o asset sales
o property management or sale
o other related real estate services
The Portfolio may invest more than 25% of its
assets in any of the above sectors.
The Portfolio also may invest in:
o equity, debt, or convertible securities of
issuers whose products and services are related
to the real estate industry
o financial institutions which issue or service
mortgages
o securities of companies unrelated to the real
estate industry but which have significant real
estate holdings believed to be undervalued
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o REAL ESTATE RISK. Although the Portfolio
will not invest in real estate directly, the
Portfolio may invest in real estate industry
companies, including real estate investment
trusts. As a result, the Portfolio may be
subject to certain risks associated with
direct ownership of real estate and the real
estate industry in general. 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, tenant credit
worthiness and ability to meet rent
obligations, increases in property taxes and
operating expenses, changes in zoning laws,
casualty or condemnation losses, limitations
on
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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rents, changes in neighborhood values, the
appeal of properties to tenants, leveraging
of interests in real estate, and increase in
interest rates.
In addition, real estate investment trusts
(called "REITs") may be affected by any changes
in the value of the underlying property owned
by the REIT or by the quality of any credit
extended. REITs are dependent upon management
skills. Some REITs may not be highly
diversified, and are therefore subject to the
risk of financing single or a limited number of
projects. REITs 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.
o INDUSTRY CONCENTRATION RISK. Since the
Portfolio invests primarily in securities of
companies in the real estate industry, the
Portfolio may be subject to greater risks and
market fluctuations than other portfolios
that are more diversified by industry.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Prudential Real Estate Securities Investors (PRESI),
ON THE located at Gateway Center 2, McCarter Highway &
PORTFOLIO Markets St., Newark, NJ 07102, is a public real
MANAGER estate securities unit of Prudential Real Estate
Investors, located at the same address. PRESI is
also a subsidiary of The Prudential Investment
Corporation of America (PIC), located at 100 Mulberry
Street, Gateway Center 3, Newark, NJ 07102. PRESI
provides both discretionary and non-discretionary
investment advisory services to its clientele which
consists of investment companies, employee retirement
plans and other institutional investors. As of
December 31, 1999, PRESI and its parent company managed
over $141 billion in assets.
PRESI is managed by a team of investment professionals
lead by Robert McConnaughey who joined PRESI as a
Managing Director and Senior Portfolio Manager in
October 1997 and who is primarily responsible for the
day-to-day investment decisions of the portfolio.
Prior to that he managed a range of real estate
securities funds for retail and institutional clients
since 1993.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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HARD ASSETS PORTFOLIO
PORTFOLIO
MANAGER Baring International Investment Limited
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in hard asset
INVESTMENT securities.
Hard asset securities in which the Portfolio may
invest include equity securities of hard asset
companies and debt securities, including
structured notes, whose value is linked to the
price of a hard asset commodity or a commodity
index. Hard asset companies are companies that
are directly or indirectly engaged significantly
in the exploration, development, production or
distribution of one or more of the following:
o precious metals
o ferrous and non-ferrous metals
o integrated oil
o exploration/production
o gas/other hydrocarbons
o forest products
o agricultural commodities
o other basic materials that can be priced
by a market
The Portfolio may invest in any of the
above sectors up to a maximum of 50%.
The Portfolio's investment strategy is based on
the belief that hard asset securities can protect
against eroding monetary values or a rise in
activity which consumes more of these commodities.
The Portfolio may invest in:
o securities of foreign issuers, including up
to 35% in South Africa
o companies not engaged in natural
resources/hard asset activities
o investment-grade corporate debt
o U.S. government or foreign obligations
o money market instruments
o repurchase agreements
o special classes of shares available only to
foreign persons in those markets that restrict
ownership of certain classes of equity to
nationals or residents of that country
o derivatives
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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Equity securities in which the Portfolio invests
may be listed on the U.S. or foreign securities
exchanges or traded over-the-counter, and
include:
o common stock o direct equity
interests in trusts
o preferred stock o joint ventures
o rights o "partly paid" securities
o warrants o partnerships
o "when-issued" o restricted securities
securities
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
The Portfolio is non-diversified and, when
compared with other funds, may invest a greater
portion of its assets in a particular issuer.
A non-diversified portoflio has greater exposure
to the risk of default or the poor earnings of
the issuer.
PRINCIPAL An investment in the Portfolio is subject to
RISKS the following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o HARD ASSET RISK. The production and
marketing of hard assets (commodities)
may be affected by actions and changes
in governments. Securities of hard asset
companies may be subject to broad
price fluctuations, reflecting volatility
of energy and basic materials
prices and possible instability of
supply of various hard assets. In addition,
some hard asset companies may also be subject
to the risks generally associated with
extraction of natural resources, such as the
risks of mining and oil drilling, and the
risks of the hazards associated with natural
resources, such as fire, drought, increased
regulatory and environmental costs.
o SECTOR CONCENTRATION RISK. Since the
Portfolio may invest up to 50% of its assets
in one particular hard asset sector, the
Portfolio may be subject to greater risks and
market fluctuations than other portfolios
that are more diversified by sector.
o INDUSTRY CONCENTRATION RISK. Since the
Portfolio invests primarily in securities of
companies engaged in natural resources/hard
asset activities and may concentrate in
securities of companies engaged in gold
operations, the Portfolio may be subject to
greater risks and market fluctuations than
other portfolios that are more diversified by
industry.
o FOREIGN INVESTMENT AND CURRENCY RISK. The
Portfolio may purchase securities in any
foreign country, developed or underdeveloped.
In many foreign countries, there is less
publicly available information about
companies 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 Portfolio may
encounter difficulties or be unable to pursue
legal remedies or obtain judgments in foreign
courts.
Since investment may be concentrated in South
Africa, 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 investment, may pose certain
risks to the Portfolio's
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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investments. If
aggravated by local or international developments,
such risk could have an adverse effect on
investment in South Africa, including the
Portfolio's investments and possibly, the
liquidity of the Portfolio and its ability to meet
shareholder redemption requests.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Baring International Investment Limited ("Baring
ON THE International") has managed the Portfolio since
PORTOFLIO March 1, 1999. Baring International is a
MANAGER subsidiary of Baring Asset Management Holdings
Limited ("Baring"). Baring is the parent of the
world-wide group of investment management
companies that operate under the collective name
"Baring Asset Management" and is owned by ING
Groep N.V., a publicly traded company based in
the Netherlands with worldwide insurance and
banking subsidiaries. The address of Baring
International is 155 Bishopsgate, London.
Baring Asset Management provides global
investment management services to U.S. investment
companies and maintains major investment offices
in Boston, London, Hong Kong and Tokyo. Baring's
predecessor corporation was founded in 1762.
Baring Asset Management provides advisory
services to institutional investors, offshore
investment companies, insurance companies and
private clients. As of December 31, 1999, Baring
Asset Management managed approximately $56.2
billion of assets.
The following person at Baring International is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Mark Latham Investment Manager
Mr. Latham has been an investment
professional with Baring International
Investment Limited and its ING affiliates
since 1987 and has 18 years of investment
experience.
Baring International Investment also manages the
Developing World Portfolio, Emerging Markets Portfolio
and the Global Fixed Income Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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DEVELOPING WORLD PORTFOLIO
PORTFOLIO
MANAGER Baring International Investment Limited
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Developing World Portfolio invests primarily
INVESTMENT in the equity securities of emerging market
STRATEGY companies. The Portfolio normally invests in at
least six "emerging market countries"
with no more than 35% of its assets in any one
country. Emerging market countries are those
that are identified as such in the Morgan Stanley
Capital International Emerging Markets Free Index,
or the International Finance Corporation Emerging
Market Index, or by the Portfolio Manager because
they have a developing economy or because their
markets have begun a process of change and are
growing in size and/or sophistication. As of the
date of this prospectus, the Portfolio Manager
considers the following to be emerging market
countries:
LATIN AMERICA ASIA EUROPE MIDDLE EAST
Argentina Bangladesh Czech Republic Israel
Brazil China* Greece Jordan
Chile India Hungary
Colombia Indonesia Poland AFRICA
Costa Rica Korea Russia Egypt
Jamaica Malaysia Turkey Ghana
Mexico Pakistan Croatia Ivory Coast
Peru Philippines Estonia Kenya
Trinidad and Sri Lanka Morocco
Tobago
Uruguay Taiwan Nigeria
Venezuela Thailand South Africa
Vietnam Tunisia
Hong Kong Zimbabwe
* Includes Chinese companies that are quoted on the
Hong Kong Stock Exchange.
The Portfolio Manager, when defining "emerging
markets", recognizes the International Finance
Corporation definition of an emerging market as
being those countries where the Gross Domestic
Product is less than U.S. $10,000 a year per capita.
In particular, the Portfoli Manager focuses
on the constituent countries of the Morgan Stanley
Emerging Free Index. However, there are countries,
which satisfy the emerging definition even though
they currently lie outside the Index.
The Portfolio Manager's philosophy is based on the
belief that superior long term results come from
identifying unrecognised growth investment opportunities
in countries and companies.
The Portfolio Manager's investment process seeks to
deliver superior risk adjusted returns by evaluating key
investment drivers at both the country and company level.
As a result of research into the key drivers of
Emerging market performance the Portfolio Manager has defined an
investment framework consisting of five critical drivers -
Growth, Liquidity, Currency, Management and Valuation.
Structured fundamental research takes place at the country
and company level using the discipline of the investment
framework. The research focuses on the key factors behind
each of the five drivers. For example, growth, it is the
quality and direction of GDP growth in a country or the
potential for earnings surprise at the company level that
is our focus. It is the structured fundamental research
that drives both the country and company selection decision
making.
Equity securities in which the Portfolio invests
are primarily common stock but may also include
other types of equity and equity derivative
securities. The Portfolio may invest 10% in debt
securities, rated below investment-grade.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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PRINCIPAL Any investment involves the possibility that you
RISKS will lose money or not make money. An investment
in the Portfolio is subject to the following
principal risks described under "Introduction --
General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o EMERGING MARKET RISK. 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 after investments in those
currencies by the Portfolio. 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 (may
be unable to transfer currency from a given
country); or creation of government monopolies.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies 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 Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar Terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their relative
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
106
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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MORE Baring International Investment Limited ("Baring
ON THE International") has managed the Portfolio since
PORTFOLIO March 1, 1999. Baring International is a
MANAGER subsidiary of Baring Asset Management Holdings
Limited ("Baring"). Baring is the parent of the
world-wide group of investment management
companies that operate under the collective name
"Baring Asset Management" and is owned by ING
Groep N.V., a publicly traded company based in
the Netherlands with worldwide insurance and
banking subsidiaries. The address of Baring
International is 155 Bishopsgate, London.
Baring Asset Management provides global
investment management services to U.S. investment
companies and maintains major investment offices
in Boston, London, Hong Kong and Tokyo. Baring's
predecessor corporation was founded in 1762.
Baring Asset Management provides advisory
services to institutional investors, offshore
investment companies, insurance companies and
private clients. As of December 31, 1999, Baring
Asset Management managed approximately $56.2
billion of assets.
The Developing World Portfolio is managed by a
team of 24 investment professionals.
The following person at Baring International is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Matt Linsey Investment Manager
Mr. Linsey has been an investment
professional with Baring International
and its ING affiliates since 1994
and has 16 years of investment experience.
Baring International also manages the Hard Assets
Portfolio, Emerging Markets Portfolio and the
Global Fixed Income Portfolio.
107
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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EMERGING MARKETS PORTFOLIO
PORTFOLIO
MANAGER Baring International Investment Limited
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity of
INVESTMENT emerging market countries. The Portfolio's
STRATEGY investment philosophy is to capitalize on
emerging capital markets in developing nations
and other nations in which economic and political
factors are likely to produce above average
growth rates.
Emerging market countries are those that are
identified as such in the Morgan Stanley Capital
International Emerging Markets Free Index or the
International Finance Corporation Emerging Market
Index, or by the Portfolio Manager because they
have a developing economy or because their
markets have begun a process of change and are
growing in size and/or sophistication.
Equity securities that the Portfolio may invest in
include common stock and other securities with
equity characteristics (such as preferred stock,
rights and warrants, convertible securities
and shares of investment companies).
The Portfolio Manager's philosophy is based on the
belief that superior long term results come from
identifying unrecognised growth investment opportunities
in countries and companies.
The Portfolio Manager's investment process seeks to
deliver superior risk adjusted returns by evaluating key
investment drivers at both the country and company level.
As a result of research into the key drivers of
Emerging market performance the portfolio manager has defined an
investment framework consisting of five critical drivers -
Growth, Liquidity, Currency, Management and Valuation.
Structured fundamental research takes place at the country
and company level using the discipline of the investment
framework. The research focuses on the key factors behind
each of the five drivers. For example, growth, it is the
quality and direction of GDP growth in a country or the
potential for earnings surprise at the company level that
is our focus. It is the structured fundamental research
that drives both the country and company selection decision
making.
If the Portfolio is not fully invested in
emerging market equity securities, the Portfolio
Manager may invest the remainder of the
Portfolio's assets (but not more than 35%) in:
o equity securities of issuers in developed
economies
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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o 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
o bank deposits or bank obligations, including
certificates of deposit, time deposits, and
bankers' acceptances
o mortgage-backed securities of banks in
emerging market or industrialized countries,
including the United States
o instruments issued by international
development agencies
o high-quality money market instruments,
including commercial paper and other short-
term corporate debt obligations of issuers in
industrialized and emerging market countries
o debt securities that are rated below
investment-grade or, if not rated, of
equivalent quality up to 10% of assets
o borrowings up to 10% of assets (which the
Portfolio Manager may increase to 25% for
temporary purposes)
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o EMERGING MARKET RISK. 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 after investments in those
currencies by the Portfolio. 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 (may
be unable to transfer currency from a given
country); or creation of government monopolies.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies 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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Baring International Investment Limited ("Baring
ON THE International") has managed the Portfolio since
PORTFOLIO March 15, 2000. Baring International is a
MANAGER subsidiary of Baring Asset Management Holdings
Limited ("Baring"). Baring is the parent of the
world-wide group of investment management
companies that operate under the collective name
"Baring Asset Management" and is owned by ING
Groep N.V., a publicly traded company based in
the Netherlands with worldwide insurance and
banking subsidiaries. The address of Baring
International is 155 Bishopsgate, London.
Baring Asset Management provides global
investment management services to U.S. investment
companies and maintains major investment offices
in Boston, London, Hong Kong and Tokyo. Baring's
predecessor corporation was founded in 1762.
Baring Asset Management provides advisory
services to institutional investors, offshore
investment companies, insurance companies and
private clients. As of December 31, 1999, Baring
Asset Management managed approximately $56.2
billion of assets.
The Emerging Markets Portfolio is managed by a
team of 24 investment professionals.
The following person at Baring International is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Matt Linsey Investment Manager
Mr. Linsey has been an investment
professional with Baring International
and its ING affiliates since 1994
and has 15 years of investment experience.
Baring International also manages the Hard Assets
Portfolio, Developing World Portfolio and the
Global Fixed Income Portfolio.
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OVERALL MANAGEMENT OF THE TRUST
- -------------------------------------------------------------------------
THE Directed Services, Inc. ("DSI") is the overall
ADVISER adviser to the GCG Trust. DSI is a New York
corporation and is a wholly owned indirect subsidiary
of ING. DSI is registered with the SEC as an
investment adviser and a broker-dealer. DSI is
the principal underwriter and distributor of the
Variable Contracts that Golden American Life
Insurance Company issues. The address of DSI is
1475 Dunwoody Drive, West Chester, Pennsylvania
19380.
DSI has overall responsibility for hiring
portfolio managers and for periodically
monitoring their performance. DSI considers
performance records in light of a portfolio's
investment objectives and policies. The GCG
Trust pays DSI for its services an advisory fee.
Out of this advisory fee, DSI in turn pays the
portfolio managers their respective portfolio
management fee.
In addition to advisory services, DSI provides
administrative and other services necessary for
the ordinary operation of the portfolios. DSI
procures and pays for the services and
information necessary to the proper conduct of
the portfolios' business, including custodial,
administrative, transfer agency, portfolio
accounting, dividend disbursing, auditing, and
ordinary legal services. DSI also acts as
liaison among the various service providers to
the portfolios, including the custodian,
portfolio accounting agent, portfolio managers,
and the insurance company or companies to which
the portfolios offer their shares. DSI also
ensures that the portfolios operate in compliance
with applicable legal requirements and monitors
the portfolio managers for compliance with
requirements under applicable law and with the
investment policies and restrictions of the
portfolios. 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 portfolio,
interest on borrowing, fees and expenses of the
independent trustees, and extraordinary expenses,
such as litigation or indemnification expenses.
DSI has full investment discretion and makes all
determinations with respect to the investment of
a portfolio's assets and the purchase and sale of
portfolio securities for one or more portfolios.
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The GCG Trust pays DSI an advisory fee, payable
monthly, based on the average daily net assets of
a portfolio (or the combined net assets of
portfolios).
ADVISORY FEE PAID IN 1999. For portfolios that
were in operation for the full 1999 year, the
Trust paid DSI in 1999 an advisory fee at the
following annual rates (based on the average
daily net assets of the portfolio):
|-------------------------------------------------------------|
| FEE PAID TO ADVISER |
| DURING 1999 |
| (as a percentage of average |
| PORTFOLIO net assets) |
|-------------------------------------------------------------|
| Liquid Asset 0.56% |
| Limited Maturity Bond 0.57% |
| Global Fixed Income 1.60% |
| Total Return 0.91% |
| Fully Managed 0.97% |
| Equity Income 0.96% |
| Rising Dividends 0.98% |
| Capital Growth 2.05% |
| Growth 1.04% |
| Value Equity 0.96% |
| Research 0.91% |
| Managed Global 1.25% |
| Capital Appreciation 0.96% |
| Mid-Cap Growth 0.91% |
| Strategic Equity 0.96% |
| Small Cap 0.96% |
| Real Estate 0.96% |
| Hard Assets 0.96% |
| Developing World 1.75% |
| Emerging Markets 1.75% |
|-------------------------------------------------------------|
For portfolios that commenced operations in 1999 or 2000, the
Trust pays DSI an advisory fee at the following annual rates
(based on average daily net assets):
|-------------------------------------------------------------|
| FEE (AS A PERCENTAGE OF AVERAGE |
| NET ASSETS OF A PORTFOLIO OR |
| COMBINED ASSETS OF THE INDICATED|
| PORTFOLIO GROUPS OF PORTFOLIOS) |
|-------------------------------------------------------------|
| Investors Series and 1.00% of first $500 million; |
| All Cap Series .95% of next $250 million; |
| Combined: .90% of next $500 million; and |
| .85% thereafter. |
| |
| Large Cap Value 1.00% of first $500 million; |
| Series: .95% of next $250 million; |
| .90% of next $500 million; and |
| .85% thereafter. |
| |
| Large Cap Growth 1.00% of first $500 million; |
| Series: .95% of next $250 million; |
| .90% of next $500 million; and |
| .85% thereafter. |
|-------------------------------------------------------------|
Out of the advisory fee, DSI in turn pays, on a
monthly basis, the portfolio managers a portfolio
management fee for its services.
The GCG Trust is distinct in that the portfolios'
expense structure is simpler and more predictable
than that of most mutual funds. DSI PAYS MANY OF
THE ORDINARY EXPENSES FOR EACH PORTFOLIO,
INCLUDING CUSTODIAL, ADMINISTRATIVE, TRANSFER
AGENCY, PORTFOLIO ACCOUNTING, AUDITING, AND
ORDINARY LEGAL EXPENSES. MOST MUTUAL FUNDS PAY
FOR THESE EXPENSES DIRECTLY FROM THEIR OWN
ASSETS.
- -------------------------------------------------------------------------
SHARE PRICE
- -------------------------------------------------------------------------
Purchase and redemption orders ("orders") are
accepted only on days on which the New York Stock
Exchange ("NYSE") is open for business
("a business day").
A portfolio's share price (net asset value, or
"NAV"), is calculated each business day after the
close of trading (generally 4 p.m. Eastern time)
on the New York Stock Exchange.
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Therefore, orders received by the Trust via insurance
company Separate Accounts on any business day prior
to the close of NYSE trading will receive the price
calculated at the close of trading that day.
Orders received by a Separate Account after the close
of trading on a business day, but prior to the close
of business on the next business day, will receive
the price calculated at the close of trading on that
next business day.
Net asset value per share is computed by adding
up the total value of the portfolio's investments
and other assets, subtracting its liabilities and
then dividing by the number of portfolio shares
outstanding.
The net asset values per share of each portfolio,
except the Liquid Asset Portfolio, fluctuates in
response to changes in market conditions and
other factors. The NAV of the shares of the
Liquid Asset Portfolio will not fluctuate in
response to changes in market conditions for so
long as the Portfolio is using the amortized cost
method of valuation. The Liquid Asset
Portfolio's securities are valued using the
amortized cost method of valuation. This
involves valuing a security at cost on the date
of purchase and thereafter assuming a constant
accretion of a discount or amortization of a
premium to maturity.
The other portfolios' securities are valued based
on market value. Market value is determined
based on the 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. If market quotations
are not available, securities are valued at their
fair value as determined in good faith by, or
under the direction of, the Board. 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 at close of business.
Securities traded in over-the-counter markets
outside the United States are valued at the last
available price in the over-the-counter market
before 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 portfolio writes a put or call option, the
amount of the premium is included in the
portfolio's 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 a portfolio pays
for an option is recorded as an asset, and
subsequently adjusted to market value. Futures
and options traded on commodities exchanges or
boards of trade are valued at their closing
settlement price on such exchange or board of
trade. Foreign securities quoted in foreign
currencies generally are valued at 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. The calculation of the
net asset value of a portfolio investing in
foreign securities may not take place
contemporaneously with the determination of the
prices of the securities included in the
calculation. Further, 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 GCG Trust
or its agents after the time 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
portfolio's net asset value is determined may not
be reflected in the calculation of net asset
value of the portfolio unless DSI or the
portfolio manager, acting under authority
delegated by the Board of Trustees, deems that
the particular event would materially
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<PAGE>
affect net asset value. In this event, the securities
would be valued at fair market value as determined in
good faith by DSI or the portfolio manager acting
under the direction of the Board.
- -------------------------------------------------------------------------
TAXES AND DISTRIBUTIONS
- -------------------------------------------------------------------------
The GCG Trust pays net investment income, if any,
on your shares of each portfolio annually, except
that net investment income of the Liquid Asset
Portfolio is declared as a dividend daily and
paid monthly and that the Limited Maturity Bond
Portfolio may declare a dividend monthly or
quarterly. Any net realized long-term capital
gains for any portfolio will be declared and paid
at least once annually. Net realized short-term
gains may be declared and paid more frequently.
We will automatically reinvest any distributions
made by any portfolio in additional shares of
that portfolio, unless the separate account of
your insurance company makes an election to
receive distributions in cash. Dividends or
distributions by a portfolio other than the
Liquid Asset Portfolio will reduce the per share
net asset value by the per share amount paid.
Each portfolio of the GCG Trust has qualified and
expect to continue to qualify as a regulated
investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended
("Code"). As qualified regulated investment
companies, the portfolios are generally not
subject to Federal income tax on the part of
their investment company taxable income
(including any net capital gains) which they
distribute to shareholders. It is each
portfolio's intention to distribute all such
income and gains.
Shares of each portfolio are offered to the
Separate Accounts of insurance companies. Under
the Code, an insurance company pays no tax with
respect to income of a qualifying Separate
Account when the income is properly allocable to
the value of eligible variable annuity or
variable life insurance contracts. Under current
tax law, your gains under your Contract are taxed
only when you take them out. Contract purchasers
should review the Contract prospectus for a
discussion of the tax treatment applicable to
holders of the Contracts.
The foregoing is only a summary of some of the
important Federal income tax considerations
generally affecting a portfolio and you. Please
refer to the Statement of Additional Information
for more information about the tax status of the
portfolios. You should consult with your tax
adviser for more detailed information regarding
taxes applicable to the Contracts.
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<TABLE>
<C> <C>
TO OBTAIN THE GCG TRUST
MORE INFORMATION TRUSTEES
A Statement of Additional Information, dated Barnett Chernow, Chairman and Trustee
May 1, 2000, has been filed with the Securities
and Exchange Commission, and is made a part of John R. Barmeyer, Trustee
this prospectus by reference.
J. Michael Earley, Trustee
To obtain a free copy of this document or to
make inquiries about the portfolios, please write R. Barbara Gitenstein, Trustee
to our Customer Service Center at P.O. Box 2700,
West Chester, Pennsylvania 19380 or call (800) Robert A. Grayson, Trustee
366-0066, or access the SEC's website
(http://www.sec.gov). Elizabeth J. Newell, Trustee
Information about the GCG Trust can be reviewed Stanley B. Seidler, Trustee
and copied at the SEC's Public Reference Room.
Information about its operation may be obtained Roger B. Vincent, Trustee
by calling 1-800-SEC-0330. You may obtain copies
of reports and other information about the GCG
Trust, for payment of a duplication fee, by
writing to Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
</TABLE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is a stock
company domiciled in Delaware
106874 5/00 811-5629
<PAGE>
PROSPECTUS #2
MARKET MANAGER SERIES
<PAGE>
THE GCG TRUST
PROSPECTUS
MAY 1, 2000
MARKET MANAGER SERIES
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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.
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------
In this prospectus aand in the Statement of Additional
Information, we refer to The GCG Trust as "the GCG Trust"
and to the Market Manager Series as the "Market Manager
Portfolio or the "Portfolio."
PAGE
INTRODUCTION ..........................................
Investing Through Your Variable Contract .............
Why Reading This Prospectus is Important .............
THE PORTFOLIO AT A GLANCE .............................
FINANCIAL HIGHLIGHTS ..................................
DESCRIPTION OF THE PORTFOLIO ..........................
MANAGEMENT OF THE TRUST ...............................
The Adviser ..........................................
Portfolio Manager ....................................
Distributor ..........................................
Expenses .............................................
Portfolio Transactions ...............................
SHARE PRICE ...........................................
TAXES AND DISTRIBUTION ................................
MORE INFORMATION ......................................
Additional Investment Strategies .....................
Portfolio Turnover ...................................
Legal Counsel ........................................
Independent Auditors .................................
Year 2000 ............................................
AN INVESTMENT IN THE MARKET MANAGER PORTFOLIO OF THE GCG TRUST IS NOT
A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER AGENCY.
i
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<PAGE>
- -------------------------------------------------------------------------
INTRODUCTION
- -------------------------------------------------------------------------
INVESTING THROUGH YOUR VARIABLE CONTRACT
Shares of the Market Manager Portfolio of the GCG Trust currently are
sold to segregated asset accounts ("Separate Accounts") of insurance
companies as funding choices for variable annuity contracts ("Variable
Contracts"). Assets in the Separate Account are invested in shares of
the Portfolio based on your allocation instructions. You do not deal
directly with the Portfolio to purchase or redeem shares. The
accompanying Separate Account prospectus describes your rights as a
Variable Contract owner.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, risks and strategy
of the Portfolio. Reading the prospectus will help you to decide
whether the Portfolio is the right investment for you. We suggest
that you keep this prospectus and the prospectus for the Separate
Account for future reference.
1
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<PAGE>
- -------------------------------------------------------------------------
PORTFOLIO AT A GLANCE
- -------------------------------------------------------------------------
MARKET MANAGER PORTFOLIO
INVESTMENT Favorable equity market performance and at the same
OBJECTIVE time preserve capital (without taking into account
expenses) for investments in the Portfolio held until
the Target Maturity Date of March 6, 2001.
PRINCIPAL
INVESTMENT The Portfolio seeks to return the following to its
STRATEGY shareholders on the Target Maturity Date:
o the principal amount invested in the Portfolio
(without regard to expenses)
o a percentage of the price appreciation from the
Portfolio's 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.
The Portfolio allocates its assets among the following
two types of investments:
o over-the-counter call options of the S&P 500 and
other indexes of publicly traded common stocks of
large and mid-cap companies
o zero coupon bonds issued by the U.S. Government,
and its agencies and instrumentalities and by
private issuers which are rated A or better by
Moody's Investors Service, Inc. or Standard &
Poor's Corporation ("S&P)
The Portfolio is non-diversified and, when compared
with other funds, may invest a greater portion of its
assets in a particular issuer. A non-diversified
portfolio has greater exposure to the risk of default
or the poor earnings of the issuer.
The Portfolio will no longer accept investments in the
Portfolio as of March 3, 1995.
PRINCIPAL Any investment involves the possibility that you will
RISKS lose money or not make money. Investment in the Portfolio
is not insured against loss of principal. We cannot assure
that the Portfolio will achieve its investment objective.
Investing in shares of the Portfolio should not be
considered a complete investment program. The share value
of the Portfolio will rise and fall.
An investment in the Portfolio is subject to the
following principal risks described under "Description
of the Portfolio":
o MANAGER RISK o MARKET AND COMPANY RISK
Risks Related to Coupon Bond Investing:
o INTEREST RATE RISK o CREDIT RISK.
Risks Related to OTC Call Options:
o CREDITWORTHINESS OF DEALER
o INVESTMENT CONCENTRATION IN THE SECURITIES
INDUSTRY
Because of these risks, your investment could lose or
not make any money.
2
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- -------------------------------------------------------------------------
PORTFOLIO AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will fluctuate
depending on its investment performance. The following
bar chart shows the Portfolio's annual total return
changes from year-to-year. The accompanying table shows
the portfolio's average annual total return for 1 year and
since its inception date as compared to the applicable
market indices. The average annual total returns below
include reinvestment of dividends and distributions. This
may help you weigh the risk of investing in the Portfolio.
Of course, past performance does not necessarily indicate
future results. ING Investment Management LLC has managed
the Portfolio since January 2, 1998. From March 3, 1997 to
January 1, 1998, Equitable Investment Services, Inc.,
an affiliate of ING, managed the Portfolio. Prior to
that date, the Portfolio was managed by other portfolio
managers.
The performance information does not include insurance-
related charges. Thus, you should not compare the portfolio's
performance directly with performance information of other
products without taking into account all insurance-related
charges and expenses payable under your Variable Contract.
[[Performance Bar Chart Follows:]
MARKET MANAGER -- ANNUAL TOTAL RETURN
Year 1995 1996 1997 1998 1999
24.33% 19.40% 33.82% 24.55% 16.59%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 11/14/94| | Quarter Ended |
| (INCEPTION)| | |
| | | 12/31/98....23.77% |
| Portfolio's Average | | |
| Annual Total Return 16.59% 23.60% 23.04% | |--------------------|
| S&P 500 21.03% 28.54% 26.24% | | WORST QUARTER |
| Russell Midcap 18.23% 21.86% 18.55% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/98...(12.19)% |
| | | |
|-------------------------------------------------| |--------------------|
The S&P 500 Index is comprised of 500 U.S. Stocks. The Russell
Midcap index consists of the 800 smallest companies in the
Russell 1000 Index, which contains the 1,000 largest companies
in the United States.
3
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- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------
The following financial highlights tables are intended to help you
understand the Portfolio's financial performance for the past 5 years.
Certain information reflects financial reqults for a single portfolio
share. The total returns in the tables represent the rate that an
investor would have earned or lost on an investment in the Portfolio
(assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young LLP, independent auditors,
whose report, along with the Portfolio's financial statements, are
included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
MARKET MANAGER PORTFOLIO **
- ---------------------------------------------------------------------------------------
YEAR ENDED
- ---------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.62 $16.47 $13.22 $12.03 $10.02
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income(Loss) 0.34 0.32 0.36 0.46 0.37
Net Realized and Unrealized
Gain(Loss) on Investments 2.82 3.69 4.11 1.89 2.06
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 3.16 4.01 4.47 2.35 2.43
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.34) (0.32) (0.36) (0.46) (0.37)
Distributions from Capital Gains (3.04) (0.54) (0.86) (0.70) (0.05)
------------------------------------------------
TOTAL DISTRIBUTIONS (3.38) (0.86) (1.22) (1.16) (0.42)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.40 $19.62 $16.47 $13.22 $12.03
=======================================================================================
TOTAL RETURN 16.59% 24.55% 33.82% 19.40% 24.33%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $7,319 $8,139 $6,791 $5,585 $5,952
Ratio of Operating Expenses to
Average Net Assets 1.00% 1.01% 1.01% 1.02% 0.89%
Decrease Reflected in Above
Expense Ratio Due to
Expense Limitations -- -- -- -- 0.13%
Ratio of Net Investment Income
to Average Net Assets 1.57% 1.78% 2.19% 3.06% 3.42%
Portfolio Turnover Rate -- -- -- -- 5.00%
- ---------------------------------------------------------------------------------------
</TABLE>
** On January 2, 1998, ING Investment Management LLC ("IIM") became
the Portfolio Manager of the Portfolio. From March 3, 1997 to
January 1, 1998, Equitable Investment Services, Inc., and
affiliate of IIM, was the Portfolio Manager of the Portoflio Prior
to March 3, 1997, the Portfolio had been advised by other Portfolio
Managers.
4
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIO
- -------------------------------------------------------------------------
MARKET MANAGER PORTFOLIO
PORTFOLIO
MANAGER ING Investment Management LLC
INVESTMENT Favorable equity market performance and at the same time
OBJECTIVE preserve capital (without taking into account expenses)
for investments in the Portfolio held until the Target
Maturity Date of March 6, 2001.
PRINCIPAL
INVESTMENT The Portfolio seeks to return the following to its
STRATEGY shareholders on the Target Maturity Date:
o the principal amount invested in the Portfolio
(without regard to expenses)
o a percentage of the price appreciation from the
Portfolio's 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 indices of publicly traded
common stocks of large and mid-cap companies.
There are two components of the Portfolio's investment
objective: (1) seeking favorable equity market
performance, and (2) seeking preservation of capital.
The Portfolio Manager allocates the assets of the
Portfolio among the investments described below:
o FAVORABLE EQUITY PERFORMANCE. The Portfolio seeks
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. An index of publicly
traded common stocks will generally 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.
The call options into which the Portfolio will enter
will be negotiated on behalf of the Portfolio by the
Portfolio Manager in an attempt to provide the
Portfolio with the right to receive a percentage of
the price appreciation on the stocks included in the
indices 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 indices does not include the value of dividends
paid by in the indices. 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 indices, and that these options would give the
Portfolio the right to receive approximately 110%-
118% of the price appreciation of a composite of
these indices from the Investment Start Date through
the Target Maturity Date, based upon the expected
weighting of the Portfolio's relative positions in
call options on these indices.
The Portfolio will initially invest on or about the
Investment Start Date between 25% and 45% of the
Portfolio's assets in call options on equity indices. If
at the option's maturity or when the Portfolio seeks to
close out the option there is no price appreciation on
the S&P 500 or another index with respect to which the
Portfolio holds a call option, the Portfolio will not
benefit from the investment and will lose its investment
in the option. The Portfolio will seek to enter into
call options that provide an absolute right for the
Portfolio to cause the issuing dealer to repurchase the
call at any time.
5
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<PAGE>
PRESERVATION OF CAPITAL. The Portfolio 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 Portfolio 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 Portfolio can be
expected to decrease as the Portfolio nears its Target
Maturity Date. The Portfolio may hold any or all of the
zero coupon bonds in which it invests until their
maturity date or until or close to the Portfolio's Target
Maturity Date, although, alternatively, the Portfolio 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 Portfolio's 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 Portfolio so that
if the Portfolio Manager is successful in its strategy,
an investor in the Portfolio 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 Portfolios. The purchaser
of a Variable Contract would pay the expenses 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
prospectus.
OFFERING PERIOD. The Commencement Date is November 14,
1994. The Portfolio was 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 Portfolio ceased issuing new shares at the end of
the Offering Period (other than shares of the Portfolio
issued in connection with reinvestment of the Portfolio's
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
Portfolio is March 6, 2001. On or about this date, the
Portfolio will be converted to cash (after deduction of
any unpaid Portfolio 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
Portfolio to choose their desired allocation. If no
instructions are given, liquidation proceeds will be
invested automatically in a series substantially similar
to the Portfolio, if any is being offered at the time,
and if not, to the Liquid Asset Series of the Trust.
PRINCIPAL Any investment involves the possibility that you will
RISKS lose money or not make money. Investment in the Portfolio
is not insured against loss of principal. We cannot assure
that the Portfolio will achieve its investment objective.
Investing in shares of the Portfolio should not be
considered a complete investment program. The Portfolio is
not intended for sharholders seeking short-term profits.
The share value of the Portfolio will rise and fall.
An investment in the Portfolio is subject to the
following principal risks:
o MANAGER RISK. The Portfolio Manager may do a
mediocre or poor job in selecting securities.
o MARKET AND COMPANY RISK. The price of a
security held by the Portfolio may fall due to
changing economic, political or
market conditions
6
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<PAGE>
or disappointing earnings results. Stock prices
in general will decline over short or even
extended periods. The stock market tends to be
cyclical, with periods when stock prices
generally rise and periods when stock prices
generally decline.
Risks Related to Coupon Bond Investing:
o INTEREST RATE RISK. The value of debt
instruments generally rises and falls inversely
with interest rate. Therefore, bond prices
overall will decline over short or even extended
periods due to rising interest rates. Further,
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.
o CREDIT RISK. A bond issuer (debtor) may fail
to repay interest and principal in a timely
manner. The price of a security held by a
portfolio may fall due to changing economic,
political or market conditions or disappointing
earnings results.
Risks Related to OTC Call Options:
o CREDITWORTHINESS OF DEALER. Under the terms
of the over-the-counter call options that will be
acquired by the Portfolio, the Portfolio must
look to the issuing dealer to repurchase the
option and for payment upon exercise. Thus, it
is likely that the Portfolio will be subject to
the creditworthiness of the dealers throughout
the Target Maturity Date. Nonperformance by a
dealer as a result of insolvency or otherwise may
result in material losses to the Portfolio.
o INVESTMENT CONCENTRATION IN THE SECURITIES INDUSTRY.
Since at least 25% of the Portfolio will be
invested in over-the-counter options, the
Portfolio might be deemed to have concentrated
its investments in issuers in the securities
industry. The concentration of the Portfolio's
assets in firms in the securities industry will
cause the Portfolio to have greater exposure to
risks associated with the securities industry in
general.
Because of these risks, your investment could lose or not
make any money.
MORE ON THE ING Investment Management LLC ("ING Investment") (or
PORTFOLIO investment advisors acquired by ING Investment Management)
MANAGER has managed the Portfolio since March, 1997. ING Investment
is engaged in the business of providing investment advice
to affiliated insurance and investment companies and
institutional clients possessing portfolios, which, as of
December 31, 1999, were valued at approximately $27.6
billion. The address of ING Investment is 5780 Powers
Ferry Road, N.W., Suite 300, Atlanta, Georgia 30327.
ING Investment is a subsidiary of ING Groep N.V. and is
affiliated with Directed Services, Inc.
The following person at ING Investment is primarily
responsible for the day-to-day investment decisions of the
Portfolio:
Name Name and Recent Business Experience
---- -----------------------------------
Robert F. Bowman Senior Portfolio Manager
Mr. Bowman has been employed by the
Portfolio Manager as a Managing Director
since January 2, 1998. Prior to that he
served as the Portfolio's portfolio
manager while working for Equitable
Investment Services, Inc. ("EISI"). He
joined EISI as Executive Vice President in
1986, and has over 18 years of direct
investment experience.
7
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- -------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
- -------------------------------------------------------------------------
THE ADVISER Directed Services, Inc. ("DSI") is the overall adviser to
the GCG Trust. The Trust is an open-end management
investment company organized as a Massachusetts business
trust. DSI is a New York corporation and is a wholly
owned subsidiary of ING Groep N.V. ("ING"). DSI is
registered with the SEC as an investment adviser and a
broker-dealer. DSI is the principal underwriter and
distributor of the Variable Contracts that Golden
American Life Insurance Company ("Golden American")
issues. Golden American is a stock life insurance
company organized under the laws of the State of Delaware
and a subsidiary of ING.
The Trust pays DSI, as adviser, for its services a
quarterly fee at the annual rate of 1.0% of the value of
the average daily net assets of the Portfolio. The Trust
pays DSI, adviser to the manager, for management services
a quarterly fee equal to an annual rate of 1.0% of the
average daily net assets of the Portfolio.
The Trust is distinct in that the expense structure of
the Portfolio is simpler and more predictable than most
mutual funds. Many of the ordinary expenses for the
Portfolio, including custodial, administrative, transfer
agency, portfolio accounting, auditing, and ordinary
legal expenses are paid by DSI, whereas most mutual funds
pay for these expenses directly from their own assets.
As adviser, 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 Portfolio in addition to
advisory services. DSI, as adviser, provides the overall
business management and administrative services necessary
for the Portfolio's operation and provides or procures
the services and information necessary to the proper
conduct of the business of the Portfolio. DSI is
responsible for providing or procuring, at its own
expense, the services reasonably necessary for the
ordinary operation of the Portfolio. DSI is also
responsible for ensuring that the Portfolio operate in
compliance with applicable legal requirements and for
monitoring the Portfolio Manager for compliance with
requirements under applicable law and the their
investment policies and restrictions of the Portfolio.
DSI does not bear the expense of brokerage fees and other
transaction expenses for securities or other asset,
taxes, if any, paid by the Portfolio, interest on
borrowing, fees and expenses of the independent trustees,
and extraordinary expenses, such as litigation or
indemnification expenses.
PORTFOLIO DSI and the Trust have retained an affiliate, ING
MANAGER Investment Management LLC ("ING Investment") to manage
the assets of the Portfolio. As Portfolio Manager, ING
Investment makes all determinations on the investment of
the Portfolio's assets consistent with the investment
objectives, policies, and restrictions of the
Portfolio. ING is compensated by DSI. DSI pays ING a
fee, payable monthly, based on the average daily net
assets of the Portfolio at the annual rate of 0.50%. See
"Description of the Portfolio -- More on the Portfolio
Manager."
DISTRIBUTOR DSI acts as distributor of shares of the Portfolio, in
addition to serving as manager to the Trust. As
distributor, DSI is a registered broker-dealer and a
member of the National Association of Securities Dealers,
Inc., and acts as distributor without remuneration from
the Trust.
EXPENSES DSI, as manager, bears the expenses of the ordinary
operations of the Portfolio. The Trust bears the expense
of taxes (if any) paid by the Portfolio, the fees and
expense of its independent trustees, any extraordinary
expense, such as any litigation or
indemnification
8
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<PAGE>
expenses, as well as other expenses as described under
"Management of the Trust." Any such Trust expenses
directly attributable to the Portfolio are charged to the
Portfolio; other expenses are allocated among all the
portfolios of the Trust. For the fiscal year ended
December 31, 1999, total Portfolio expenses (net of fee
waiver) were 1.00% of the Portfolio's net assets.
PORTFOLIO Shares of the Portfolio may be offered for purchase by
TRANSACTIONS separate accounts of Golden American to serve as an
investment medium for the Variable Contracts issued by
the insurer. Shares of the Portfolio 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 Periods (other than for
reinvestment of any dividends and distributions).
Shares of the Portfolio 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 Portfolio. Redemption proceeds normally
will be paid within seven days following receipt of
instructions in proper form. The Trust may suspend the
right of redemption or postpone the payment date 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 is restricted.
Shares of the Portfolio may be exchanged for shares of
any other portfolio of the Trust, other than The Fund For
Life, at any time. Exchanges of shares of other
portfolios of the Trust into the Portfolio will only be
permitted during the Offering Period. Exchanges are
treated as a redemption of shares of one portfolio and a
purchase of shares of one or more of the other portfolios
and are effected at the respective net asset values per
shares of each portfolio on the date of the exchange.
The Portfolio will be managed to achieve its investment
object as of the Target Maturity Date, and is intended
for investors who desire to maintain their holding in the
Portfolio for the duration of the Portfolio through the
Target Maturity Date. Variable Contract Owners who
withdraw their interest earlier may be subject to a
greater risk that the Portfolio will not achieve its
investment objective and to the risk that the assets in
which the Portfolio will invest have not yet reached
their full potential return.
- -------------------------------------------------------------------------
SHARE PRICE
- -------------------------------------------------------------------------
NET ASSET Purchase and redemption orders ("orders") are
VALUE accepted only on days on which the New York Stock
Exchange ("NYSE") is open for business
("a business day").
The net asset value per share of the Portfolio is
calculated at or about 4:00 p.m. (New York City time),
Monday through Friday, on each day that the NYSE is
open for trading. Therefore, orders received by the
Trust via insurance company Separate Accounts on any
business day prior to the close of NYSE trading will
receive the price calculated at the close of trading
that day. Orders received by a Separate Account after
the close of trading on a business day, but prior to
the close of business on the next business day, will
receive the price calculated at the close of trading
on that next business day.
Net asset value per share is calculated by dividing the
aggregate value of the Fund's assets less all liabilities
by the number of the Portfolio's outstanding shares.
The assets of the Portfolio consist primarily of the
mutual funds, which are valued at their respective net
asset values under the 1940 Act. Each mutual fund is
required to value securities in its portfolio for which
market quotations are readily available at their current
market value (generally the last reported sale price) and
all other securities and assets at fair value pursuant to
methods established in good faith by the board of
directors of the underlying fund. Money market funds
with portfolio securities that mature in one year or less
may use the amortized cost or penny-rounding methods to
value their securities. Securities having 60 days or
less remaining to maturity generally are valued at their
amortized cost, which approximates market value.
9
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Other assets of the Portfolio are valued at their current
market value if market quotations are readily available
and, if market quotations are not available, they are
valued at fair value pursuant to methods established in
good faith by the Board of Trustees. Securities having
60 days or less remaining to maturity are valued at their
amortized cost.
- -------------------------------------------------------------------------
TAXES AND DISTRIBUTION
- -------------------------------------------------------------------------
The GCG Trust pays net investment income, if any, on your
shares of each Portfolio annually. Any net realized long-
term capital gains for the Portfolio will be declared and
paid at least once annually. Net realized short-term
gains may be declared and paid more frequently. We will
automatically reinvest any distributions made by the
Portfolio in additional shares of the Portfolio, unless
the separate account of your insurance company makes an
election to receive distributions in cash. Dividends or
distributions by the Portfolio will reduce the per share
net asset value by the per share amount paid.
The Portfolio has qualified and expect to continue to
qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). As a qualified regulated investment
company, the Portfolio is generally not subject to
Federal income tax on the part of their investment
company taxable income (including any net capital gains)
which they distribute to shareholders. It is the
Portfolio's intention to distribute all such income and
gains.
Shares of the Portfolio are offered to the Separate
Accounts of insurance companies. Under the Code, an
insurance company pays no tax with respect to income of a
qualifying Separate Account when the income is properly
allocable to the value of eligible variable annuity or
variable life insurance contracts. Under current tax
law, your gains under your Contract are taxed only when
you take them out. Contract purchasers should review the
Contract prospectus for a discussion of the tax treatment
applicable to holders of the Contracts.
The foregoing is only a summary of some of the important
Federal income tax considerations generally affecting the
Portfolio and you. Please refer to the Statement of
Additional Information for more information about the tax
status of the Portfolio. You are urged to consult with
your tax advisor for more detailed information regarding
taxes applicable to the Contracts and the holders
thereof.
- -------------------------------------------------------------------------
MORE INFORMATION
- -------------------------------------------------------------------------
ADDITIONAL The description of the Portfolio in this prospectus does
INVESTMENT not describe all of the non-principal investments,
STRATEGIES techniques and strategies the Portfolio may use to achieve
its investment objective. The Portfolio is not obligated
to use any of these techniques or strategies at any given
time or under any particular economic condition. For
further information on these investments, techniques and
strategies, please refer to the Statement of Additional
Information.
The Portfolio may take temporary defensive positions
inconsistent with its respective investment policies to
adjust its investment exposure during uncertain
periods, such as periods when the portfolio manager
determines that adverse market, economic, political or
other conditions exist. These positions generally
involve investing in a manner
10
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<PAGE>
different than that in
which the portfolio invests under normal market
conditions. To the extent the Portfolio assumes a
temporary investment position, it may not achieve its
investment objective. For more detailed information on
the Portfolio's temporary defensive positions, please
refer to the Statement of Additional Information.
PORTFOLIO Before investing in the Portfolio, you should review its
TURNOVER portfolio turnover rate for an indication of the
potential effect of transaction costs on the
portfolio's future returns. In general, the
greater the volume of buying and selling by the
portfolio, the greater the impact that brokerage
commissions and other transaction costs will have on its
return.
Portfolio turnover rate is calculated by dividing the
value of the lesser of purchases or sales of portfolio
securities for the year by the monthly average of the
value of portfolio securities owned by the portfolio
during the year. Securities whose maturities at the time
of purchase were one year or less are excluded. A 100%
portfolio turnover rate would occur, for example, if a
portfolio sold and replaced securities valued at 100% of
its total net assets within a one-year period. The
portfolio turnover rate for the Portfolio is presented in
"Financial Highlights" in this prospectus.
LEGAL Sutherland Asbill & Brennan LLP, 1275 Pennsylvania
COUNSEL Avenue, N.W., Washington, D.C. 20004-2404 serves as
counsel to the GCG Trust.
INDEPENDENT Ernst & Young LLP, Two Commerce Square, Suite 400,
AUDITORS 2001 Market Street, Philadelphia, Pennsylvania 19103.
serves as independent auditors of the GCG Trust.
11
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<TABLE>
<S> <C> <C>
TO OBTAIN
MORE
INFORMATION THE GCG TRUST
TRUSTEES
Barnett Chernow, Chairman and Trustee
STATEMENT OF ADDITIONAL INFORMATION. The
Statement of Additional Information contains John R. Barmeyer, Trustee
additional information about the Portfolio. A
current Statement of Additional Information has J. Michael Earley, Trustee
been filed with the Securities and Exchange
Commission, and is made a part of this prospectus R. Barbara Gitenstein, Trustee
by reference.
Robert A. Grayson, Trustee
To obtain a free copy of these documents or to
make inquiries about the Portfolio, please write Elizabeth J. Newell, Trustee
to our Customer Service Center at P.O. Box 2700,
West Chester, Pennsylvania 19380 or call (800) Stanley B. Seidler, Trustee
366-0066, or access the SEC's website
(http://www.sec.gov). Roger B. Vincent, Trustee
Information about the GCG Trust can be reviewed
and copied at the SEC's Public Reference Room.
Information about its operation may be obtained by
calling 1-800-SEC-0330. You may obtain copies of
reports and other information about the GCG Trust,
for payment of a duplication fee, by writing to
Public Reference Section of the Commission,
Washington, D.C. 20549-6009.
</TABLE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
GOLDEN AMERICAN LIFE INSURANCE COMPANY IS A STOCK COMPANY DOMICILED
IN DELAWARE
5/00
<PAGE>
PROSPECTUS #3
THE FUND FOR LIFE SERIES
<PAGE>
THE GCG TRUST
PROSPECTUS
MAY 1, 2000
THE FUND FOR LIFE SERIES
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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.
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------
In this prospectus aand in the Statement of Additional
Information, we refer to The GCG Trust as "the GCG Trust"
and to the Fund For Life Series as the "Fund For Life
Portfolio" Portfolio or the "Portfolio."
PAGE
INTRODUCTION ..........................................
Investing Through Your Variable Contract .............
Why Reading This Prospectus is Important .............
THE PORTFOLIO AT A GLANCE .............................
FINANCIAL HIGHLIGHTS ..................................
DESCRIPTION OF THE PORTFOLIO ..........................
MANAGEMENT OF THE TRUST ...............................
The Adviser ..........................................
Portfolio Manager ....................................
Distributor ..........................................
Expenses .............................................
Portfolio Transactions ...............................
SHARE PRICE ...........................................
TAXES AND DISTRIBUTION ................................
MORE INFORMATION ......................................
Additional Investment Strategies .....................
Portfolio Turnover ...................................
Legal Counsel ........................................
Independent Auditors .................................
Year 2000 ............................................
AN INVESTMENT IN THE FUND FOR LIFE PORTFOLIO OF THE GCG TRUST IS NOT A
BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER AGENCY.
i
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- -------------------------------------------------------------------------
INTRODUCTION
- -------------------------------------------------------------------------
[Section is in two-column format.]
INVESTING THROUGH YOUR VARIABLE CONTRACT
Shares of the Fund For Life Portfolio of the GCG Trust currently are
sold to segregated asset accounts ("Separate Accounts") of insurance
companies as funding choices for variable annuity contracts ("Variable
Contracts"). Assets in the Separate Account are invested in shares of
the Portfolio based on your allocation instructions. You do not deal
directly with the Portfolio to purchase or redeem shares. The
accompanying Separate Account prospectus describes your rights as a
Variable Contract owner.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, risks and strategy
of the Portfolio. Reading the prospectus will help you to decide
whether the Portfolio is the right investment for you. We suggest
that you keep this prospectus and the prospectus for the Separate
Account for future reference.
1
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- -------------------------------------------------------------------------
PORTFOLIO AT A GLANCE
- -------------------------------------------------------------------------
THE FUND FOR LIFE PORTFOLIO
INVESTMENT High total investment return (capital appreciation and
OBJECTIVE current income) consistent with prudent investment risk
and a balanced investment approach.
PRINCIPAL The Portfolio invests primarily in shares of other
INVESTMENT mutual funds. Under the Portfolio's allocation
STRATEGY strategy, investments are allocated between two asset
classes of mutual funds:
o 70% of the Portfolio's assets in mutual funds
investing primarily in equity securities
(including 10% in equity securities of foreign
issuers)
o 30% of the Portfolio's assets in mutual funds
investing primarily in debt securities rated at
least investment grade.
The Portfolio Manager believes that such asset
allocation strategy provides the majority of investment
return that would otherwise be obtained by investing
exclusively in common stocks, yet with significantly
lower volatility.
PRINCIPAL Any investment involves the possibility that you will
RISKS lose money or not make money. Investment in the Portfolio
is not insured against loss of principal. We cannot assure
that the Portfolio will achieve its investment objective.
Investing in shares of the Portfolio should not be
considered a complete investment program. The share value
of the Portfolio will rise and fall.
An investment in the Portfolio is subject to the
following principal risks described under "Description
of the Portfolio":
o MANAGER RISK
o LIQUIDITY RISK
o DIVERSITY RISK
Because the Portfolio invests in underlying mutual
funds, the Portfolio is subject to the risks associated
with the investment activities of the underlying mutual
funds. The following principal risks are described
under "Description of the Portfolio":
Principal risk associated with equity securities:
o MARKET AND COMPANY RISK
Principal risk associated with international
investments:
o FOREIGN INVESTMENT RISK
Principal risk associated with debt securities:
o INCOME RISK o INTEREST RATE RISK
o CREDIT RISK o CALL RISK
Because of these risks, your investment could lose or
not make any money.
2
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- -------------------------------------------------------------------------
PORTFOLIO AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will fluctuate
depending on its investment performance. The following
bar chart shows the Portfolio's annual total return
changes from year-to-year. The accompanying table shows
the portfolio's average annual total return for 1 year,
5 year and since its inception date as compared to the
applicable market indices. The average annual total
returns below include reinvestment of dividends and
distributions. This may help you weigh the risk of
investing in the Portfolio. Of course, past performance
does not necessarily indicate future results. Directed
Services manages the Portfolio.
The performance information does not include insurance-
related charges. Thus, you should not compare the portfolio's
performance directly with performance information of other
products without taking into account all insurance-related
charges and expenses payable under your Variable Contract.
[[Performance Bar Chart Follows:]
FUND FOR LIFE -- ANNUAL TOTAL RETURN
Year 1994 1995 1996 1997 1998 1999
-2.15% 18.79% 10.57% 14.58% 13.67% 21.82%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 3/1/93 | | |
| (INCEPTION)| | 12/31/99.. 16.61% |
| Portfolio's Average | | |
| Annual Total Return 21.82% 15.80% 12.30% | |--------------------|
| Standard & Poor's | | WORST QUARTER |
| 500 Index 21.03% 28.54% 21.66% | |--------------------|
| Lehman Aggregate Bond | | Quarter Ended |
| Index (0.82)% 7.73% 6.01% | | |
| Morgan Stanley/Capital | | 9/30/98.. (4.60)%|
| International | | |
| Pacific Index 57.63% 1.42% 6.55% | |--------------------|
|-------------------------------------------------|
The S&P 500 Index is composed of 500 U.S. Stocks. The Lehman
Aggregate Bond Index is composed of the Lehman Brothers
Government/Corporate Index, the Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. The Morgan
Stanley/Capital International Pacific index measures the
performance of stock markets in Australia, Hong Kong, Japan,
New Zealand, Singapore and Malaysia.
3
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- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------
The following financial highlights tables are intended to help you
understand the Portfolio's financial performance for the past 5 years.
Cetain information reflects financial results for a single portfolio
share. The total returns in the tables represent the rate that an
investor would have earned or lost on an investment in the Portfolio
(assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young LLP, independent auditors,
whose report, along with the Portfolio's financial statements, are
included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
FUND FOR LIFE PORTFOLIO
- ---------------------------------------------------------------------------------------
YEAR ENDED
- ---------------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.45 $ 7.25 $ 7.61 $10.95 $ 9.23
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income(Loss)# (0.03) 0.03 0.03 0.01 (0.24)
Net Realized and Unrealized
Gain(Loss) on Investments 1.59 0.88 1.09 0.88 1.98
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.56 0.91 1.12 0.89 1.74
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income 0.03 0.09 0.13 0.00 0.02
Distributions from Capital Gains 0.81 0.62 1.35 4.23 0.00
------------------------------------------------
TOTAL DISTRIBUTIONS 0.84 0.71 1.48 4.23 0.02
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 8.17 $ 7.45 $ 7.25 $ 7.61 $10.95
========================================================================================
TOTAL RETURN 21.82% 13.67% 14.58% 10.57% 18.79%
========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ 274 $ 227 $ 202 $ 201 $ 333
Ratio of Operating Expenses to
Average Net Assets 2.50% 2.50% 2.50% 2.56% 4.25%
Decrease Reflected in Above
Expense Ratio Due to
Expense Limitations 0.55% 3.27% 12.06% 9.45% 0.68%
Ratio of Net Investment Income(Loss)
to Average Net Assets (0.41%) 0.40% 0.40% 0.10% (2.32%)
Portfolio Turnover Rate 2.08% 0.00% 8.94% 6.87% 5.68%
- ---------------------------------------------------------------------------------------
</TABLE>
# Per share data numbers have been calculated using the average
share method.
4
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- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIO
- -------------------------------------------------------------------------
THE FUND FOR LIFE PORTFOLIO
PORTFOLIO
MANAGER Directed Services, Inc.
INVESTMENT High total investment return (capital appreciation and
OBJECTIVE current income) consistent with prudent investment risk
and a balanced investment approach.
PRINCIPAL The Portfolio invests primarily in other mutual funds.
INVESTMENT The Portfolio uses an allocation strategy that emphasizes
STRATEGY mutual funds that invest primarily in domestic equity
securities, while also allocating a portion of the
Portfolio's assets to mutual funds that invest in
international equity securities and a portion of the
Portfolio's assets to mutual funds that invest primarily
in debt securities rated at least investment grade. The
Portfolio invests only in mutual funds that are not
affiliated with the Portfolio or the Portfolio Manager.
Toward this end, the Portfolio allocates its assets among
the following three general classifications:
o EQUITY FUNDS. Approximately 60% of the Portfolio's
assets will be invested in mutual funds that seek
growth, growth and income, capital appreciation, or a
similar objective or objectives, primarily through
investment in domestic equity securities under normal
circumstances.
o INTERNATIONAL EQUITY FUNDS. Approximately 10% of
the Portfolio's assets will be invested in mutual
funds that seek growth, growth and income, capital
appreciation, or a similar objective or objectives,
primarily through investment in equity securities
that may be from issuers domiciled or traded in
countries outside of the United States.
o INCOME FUNDS. Approximately 30% of the Portfolio's
assets will be invested in mutual funds that seek as
their objective income, growth, or total return
primarily through investment in debt securities that
are rated investment grade or better.
The Portfolio normally maintains the allocation of its
assets among the three classifications indicated above,
but may vary the percentages to respond to market
conditions.
The Portfolio Manager believes that the allocation
strategy provides the majority of investment return that
would otherwise be obtained by investing exclusively in
common stocks, yet with significantly lower volatility.
The Portfolio Manager also believes that with the
increasing globalization of securities markets, investors
should have some exposure to foreign stock markets. The
Portfolio Manager selects mutual funds that have had the
best performance within their classification, as measured
over time periods deemed appropriate by the Portfolio
Manager. The Portfolio normally invests in 10-15 mutual
funds. The Portfolio generally may not purchase or
invest in securities of any investment company if, as a
result, the Portfolio and all of its affiliates, would
own more than 3% of the total outstanding stock of that
company.
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The Portfolio may invest in underlying mutual funds that
are both diversified and non-diversified. A non-
diversified mutual fund may invest more than 5% and up to
25% of its assets in the securities of one issuer. The
Portfolio itself is classified as diversified under the
Investment Company Act of 1940.
PRINCIPAL Any investment involves the possibility that you will
RISKS lose money or not make money. Investment in the Portfolio
is not insured against loss of principal. We cannot assure
that the Portfolio will achieve its investment objective.
Investing in shares of the Portfolio should not be
considered a complete investment program. The share value
of the Portfolio will rise and fall.
An investment in the Portfolio is subject to the
following principal risks:
o MANAGER RISK. The Portfolio Manager and the
investment advisers of the underlying mutual funds
may do a mediocre or poor job in selecting
securities.
o LIQUIDITY RISK. The 1940 Act provides than an
underlying mutual fund whose shares are purchased by
the Portfolio will be obligated to redeem shares held
by the Portfolio only in an amount up to 1% of the
mutual fund's outstanding securities during any
period of less than 30 days. Shares held by the
Portfolio in excess of 1% of a mutual fund's
outstanding securities therefore will be considered
not readily marketable, and these securities together
with other illiquid securities may not, exceed 15% of
the Portfolio's assets.
o DIVERSITY RISK. The Portfolio may invest in shares
of mutual funds that are both diversified and non-
diversified. Non-diversified funds are permitted to
invest a greater proportion of their assets in the
securities of a smaller number of issuers, and may be
more susceptible to any single economic, political or
regulatory occurrence.
Because the Portfolio invests in underlying mutual
funds, the Portfolio is subject to the following
principal risks associated with the investment activities
of the underlying mutual funds:
o PRINCIPAL RISK ASSOCIATED WITH EQUITY SECURITIES:
o MARKET AND COMPANY RISK. The price of a
security held by an underlying mutual fund may
fall due to changing economic, political or
market conditions or disappointing earnings
results. Stock prices in general will decline
over short or even extended periods. The stock
market tends to be cyclical, with periods when
stock prices generally rise and periods when
stock prices generally decline. Further, even
though the stock market is cyclical, returns from
a particular stock market segment in which the
mutual fund may invest may still trail returns
from the overall stock market.
o PRINCIPAL RISK ASSOCIATED WITH INTERNATIONAL
INVESTMENTS:
o FOREIGN INVESTMENT RISK. In many foreign
countries there is less publicly available
information about companies 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 underlying mutual fund may encounter
difficulties or be unable to pursue legal
remedies or obtain judgments in foreign courts.
The values of foreign investments may be
affected by changes in currency rates or
exchange control regulations. If the local
currency gains strength against the U.S. dollar,
the value of the foreign security increases in
U.S. dollar terms. Conversely, if the local
currency weakens against the U.S. dollar, the
value of the foreign security declines in U.S.
dollar terms U.S.
6
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<PAGE>
dollar-denominated securities
of foreign issuers, including depositary
receipts, also are subject to currency risk based
on their related investments.
o PRINCIPAL RISK ASSOCIATED WITH DEBT SECURITIES:
o INCOME RISK. The underlying mutual fund's
income may fall due to falling interest rates.
Income risk is generally the greatest for short-
term bonds, and the least for long-term bonds.
Changes in interest rates will affect bond prices
as well as bond income.
o INTEREST RATE RISK. This is the risk that
bond prices overall will decline over short or
even extended periods due to rising interest
rates. Interest rate risk is generally modest
for shorter-term bonds, moderate for intermediate-
term bonds, and high for longer-term bonds. A
bond's duration measures its sensitivity to
changes in interest rates. The longer the
duration, the greater the bond's price movement
will be as interest rates change.
o CREDIT RISK. A bond issuer (debtor) may fail
to repay interest and principal in a timely
manner. The price of a security held by a
portfolio may fall due to changing economic,
political or market conditions or disappointing
earnings results.
o CALL RISK. During periods of falling interest
rates, a bond issuer may "call," or repay, its
high yielding bond before the bond's maturity
date. Forced to invest the unanticipated
proceeds at lower interest rates, a portfolio
would experience a decline in income.
Because of these risks, your investment could lose or not
make any money.
MORE ON THE The Trust has retained Directed Services, Inc. ("DSI") as
PORTFOLIO Portfolio Manager to manage the assets of the Portfolio
MANAGER and to act as administrator to the Portfolio. DSI is a
subsidiary of ING Groep N.V. The address of DSI is 1475
Dunwoody Drive, West Chester, Pennsylvania 19380.
The following person at DSI is primarily responsible for
the day-to-day investment decisions of the Portfolio:
Name Name and Recent Business Experience
---- ------------------------------------
Christopher W. Smythe Vice President
Mr. Smythe has been employed as Vice
President at DSI for the past 2 years.
Prior to date, he was employed as
Assistant Vice President at PNC Bank.
DSI also serves as manager and administrator to the GCG
Trust and is the principal underwriter and distributor of
the Variable Contracts issued by Golden American Life
Insurance Company. For more information, please refer to
"Management of the Trust."
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MANAGEMENT OF THE TRUST
- -------------------------------------------------------------------------
THE ADVISER Directed Services, Inc. ("DSI") is the overall adviser to
the GCG Trust. The Trust is an open-end management
investment company organized as a Massachusetts business
trust. DSI is a New York corporation and is a wholly
owned subsidiary of ING Groep N.V. ("ING"). DSI is
registered with the SEC as an investment adviser and a
broker-dealer. DSI is the principal underwriter and
distributor of the Variable Contracts that Golden
American Life Insurance Company ("Golden American")
issues. Golden American is a stock life insurance
company organized under the laws of the State of Delaware
and a subsidiary of ING.
DSI performs the activities described above in this
Prospectus and below under the caption "Distributor."
The Trust pays DSI, as portfolio manager, for management
services a monthly fee at an annual rate of 0.10% of the
average daily net assets of the Portfolio. DSI is
currently waiving the management fee.
DSI also provides administrative services necessary for
the Trust's operation and furnishes or procures on behalf
of the Trust and the Portfolio the services and
information necessary to the proper conduct of the
Portfolio's business. As administrator, DSI also
liaisons among the various service providers to the
Portfolio. DSI is also responsible for ensuring that the
Portfolio is operated in compliance with applicable legal
requirements. The Trust pays DSI, as administrator, for
administrative services a monthly fee at an annual rate
of 0.20% of the average daily net assets of the
Portfolio. DSI is currently providing (non-advisory)
management and administrative services to the other
operational portfolios of the Trust.
DISTRIBUTOR DSI acts as distributor of shares of the Portfolio, in
addition to serving as manager and administrator. As
distributor, DSI is a registered broker-dealer and a
member of the National Association of Securities Dealers,
Inc., and acts as distributor without remuneration from
the Trust.
EXPENSES Investors in the Portfolio bear not only a proportionate
share of the expenses of the Portfolio (including
operating costs and management fees) but also indirectly
similar expenses of the underlying mutual funds.
Shareholders also bear their proportionate share of any
sales charges incurred by the Portfolio related to the
purchase of shares of the mutual funds. In addition,
shareholders of the Portfolio may indirectly bear
expenses paid by a mutual fund related to the
distribution of its shares. For the fiscal year ended
December 31, 1999, total expenses paid by the Portfolio
were 2.50% of average net assets.
OTHER The Trust bears all costs of its operations other than
EXPENSES expenses specifically borne by DSI. See "Management of
the Trust" in the Statement of Additional Information.
Trust expenses directly attributable to the Portfolio
are charged to the Portfolio; other expenses are
allocated among all the portfolios of the Trust. The
Trust reimburses DSI for the Portfolio's organizational
expenses that DSI advanced.
PORTFOLIO DSI, as portfolio manager, places orders for the purchase
TRANSACTIONS and sale of no-load mutual funds for the Portfolio's
account directly with the mutual fund. Purchase and sale
orders of load mutual funds may be placed with DSI, as the
distributor, although other brokers or dealers may be
selected at the discretion of DSI. Purchase order for
certain money market instruments may be placed directly
with the issuer.
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DSI, as distributor, may also assist in the execution of
the Portfolio's transactions to purchase underlying fund
shares for which it may receive distribution payments
from the mutual funds or their distributors in
accordance with the distribution plans of those funds.
The Portfolio has no restrictions on portfolio turnover,
although its annual turnover rate is not expected to
exceed 100%. A 100% annual portfolio turnover rate would
occur if each security in the Portfolio (other than
securities with less than one year remaining to maturity)
was replaced once during the year. If the Portfolio
purchases shares of load funds, a higher turnover rate
would result in correspondingly higher sales loads paid
by the Portfolio. There is no limit on the portfolio
turnover rates of the mutual funds in which the Portfolio
may invest.
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SHARE PRICE
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NET ASSET
VALUE The net asset value per share of the Portfolio is
calculated at or about 4:00 p.m. (New York City time),
Monday through Friday, on each day that the New York
Stock Exchange is open for trading, exclusive of federal
holidays. Net asset value per share is calculated by
dividing the aggregate value of the Fund's assets less
all liabilities by the number of the Portfolio's
outstanding shares.
The assets of the Portfolio consist primarily of the
mutual funds, which are valued at their respective net
asset values under the 1940 Act. Each mutual fund is
required to value securities in its portfolio for which
market quotations are readily available at their current
market value (generally the last reported sale price) and
all other securities and assets at fair value pursuant to
methods established in good faith by the board of
directors of the underlying fund. Money market funds
with portfolio securities that mature in one year or less
may use the amortized cost or penny-rounding methods to
value their securities. Securities having 60 days or
less remaining to maturity generally are valued at their
amortized cost, which approximates market value.
Other assets of the Portfolio are valued at their current
market value if market quotations are readily available
and, if market quotations are not available, they are
valued at fair value pursuant to methods established in
good faith by the Board of Trustees. Securities having
60 days or less remaining to maturity are valued at their
amortized cost.
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TAXES AND DISTRIBUTION
- -------------------------------------------------------------------------
The GCG Trust pays net investment income, if any, on your
shares of each Portfolio annually. Any net realized long-
term capital gains for the Portfolio will be declared and
paid at least once annually. Net realized short-term
gains may be declared and paid more frequently. We will
automatically reinvest any distributions made by the
Portfolio in additional shares of the Portfolio, unless
the separate account of your insurance company makes an
election to receive distributions in cash. Dividends or
distributions by the Portfolio will reduce the per share
net asset value by the per share amount paid.
The Portfolio has qualified and expect to continue to
qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as
amended
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("Code"). As a qualified regulated investment
company, the Portfolio is generally not subject to
Federal income tax on the part of their investment
company taxable income (including any net capital gains)
which they distribute to shareholders. It is the
Portfolio's intention to distribute all such income and
gains.
Shares of the Portfolio are offered to the Separate
Accounts of insurance companies. Under the Code, an
insurance company pays no tax with respect to income of a
qualifying Separate Account when the income is properly
allocable to the value of eligible variable annuity or
variable life insurance contracts. Under current tax
law, your gains under your Contract are taxed only when
you take them out. Contract purchasers should review the
Contract prospectus for a discussion of the tax treatment
applicable to holders of the Contracts.
The foregoing is only a summary of some of the important
Federal income tax considerations generally affecting the
Portfolio and you. Please refer to the Statement of
Additional Information for more information about the tax
status of the Portfolio. You are urged to consult with
your tax advisor for more detailed information regarding
taxes applicable to the Contracts and the holders
thereof.
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MORE INFORMATION
- -------------------------------------------------------------------------
ADDITIONAL The description of the Portfolio in this prospectus does
INVESTMENT not describe all of the non-principal investments,
STRATEGIES techniques and strategies the Portfolio may use to achieve
its investment objective. The Portfolio is not obligated
to use any of these techniques or strategies at any given
time or under any particular economic condition. For
further information on these investments, techniques and
strategies, please refer to the Statement of Additional
Information.
The Portfolio may take temporary defensive positions
inconsistent with its respective investment policies to
adjust its investment exposure during uncertain
periods, such as periods when the portfolio manager
determines that adverse market, economic, political or
other conditions exist. These positions generally
involve investing in a manner different than that in
which the portfolio invests under normal market
conditions. To the extent the Portfolio assumes a
temporary investment position, it may not achieve its
investment objective. For more detailed information on
the Portfolio's temporary defensive positions, please
refer to the Statement of Additional Information.
PORTFOLIO Before investing in the Portfolio, you should review its
TURNOVER portfolio turnover rate for an indication of the
potential effect of transaction costs on the
portfolio's future returns. In general, the
greater the volume of buying and selling by the
portfolio, the greater the impact that brokerage
commissions and other transaction costs will have on its
return.
Portfolio turnover rate is calculated by dividing the
value of the lesser of purchases or sales of portfolio
securities for the year by the monthly average of the
value of portfolio securities owned by the portfolio
during the year. Securities whose maturities at the time
of purchase were one year or less are excluded. A 100%
portfolio turnover rate would occur, for example, if a
portfolio sold and replaced securities valued at 100% of
its total net assets within a one-year period. The
portfolio turnover rate for the Portfolio is presented in
"Financial Highlights" in this prospectus.
LEGAL COUNSEL Sutherland Asbill & Brennan LLP, 1275 Pennsylvania
Avenue, N.W., Washington, D.C. 20004-2404 serves as
counsel to the GCG Trust.
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INDEPENDENT Ernst & Young LLP, Two Commerce Square, Suite 4000
AUDITORS 2001 Market Street, Philadelphis, PA 19103
serves as independent auditors of the GCG Trust.
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<TABLE>
<S> <C> <C>
TO OBTAIN
MORE
INFORMATION THE GCG TRUST
Two documents are available that offer further TRUSTEES
information on the Portfolio:
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS. The
annual report of the Portfolio includes a Barnett Chernow, Chairman and
discussion of the market conditions and investment Trustee
strategies that significantly affected the J. Michael Earley, Trustee
Portfolio's performance during the last fiscal
year. R. Barbara Gitenstein, Trustee
STATEMENT OF ADDITIONAL INFORMATION. The Robert A. Grayson, Trustee
Statement of Additional Information contains
additional information about the Portfolio. A Elizabeth J. Newell, Trustee
current Statement of Additional Information has
been filed with the Securities and Exchange Stanley B. Seidler, Trustee
Commission, and is made a part of this prospectus
by reference. Roger B. Vincent, Trustee
To obtain a free copy of these documents or to John R. Barmeyer, Trutee
make inquiries about the Portfolio, please write
to our Customer Service Center at P.O. Box 2700,
West Chester, Pennsylvania 19380 or call (800)
366-0066, or access the SEC's website
(http://www.sec.gov).
Information about the GCG Trust can be reviewed
and copied at the SEC's Public Reference Room.
Information about its operation may be obtained by
calling 1-800-SEC-0330. You may obtain copies of
reports and other information about the GCG Trust,
for payment of a duplication fee, by writing to
Public Reference Section of the Commission,
Washington, D.C. 20549-6009.
</TABLE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
GOLDEN AMERICAN LIFE INSURANCE COMPANY IS A STOCK COMPANY DOMICILED
IN DELAWARE
IN 29999 5/00 811-5629
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
EXPLANATORY NOTE
This Registration Statement contains two separate Statements of
Additional Information (SAI). The first SAI contains all portfolios
of The GCG Trust, except for the Fund For Life Series. The second SAI
is for the Fund For Life Series.
<PAGE>
SAI #1
THE GCG TRUST
<PAGE>
THE GCG TRUST
1475 Dunwoody Drive
West Chester, PA 19380
(800) 366-0066
Statement of Additional Information
The date of this Statement of Additional Information is
May 1, 2000
This Statement of Additional Information discusses twenty-five
portfolios (the "Portfolios") of The GCG Trust (the "Trust"),
which is an open-end management investment company. The Portfolios
described herein are as follows: the Equity Income Portfolio; the
Fully Managed Portfolio; the Limited Maturity Bond Portfolio; the
Hard Assets Portfolio; the Real Estate Portfolio; the Capital
Appreciation Portfolio; the Rising Dividends Portfolio; the
Emerging Markets Portfolio; the Value Equity Portfolio; the
Strategic Equity Portfolio; the Small Cap Portfolio; the
Managed Global Portfolio; the Liquid Asset Portfolio; the Mid-Cap
Growth Portfolio; the Research Portfolio; the Total Return Portfolio;
the Capital Growth Portfolio; the Growth Portfolio; the Global Fixed
Income Portfolio; the Developing World Portfolio; Large Cap
Value Portfolio; Large Cap Growth Portfolio; Investors Portfolio;
All Cap Portfolio and the Market Manager Portfolio. The Portfolios'
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, 1999 (which pertains to all Portfolios other than
the Market Manager Portfolio) and the Prospectus of the Market
Manager Portfolio dated May 1, 1999. 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. Shareholder Reports are available, without
charge, upon request.
MANAGER:
DIRECTED SERVICES, INC.
(800) 447-3644
<PAGE>
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TABLE OF CONTENTS
Page
[to be corrected]
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 3
Mortgage-Backed Securities 4
GNMA Certificates 4
FNMA and FHLMC Mortgage-Backed Obligations 5
Collateralized Mortgage Obligations (CMOs) 5
Other Mortgage-Backed Securities 6
Asset-Backed Securities 6
Variable and Floating Rate Securities 7
Derivatives 7
Banking Industry and Savings Industry Obligations 7
Commercial Paper 8
Repurchase Agreements 9
Reverse Repurchase Agreements 10
Lending Portfolio Securities 10
Other Investment Companies 10
Short Sales 10
Short Sales Against the Box 10
Futures Contracts and Options on Futures Contracts 11
General Description of Futures Contracts 11
Interest Rate Futures Contracts 11
Options on Futures Contracts 11
Stock Index Futures Contracts 12
Investment in Gold and Other Precious Metals 13
Gold Futures Contracts 13
Limitations 14
Options on Securities and Securities Indexes 14
Purchasing Options on Securities 14
Risks of Options Transactions 15
Writing Covered Call and Secured Put Options 15
Options on Securities Indexes 16
Over-the-Counter Options 16
General 16
Risks Associated with Futures and Futures Options 17
When-Issued or Delayed Delivery Securities 18
Foreign Securities 18
Foreign Currency Transactions 19
Options on Foreign Currencies 20
Common Stock and Other Equity Securities 21
Convertible Securities 21
Currency Management 21
Hybrid Investments 21
Dollar Roll Transactions 23
Equity and Debt Securities Issued or Guaranteed by
Supranational Organizations 23
Exchange Rate Related Securities 23
Geographical and Industry Concentration 24
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Illiquid Securities 24
Restricted Securities 24
Lease Obligation Bonds 24
Borrowing 25
Hard Asset Securities 25
Real Estate Securities 25
Swaps 26
Zero-Coupon Bonds 26
Small Companies 26
Strategic Transactions 27
Lending of Portfolio Securities 27
Special Situations 28
Warrants 28
INVESTMENT OBJECTIVES AND ADDITIONAL
INVESTMENT STRATEGIES AND ASSOCIATED RISKS 28
Equity Income Portfolio 28
Fully Managed Portfolio 28
Limited Maturity Bond Portfolio 29
Hard Assets Portfolio 31
Real Estate Portfolio 33
All-Growth Portfolio 33
Rising Dividend Portfolio 34
Emerging Market Portfolio 34
Value Equity Portfolio 35
Strategic Equity Portfolio 36
Capital Appreciation Portfolio 36
Small Cap Portfolio 37
Managed Global Portfolio 38
Growth Opportunities Portfolio 39
Developing World Portfolio 39
Mid-Cap Growth Portfolio 40
Research Portfolio 41
Total Return Portfolio 41
Growth & Income Portfolio 42
Growth Portfolio 43
Global Fixed Income Portfolio 44
Liquid Asset Portfolio 44
Large Cap Value Portfolio [ ]
Large Cap Growth Portfolio [ ]
Investors Portfolio [ ]
All Cap Portfolio [ ]
Market Manager Portfolio 46
INVESTMENT RESTRICTIONS 46
Fundamental Investment Restrictions
For the Equity Income Portfolio, the Fully Managed
Portfolio, the Limited Maturity Bond Portfolio, the
Hard Assets Portfolio, the Real Estate Portfolio,
the All-Growth Portfolio, the Capital Appreciation
Portfolio, the Rising Dividends Portfolio, the
Emerging Markets Portfolio, the Value Equity
Portfolio, the Strategic Equity Portfolio, the
Small Cap Portfolio, the Managed Global Portfolio,
the Market Manager Portfolio and the Liquid Asset
Portfolio 47
For the Total Return Portfolio, Research Portfolio,
Mid-Cap Growth Portfolio and Global Fixed Income
Portfolio 48
For the Growth Portfolio 49
For the Growth & Income Portfolio 50
For the Growth Opportunities and Developing World
Portfolio 51
Non-Fundamental Investment Restrictions 52
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For the Rising Dividends Portfolio, Emerging
Markets Portfolio, Value Equity Portfolio,
Strategic Equity Portfolio, Small Cap Portfolio,
Managed Global Portfolio and Market Manager
Portfolio 52
For the Managed Global Portfolio 52
For the Total Return Portfolio, Research
Portfolio, Mid-Cap Growth Portfolio and Global
Fixed Income Portfolio 52
For the Growth Portfolio 53
For the Growth & Income Portfolio 53
For the Growth Opportunities and Developing
World Portfolio 54
MANAGEMENT OF THE TRUST 54
The Management Agreement 58
Portfolio Managers 60
Distribution of Trust Shares 62
Purchases and Redemptions 62
PORTFOLIO TRANSACTIONS AND BROKERAGE 62
Investment Decisions 62
Brokerage and Research Services 65
NET ASSET VALUE 65
PERFORMANCE INFORMATION 66
TAXES 68
OTHER INFORMATION 70
Capitalization 70
Voting Rights 70
Custodian and Other Service Providers 72
Purchase of Shares 70
Redemption of Shares 71
Exchages 71
Independent Auditors 72
Counsel 72
Registration Statement 72
Financial Statements 72
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 Portfolios,
including the discussion of certain securities and investment
techniques. The more detailed information contained herein is
intended for investors who have read the Prospectuses and are
interested in a more detailed explanation of certain aspects of some
of the Portfolio's securities and some investment techniques. Some
of the Portfolios' 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 Portfolios' Prospectuses. Terms not
defined herein will have the meanings given them in the Prospectuses.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
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.
Certain Portfolios 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
Certain Portfolios may invest in debt securities, as stated in the
Portfolios' investment objectives and policies in the relevant
Prospectus or in this Statement of Additional Information. Some
Portfolios 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") or 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
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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 Portfolio will not
accrue any income on these securities prior to delivery. The
Portfolio 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 securities
depends, to a large extent, on the credit analysis performed or used
by the Portfolio's Manager.
HIGH YIELD BONDS
"High Yield Bonds" (commonly referred to as "junk bonds"), are
bonds rated lower than Baa or BBB, or, if not rated by Moody's or
Standard & Poor's, of equivalent quality. In general, high yield
bonds are not considered to be investment grade, and investors should
consider the risks associated with high yield bonds before investing
in the pertinent Portfolio. Investment in such securities generally
provides greater income and increased opportunity for capital
appreciation than investments in higher quality securities, but it
also typically entails 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. 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 Portfolio 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
Portfolio 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 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 Portfolio 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 secondary trading market could adversely affect the price at which
the Portfolio could sell a high yield bond, and could adversely
affect and cause large fluctuations in the daily net asset value of
the Portfolio's 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.
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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
"Brady Bonds," 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 Bonds are not considered U.S. Government securities and are
considered speculative. Brady Plan debt restructuring have been
implemented to date in several countries, including Mexico,
Venezuela, Argentina, Uruguay, Costa Rica, Bulgaria, the Dominican
Republic, Jordan, Nigeria, Bolivia, Ecuador, Niger, Brazil, Peru,
Panama, Poland and the Philippines (collectively, the "Brady
Countries"). It is expected that other countries will undertake a
Brady Plan debt restructuring in the future. 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 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 Portfolio may
invest will not be subject to restructuring arrangements or to
requests for new credit, which may cause the Portfolio to suffer a
loss of interest or principal on any of its holdings.
SOVEREIGN DEBT
Debt obligations known as "sovereign debt" are obligations of
governmental issuers in emerging market countries and industrialized
countries. Some Portfolios may invest in obligations issued or
guaranteed by a foreign government or its political subdivisions,
authorities, agencies, or instrumentalities, or by supranational
entities, which, at the time of investment, are rated A or better by
Standard & Poor's or Moody's or, if not rated by Standard & Poor's or
Moody's, determined by the Portfolio Manager to be of equivalent
quality.
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 accordance with the terms of such obligations.
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A governmental entity's willingness or ability to repay principal and pay
interestdue 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 Portfolio
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 a Portfolio may invest will not be subject to
similar restructuring arrangements or to requests for new credit,
which may adversely affect the Portfolio's 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
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 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.
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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 Portfolio 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 conventional (i.e.,
not insured or guaranteed by any government agency) purchases
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 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 portfolios (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 portfolio A, B,
and C Bonds all bear current interest. Interest on the portfolio Z
Bond is accrued and added to the principal; a like amount is paid as
principal on the portfolio A, B, or C Bond currently being paid off.
When the portfolio A, B, and C Bonds are paid in full, interest and
principal on the portfolio Z Bond begin to be
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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 Portfolio' s
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.
Some Portfolios may buy mortgage-backed securities without
insurance or guarantees, if the Portfolio Manager determines that the
securities meet a Portfolio's quality standards. Although the market
for such securities is becoming increasingly liquid, securities
issued by certain private organizations may not be readily
marketable. A Portfolio will not purchase mortgage-backed securities
or any other assets which, in the opinion of the Portfolio Manager,
are illiquid if, as a result, the Portfolio will exceed its
illiquidity cap. As new types of mortgage-backed securities are
developed and offered to investors, the Portfolio Manager will,
consistent with a Portfolio's 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 Portfolios.
ASSET-BACKED SECURITIES
Asset-backed securities (unrelated to mortgage loans) are
securities such as "CARS/sm/" ("Certificates for Automobile
Receivables/sm/") and Credit Card Receivable Securities. The Market
Manager Portfolio may not invest in these securities.
CARS/sm/ represent undivided fractional interests in a 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 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
Portfolio 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
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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. 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
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.
DERIVATIVES
Certain Portfolios invest in derivatives, which are securities
and contracts whose value is based on performance of an underlying
financial asset, index or other investment. Examples of the
derivatives are CMOs, variable and floating rate securities, futures
contracts, options contracts, and forward currency exchange
contracts.
Derivative securities and contracts may be used as a direct
investment or as a hedge for a portfolio of investments. Hedging
involves using a security or contract to offset investment risk, and
can reduce the risk of a position held in an investment portfolio.
If the Portfolio Manager's judgement about fluctuations in securities
prices, interest rates or currency prices proves incorrect, or the
strategy does not correlate well with a Portfolio's volitility. In
addition, in the event that non-exchange traded derivatives are used,
they could result in a loss if the counter-party to the transaction
does not perform as promised.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Certain Portfolios 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"). Some Portfolios may invest in obligations of
foreign branches of commercial banks and foreign banks so long as the
securities are U.S. dollar-denominated, and some Portfolios also may
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 this Statement of Additional
Information 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
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of exchange, which are normally drawn by an importer
or exporter to 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 Portfolio 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% or 15%, depending on the
Portfolio, of its assets would be invested in such deposits, in
repurchase agreements maturing in more than seven days, and in 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 Portfolios invest only in bank and S&L obligations
as specified in that Portfolio's investment policies. Other
Portfolios, except the Managed Global Portfolio, will not invest in
obligations issued by a commercial bank or S&L unless:
(i) the bank or S&L has total assets of at 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 Portfolio Manager, of an investment
quality comparable with other debt securities which may be
purchased by the Portfolio. 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.
The Managed Global Portfolio will not invest in obligations issued
by a U.S. or foreign commercial bank or S&L unless:
(i) the bank or S&L has total assets of at least $10 billion
(U.S.), or the equivalent in other currencies, and the
institution has outstanding securities rated A or better by
Moody's or Standard & 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; and
(ii) in the case or a U.S. bank or S&L, its deposits are
insured by the FDIC or the SAIF, as the case may be.
COMMERCIAL PAPER
All of the Portfolios may invest in commercial paper (including
variable amount master demand notes and extendable command notes
("ECN")), denominated in U.S. dollars, issued by U.S. corporations or
foreign
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corporations. Unless otherwise indicated in the investment
policies for a Portfolio, it 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 Portfolio may
invest.
Commercial paper obligations may include variable amount master
demand notes. These notes are obligations that permit investment of
fluctuating amounts at varying rates of interest pursuant to direct
arrangements between a Portfolio, 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 Portfolio 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
Portfolio may invest. Master demand notes are considered by the
Portfolio 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 Portfolios 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 Portfolio 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 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 their
value always equals or exceeds the agreed-upon repurchase price to be
paid to the Portfolio. The Portfolio Manager, in accordance with
procedures established by the Board of Trustees, also evaluates the
creditworthiness and financial responsibility of the banks and
brokers or dealers with which the Portfolio enters into repurchase
agreements.
A Portfolio 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
Portfolio 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 Portfolio 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 that Portfolio's limitation, either 10% or
15% of the net assets of the Portfolio, depending on the Portfolio,
on investing in illiquid securities. If the seller should become
bankrupt or default on its obligations to repurchase the securities,
a Portfolio 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 Portfolio also might
incur disposition costs in connection with liquidating the securities.
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REVERSE REPURCHASE AGREEMENTS
A reverse repurchase agreement involves the sale of a security by
the Portfolio and its agreement to repurchase the instrument at a
specified time and price. A Portfolio 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
Portfolio will maintain a segregated account consisting of cash
and/or securities 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 Portfolio will limit its investments in
reverse repurchase agreements consistent with the borrowing limits
applicable to the Portfolio. See "Borrowing" for further information
on these limits. The use of reverse repurchase agreements by a
Portfolio creates leverage which increases a Portfolio's investment
risk. If the income and gains on securities purchased with the
proceeds of reverse repurchase agreements exceed the cost of the
agreements, the Portfolio's 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
Some Portfolios may lend portfolio securities to broker-dealers or
institutional investors for the purpose of realizing additional
income. A Portfolio will only enter into this type of 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; (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 33 1/3% of the total assets of the Portfolio. 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 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
Portfolio must maintain with the Portfolio 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 Portfolio lending such voting securities may call them if
important shareholder meetings are imminent. A Portfolio may only
lend portfolio securities to entities that are not affiliated with
either the Manager or a Portfolio Manager.
OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment
companies. A Portfolio 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 Portfolio's total assets in the investment company, or (3) invest
more than 10% of the Portfolio's total assets in all investment
company holdings. As a shareholder in any investment company, a
Portfolio will bear its ratable share of the investment company's
expenses, including management fees in the case of a management
investment company. The Equity Income and Fully Managed Portfolios
may, however, invest in shares of the T. Rowe Price Money Market
Funds and the Growth Portfolio may invest in shares of Janus' Money
Market Funds. Other Portfolios may invest in shares issued by other
investment companies to the extent allowable by the 1940 Act.
SHORT SALES
A short sale is a transaction in which the Portfolio sells a
security it does not own in anticipation of a decline in market
price. A Portfolio may make short sales to offset a potential
decline in a long position or a group of long positions, or if the
Portfolio Manager believes that a decline in the price of a
particular security or group of securities is likely.
The Portfolio's obligation to replace the security borrowed in
connection with the short sale will be secured by collateral
deposited with a broker, consisting of cash or securities acceptable
to the broker. In addition, with
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respect to any short sale, other than short sales against the box, the
Portfolio 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 Portfolio's potential loss on a short sale, which may exceed the
entire amount of the collateral.
A Portfolio 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.
SHORT SALES AGAINST THE BOX
A short sale "against the box" is a short sale where, at the time
of the short sale, the Portfolio owns or has the immediate and
unconditional right, at no added cost, to obtain the identical
security. A Portfolio would enter into such a transaction to defer a
gain or loss for Federal income tax purposes on the security owned by
the Portfolio. Short sales against the box are not subject to the
percentage limitations on short sales described in the Prospectuses.
FUTURES CONTRACTS AND OPTIONS ON 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 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
Portfolio has sold a futures contract, if the offsetting purchase
price is less than the original futures contract sale price, the
Portfolio realizes a gain; if it is more, the Portfolio realizes a
loss. Where a Portfolio has purchased a futures contract, if the
offsetting price is more than the original futures contract purchase
price, the Portfolio realizes a gain; if it is less, the Portfolio
realizes a loss.
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.
A Portfolio may purchase and sell interest rate futures as a hedge
against adverse changes in debt instruments and other interest rate
sensitive securities. As a hedging strategy a Portfolio might
employ, a Portfolio 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 Portfolio 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 Portfolio 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 Portfolio or avoided by taking
delivery of the debt securities under the futures contract.
A Portfolio 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 Portfolio would be substantially offset by the
ability of the Portfolio to repurchase at a lower price the interest
rate futures contract previously sold. While the Portfolio could
sell the long-term debt security and invest in a short-term security,
ordinarily the Portfolio would give up income on its investment,
since long-term rates normally exceed short-term rates.
OPTIONS ON FUTURES CONTRACTS. A futures option gives the
Portfolio 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 assigned the opposite short position. In the
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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 Portfolio.
The Portfolio 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 Portfolio would
use put and call options on debt securities, as described hereafter
in "Options on Securities and Securities Indexes."
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 a 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 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 Portfolio 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 Portfolio 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 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 Portfolio is attempting to purchase equity
positions in issues which it had or was having difficulty
purchasing at prices considered by the 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.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS. Some Portfolios may
invest in gold bullion and coins and other precious metals (silver or
platinum) bullion and in futures contracts with respect to such
metals. In order to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, each
Portfolio (with the exception of the Hard Assets Portfolio) intends
to manage its metal investments and/or futures contracts on metals so
that less than 10% of the gross income of the Portfolio 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 a
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Portfolio 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 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.
GOLD FUTURES CONTRACTS. 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 Portfolio
purchases a gold futures contract it becomes obligated to take
delivery of and pay for the gold from the seller, and when the
Portfolio 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 Portfolio may be able to enter into
gold futures contracts only for the purpose of hedging its holdings
or intended holdings of gold stocks and gold bullion. The Portfolio
will not engage in these contracts for speculation or for achieving
leverage. The Portfolio's 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
Portfolio 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 Portfolio might use futures
contracts to hedge against anticipated changes in interest rates that
might adversely affect either the value of the Portfolio's securities
or the price of the securities which the Portfolio intends to
purchase. The Portfolio's 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 Portfolio's exposure to
interest rate fluctuations, a Portfolio may be able to hedge its
exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options. See this Statement of
Additional Information for a discussion of other strategies involving
futures and futures options.
If a purchase or sale of a futures contract is made by a
Portfolio, it is required to deposit with its custodian a specified
amount of cash and/or 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 Portfolio upon termination of the contract,
assuming all contractual obligations have been satisfied. Each
investing Portfolio expects to earn interest income on its initial
margin deposits.
A futures contract held by a Portfolio is valued daily at the
official settlement price of the exchange on which it is traded.
Each day the Portfolio 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
Portfolio but is settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired.
In computing daily net asset value, each Portfolio will mark-to-
market its open futures positions.
A Portfolio 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 Portfolio.
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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 Portfolio realizes a capital gain, or if it is more,
the Portfolio realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, the Portfolio
realizes a capital gain, or if it is less, the Portfolio realizes a
capital loss. The transaction costs must also be included in these
calculations.
LIMITATIONS. When purchasing a futures contract, a Portfolio must
maintain with its custodian cash or securities (including any margin)
equal to the market value of such contract. When writing a call
option on a futures contract, the Portfolio similarly will maintain
with its custodian cash and/or securities (including any margin)
equal to the amount such option is "in-the-money" until the option
expires or is closed out by the Portfolio. 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 Portfolio 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 Portfolio and the
positions. For this purpose, to the extent the Portfolio 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 Portfolio,
after taking into account unrealized profits and unrealized gains on
any such contracts entered into.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
PURCHASING OPTIONS ON SECURITIES. An option on a security is a
contract that gives the purchaser of the option, in return or 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 Portfolio 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 Portfolio would
enable it to protect, at least partially, an unrealized gain in an
appreciated security without actually selling the security. In
addition, the Portfolio would continue to receive interest income on
such security.
A Portfolio may purchase call options on securities to protect
against substantial increases in prices of securities the Portfolio
intends to purchase pending its ability to invest in such securities
in an orderly manner. A Portfolio 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.
A Portfolio may purchase long-term exchange traded equity options
called Long Term Equity Anticipation Securities ("LEAPS") and Buy
Write Option Unitary Derivatives ("BOUNDS"). LEAPs provide the
holder the opportunity to participate in the underlying securities'
appreciation in excess of a fixed dollar amount, BOUNDs provide a
holder the opportunity to retain dividends on the underlying
securities while potentially participating in underlying securities'
capital appreciation up to a fixed dollar amount.
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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 Portfolio 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 Portfolio 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
Portfolio seeks to close out an option position. Furthermore, if
trading restrictions or suspensions are imposed on the options
markets, a Portfolio may be unable to close out a position. If a
Portfolio 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 Portfolio, 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 Portfolio's net asset value being more
sensitive to changes in the value of the underlying securities.
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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio may write a call or put option only if the option is
"covered" or "secured" by the Portfolio holding a position in the
underlying securities. This means that so long as the Portfolio is
obligated as the writer of a call option, it will own the underlying
securities subject to the option or hold a call with the same
exercise price, the same exercise period, and on the same securities
as the written call. Alternatively, a Portfolio may maintain, in a
segregated account with the Trust's custodian, cash and/or securities
with a value sufficient to meet its obligation as writer of the
option. A put is secured if the Portfolio maintains cash and/or
securities with a value equal to the exercise price in a segregated
account, or holds a put on the same underlying security at an equal
or greater
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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 Portfolio.
OPTIONS ON SECURITIES INDEXES. A Portfolio may purchase or sell
call and put options on securities indexes for the same purposes as
it purchase or sells of options on securities. 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 Portfolio is required to maintain a segregated account
consisting of cash, cash equivalents or high grade obligations or the
Portfolio must purchase a like option of greater value that will
expire no earlier than the option sold. Purchased options may not
enable the Portfolio to hedge effectively against stock market risk
if they are not highly correlated with the value of the Portfolio's
securities. Moreover, the ability to hedge effectively depends upon
the ability to predict movements in the stock market.
OVER-THE-COUNTER OPTIONS. Certain Portfolios may write or
purchase options in privately negotiated domestic or foreign
transactions ("OTC Options"), as well as exchange-traded or "listed"
options. OTC Options can be closed out only by agreement with the
other party to the transaction, and thus any OTC Options purchased by
a Portfolio will be considered an Illiquid Security. In addition,
certain OTC Options on foreign currencies are traded through
financial institutions acting as market-makers in such options and
the underlying currencies.
The staff of the SEC has taken the position that purchased over-
the-counter options and assets used to cover written over-the-counter
options are illiquid and, therefore, together with other illiquid
securities, cannot exceed a certain percentage of a Portfolio's
assets (the "SEC illiquidity ceiling"). Except as provided below, the
Portfolios intend to write over-the-counter options only with primary
U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York. Also, the contracts which such Portfolio have in
place with such primary dealers will provide that each Portfolio has
the absolute right to repurchase any option it writes at any time at
a price which represents the fair market value, as determined in good
faith through negotiation between the parties, but which in no event
will exceed a price determined pursuant to a formula in the contract.
Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a
multiple of the premium received by the Portfolio for writing the
option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may
also include a factor to account for the difference between the price
of the security and the strike price of the option if the option is
written out-of-money. A Portfolio will treat all or a part of the
formula price as illiquid for purposes of the SEC illiquidity
ceiling. Certain Portfolio may also write over-the-counter options
with non-primary dealers, including foreign dealers, and will treat
the assets used to cover these options as illiquid for purposes of
such SEC illiquidity ceiling.
OTC Options entail risks in addition to the risks of exchange-
traded options. Exchange-traded options are in effect guaranteed by
the Options Clearing Corporation, while a Portfolio relies on the
party from whom it purchases an OTC Option to perform if the
Portfolio exercises the option. With OTC Options, if the transacting
dealer fails to make or take delivery of the securities or amount of
foreign currency underlying an option it has written, in accordance
with the terms of that option, the Portfolio will lose the premium
paid for the option as well as any anticipated benefit of the
transaction. Furthermore, OTC Options are less liquid than exchange-
traded options.
GENERAL. 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 Portfolio
is recorded as an asset of the Portfolio and subsequently adjusted.
The premium received for an option written by a Portfolio is included
in the Portfolio's 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.
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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
Portfolio's transactions in futures may protect the Portfolio against
adverse movements in the general level of interest rates or other
economic conditions, such transactions could also preclude the
Portfolio 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
Portfolio and the hedging vehicle so that the Portfolio's 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 Portfolio 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 Portfolio from
liquidating an unfavorable position and the Portfolio would remain
obligated to meet margin requirements and continue to incur losses
until the position is closed.
Most Portfolios 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 Portfolio 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 Portfolio 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 Portfolio's
total assets.
Foreign markets may offer advantages such as trading in indexes
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. A Portfolio
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.
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WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Portfolios except the Market Manager Portfolio may purchase
securities on a when issued or delayed delivery basis if the
Portfolio holds, and maintains until the settlement date in a
segregated account, cash and/or securities in an amount sufficient to
meet the purchase price, or if the Portfolio enters into offsetting
contracts for the forward sale of 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 Portfolio's other assets.
Although a Portfolio would generally purchase securities on a when-
issued basis or enter into forward commitments with the intention of
acquiring securities, the Portfolio may dispose of a when-issued or
delayed delivery security prior to settlement if the Portfolio
Manager deems it appropriate to do so. The Portfolio may realize
short-term profits or losses upon such sales.
FOREIGN SECURITIES
Some Portfolios may invest in equity securities of foreign
issuers, including American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs")
(collectively, "Depositary Receipts") which are described below.
Some Portfolio may invest in foreign branches of commercial banks and
foreign banks. See the "Banking Industry and Savings Industry
Obligations" discussion in this Statement of Additional Information
for further description of these securities.
Except for the Hard Assets Portfolio, each Portfolio may have no
more than 25% of its net assets invested in securities of issuers
located in any one emerging market country and no more than 50% of
its assets invested in securities of any one country, except that a
Portfolio may have additional investments 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 Hard Assets Portfolio may invest up to 35%
of its net assets in securities of issuers located in South Africa. A
Portfolio's investments in U.S. 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 Portfolios 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 markets. There is generally less
government supervision and regulation of exchanges, brokers, and
issuers than there is in the United States. A Portfolio 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.
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As discussed above "sovereign debt" consists of debt obligations
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 Portfolio 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 Portfolio
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
Portfolio 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 Portfolio 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" and "Debt Securities--Sovereign Debt".
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 Portfolio 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.
On January 1, 1999, certain members of the European Economic and
Monetary Union ("EMU"), namely Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxenbourg, the Netherlands, Portugal, and
Spain established a common European currency known as the "euro" and
each member's local currency became a denomination of the euro. It
is anticipated that each participating country will replace its local
currency with the euro on July 1, 2002. Any other European country
that is a member of the European Union and satisfies the criteria for
participation in the EMU may elect to participate in the EMU and may
supplement its existing currency with the euro. The anticipated
replacement of existing currencies with the euro on July 1, 2002
could market disruptions before or after July 1, 2002 and could
adversely affect the value of securities held by a Portfolio.
FOREIGN CURRENCY TRANSACTIONS
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 Portfolio 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 Portfolio will engage
in forward currency transactions in anticipation of or to protect
itself against fluctuations in currency exchange rates. A Portfolio
might sell a particular currency forward, for example, when it wants
to hold bonds or bank obligations denominated in that currency but
anticipates or wishes 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 or
exposed to that currency which it anticipated purchasing.
A Portfolio may enter into forward foreign currency contracts in
two circumstances. When a Portfolio enters into a contract for the
purchase or sale of a security denominated in or exposed to a foreign
currency, the Portfolio 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 Portfolio will
be able to protect itself against a possible loss resulting from an
adverse change in
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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 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 Portfolio's securities
denominated in or exposed to 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
Portfolios will enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts
would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of the Portfolio's securities or other assets
denominated in that currency.
At the maturity of a forward contract, a Portfolio 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.
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 Portfolio 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 Portfolio is obligated to
deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio 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 Portfolio's 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
Portfolio 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
Portfolio 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 Portfolio seeks to close out a forward currency position, and
in such an event, a Portfolio might not be able to effect a closing
purchase transaction at any particular time. In addition, a
Portfolio 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 Portfolios with respect to such contracts, see
"Foreign Currency Transactions" in this Statement of Additional
Information.
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 Portfolio may enter
into closing sale transactions with respect to such options, exercise
them, or permit them to expire.
A Portfolio may employ hedging strategies with options on
currencies before the Portfolio purchases a foreign security
denominated in the hedged currency that the Portfolio anticipates
acquiring, during the period the
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Portfolio 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 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.
COMMON STOCK AND OTHER EQUITY SECURITIES
Common Stocks represent an equity (ownership) interest in a
corporation. This ownership interest generally gives a Portfolio the
right to vote on measures affecting the company's organization and
operations.
Certain of the Portfolios may also buy securities such as
convertible debt, preferred stock, warrants or other securities
exchangeable for shares of common stock. In selecting equity
investments for a Portfolio, the Adviser or Portfolio Manager will
generally invest the Portfolio's assets in industries and companies
that it believes are experiencing favorable demand for their products
and services and which operate in a favorable competitive and
regulatory climate.
CONVERTIBLE SECURITIES
A convertible security is a security that may be converted either
at a stated price or rate within a specified period of time into a
specified number of shares of common stock. By investing in
Convertible Securities, a Portfolio seeks the opportunity, through
the conversion feature, to participate in the capital appreciation of
the common stock into which the securities are convertible, while
earning a higher fixed rate of return than is available in common
stocks.
CURRENCY MANAGEMENT
A Portfolio's flexibility to participate in higher yielding debt
markets outside of the United States may allow the Portfolios to
achieve higher yields than those generally obtained by domestic money
market funds and short-term bond investments. When a Portfolio
invests significantly in securities denominated in foreign
currencies, however, movements in foreign currency exchange rates
versus the U.S. dollar are likely to impact the Portfolio's share
price stability relative to domestic short-term income funds.
Fluctuations in foreign currencies can have a positive or negative
impact on returns. Normally, to the extent that the Portfolio is
invested in foreign securities, a weakening in the U.S. dollar
relative to the foreign currencies underlying a Portfolio's
investments should help increase the net asset value of the
Portfolio. Conversely, a strengthening in the U.S. dollar versus the
foreign currencies in which a Portfolio's securities are denominated
will generally lower the net asset value of the Portfolio. The
Manager or relevant Portfolio Manager attempts to minimize exchange
rate risk through active Portfolio management, including hedging
currency exposure through the use of futures, options and forward
currency transactions and attempting to identify bond markets with
strong or stable currencies. There can be no assurance that such
hedging will be successful and such transactions, if unsuccessful,
could result in additional losses or expenses to a Portfolio.
HYBRID INSTRUMENTS
Hybrid Instruments (a type of potentially high-risk derivative)
have been developed and combine the elements of futures contracts or
options with those of debt, preferred equity, or a depository
instrument (hereinafter "Hybrid Instruments"). Generally, a Hybrid
Instrument will be a debt security, preferred stock, depository
share, trust certificate, certificate of deposit, or other evidence
of indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices,
changes in prices, or differences between prices, of securities,
currencies, intangibles, goods, articles, or commodities
(collectively "Underlying Assets") or by another objective index,
economic factor, or other
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measure, such as interest rates, currency exchange rates, commodity indices,
and securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments
may take a variety of forms, including, but not limited to, debt instruments
with interest or principal payments or redemption terms determined by
reference to the value of a currency or commodity or securities index
at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular
commodity.
Hybrid Instruments can be an efficient means of creating exposure
to a particular market, or segment of a market, with the objective of
enhancing total return. For example, a Portfolio may wish to take
advantage of expected declines in interest rates in several European
countries, but avoid the transaction costs associated with buying and
currency-hedging the foreign bond positions. One solution would be to
purchase a U.S. dollar-denominated Hybrid Instrument whose redemption
price is linked to the average three-year interest rate in a
designated group of countries. The redemption price formula would
provide for payoffs of greater than par if the average interest rate
was lower than a specified level, and payoffs of less than par if
rates were above the specified level. Furthermore, the Portfolio
could limit the downside risk of the security by establishing a
minimum redemption price so that the principal paid at maturity could
not be below a predetermined minimum level if interest rates were to
rise significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to give the
Fund the desired European bond exposure while avoiding currency risk,
limiting downside market risk, and lowering transactions costs. Of
course, there is no guarantee that the strategy will be successful,
and the Portfolio could lose money if, for example, interest rates do
not move as anticipated or credit problems develop with the issuer of
the Hybrid Instrument.
The risks of investing in Hybrid Instruments reflect a combination
of the risks of investing in securities, options, futures and
currencies. Thus, an investment in a Hybrid Instrument may entail
significant risks that are not associated with a similar investment
in a traditional debt instrument that has a fixed principal amount,
is denominated in U.S. dollars, or bears interest either at a fixed
rate or a floating rate determined by reference to a common,
nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument,
but may include, without limitation, the possibility of significant
changes in the Benchmarks or the prices of Underlying Assets to which
the instrument is linked. Such risks generally depend upon factors
which are unrelated to the operations or credit quality of the issuer
of the Hybrid Instrument and which may not be readily foreseen by the
purchaser, such as economic and political events, the supply and
demand for the Underlying Assets, and interest rate movements. In
recent years, various Benchmarks and prices for Underlying Assets
have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options,
and forward contracts herein for a discussion of the risks associated
with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the
structure of the particular Hybrid Instrument, changes in a Benchmark
may be magnified by the terms of the Hybrid Instrument and have an
even more dramatic and substantial effect upon the value of the
Hybrid Instrument. Also, the prices of the Hybrid Instrument and the
Benchmark or Underlying Asset may not move in the same direction or
at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively,
Hybrid Instruments may bear interest at above market rates but bear
an increased risk of principal loss (or gain). The latter scenario
may result if "leverage" is used to structure the Hybrid Instrument.
Leverage risk occurs when the Hybrid Instrument is structured so that
a given change in a Benchmark or Underlying Asset is multiplied to
produce a greater value change in the Hybrid Instrument, thereby
magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the
instruments are often "customized" to meet the portfolio needs of a
particular investor, and therefore, the number of investors that are
willing and able to buy such instruments in the secondary market may
be smaller than that for more traditional debt securities. In
addition, because the purchase and sale of Hybrid Instruments could
take place in an over-the-counter market without the guarantee of a
central clearing organization or in a transaction between the Fund
and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party of issuer of the Hybrid Instrument would be an
additional risk
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factor which the Fund would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the Commodities
Futures Trading Commission, which generally regulates the trading
of commodity futures by U.S. persons, the SEC, which regulates the
offer and sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
The various risks discussed above, particularly the market risk of
such instruments, may in turn cause significant fluctuations in the
net asset value of the Portfolio. Accordingly, the Portfolio will
limit its investments in Hybrid Instruments to 10% of total assets.
However, because of their volatility, it is possible that the
Portfolio's investment in Hybrid Instruments will account for more
than 10% of the Fund's return (positive or negative).
DOLLAR ROLL TRANSACTIONS
Certain Portfolios seeking a high level of current income may
enter into dollar rolls or "covered rolls" in which the Portfolio
sells securities (usually Mortgage-Backed Securities) and
simultaneously contracts to purchase, typically in 30 to 60 days,
substantially similar, but not identical securities, on a specified
future date. The proceeds of the initial sale of securities in the
dollar roll transactions may be used to purchase long-term securities
which will be held during the roll period. During the roll period,
the Portfolio forgoes principal and interest paid on the securities
sold at the beginning of the roll period. The Portfolio is
compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for
which there is an offsetting cash position or cash equivalent
securities position that matures on or before the forward settlement
date of the dollar roll transaction. As used herein the term "dollar
roll" refers to dollar rolls that are not "covered rolls." At the end
of the roll commitment period, the Portfolio may or may not take
delivery of the securities the Portfolio has contracted to purchase.
The Portfolio will establish a segregated account with its
custodian in which it will maintain cash, U.S. Government Securities
or other liquid high- grade debt obligations equal in value at all
times to its obligations in respect of dollar rolls, and,
accordingly, the Portfolio will not treat such obligations as senior
securities for purposes of the Investment Company Act of 1940.
"Covered rolls" are not subject to these segregation requirements.
Dollar Roll Transactions may be considered borrowings and are,
therefore, subject to the borrowing limitations applicable to the
Portfolio.
EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY
SUPRANATIONAL ORGANIZATIONS
Portfolios authorized to invest in securities of foreign issuers
may invest assets in equity and debt securities issued or guaranteed
by Supranational Organizations, such as obligations issued or
guaranteed by the Asian Development Bank, Inter-American Development
Bank, International Bank for Reconstruction and Development (World
Bank), African Development Bank, European Coal and Steel Community,
European Economic Community, European Investment Bank and the Nordic
Investment Bank.
EXCHANGE RATE RELATED SECURITIES
Certain of the Portfolios may invest in securities that are
indexed to certain specific foreign currency exchange rates. The
terms of such securities would provide that the principal amount or
interest payments are adjusted upwards or downwards (but not below
zero) at payment to reflect fluctuations in the exchange rate between
two currencies while the obligation is outstanding, depending on the
terms of the specific security. A Portfolio will purchase such
security with the currency in which it is denominated and will
receive interest and principal payments thereon in the currency, but
the amount of principal or interest payable by the issuer will vary
in proportion to the change (if any) in the exchange rate between the
two specific currencies between the date the instrument is issued and
the date the principal or interest payment is due. The staff of the
SEC is currently considering whether a mutual fund's purchase of this
type of security would result in the issuance of a "senior security"
within the meaning of the 1940 Act. The Trust believes that such
investments do not involve the creation of such a senior security,
but nevertheless undertakes, pending the resolution of this issue by
the staff, to establish a segregated account with respect to such
investments and to maintain in such account cash not available for
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investment or U.S. Government Securities or other liquid high quality
debt securities having a value equal to the aggregate principal
amount of outstanding securities of this type.
Investment in Exchange Rate-Related Securities entails certain
risks. There is the possibility of significant changes in rates of
exchange between the U.S. dollar and any foreign currency to which an
Exchange Rate-Related Security is linked. In addition, there is no
assurance that sufficient trading interest to create a liquid
secondary market will exist for a particular Exchange Rate-Related
Security due to conditions in the debt and foreign currency markets.
Illiquidity in the forward foreign exchange market and the high
volatility of the foreign exchange market may from time to time
combine to make it difficult to sell an Exchange Rate-Related
Security prior to maturity without incurring a significant price
loss.
GEOGRAPHICAL AND INDUSTRY CONCENTRATION
Where a Portfolio invests at least 25% of its assets in Bank
Obligations, the Portfolio's investments may be subject to greater
risk than a Portfolio that does not concentrate in the banking
industry. In particular, Bank Obligations may be subject to the risks
associated with interest rate volatility, changes in federal and
state laws and regulations governing banking and the inability of
borrowers to pay principal and interest when due. In addition,
foreign banks present the risks of investing in foreign securities
generally and are not subject to reserve requirements and other
regulations comparable to those of U.S. Banks.
ILLIQUID SECURITIES
Illiquid securities are securities that are not readily
marketable, including, where applicable: (1) repurchase agreements
with maturities greater than seven calendar days; (2) time deposits
maturing in more than seven calendar days; (3) to the extent a liquid
secondary market does not exist for the instruments, futures
contracts and options thereon; (4) certain over-the-counter options,
as described in this Statement of Additional Information; (5) certain
variable rate demand notes having a demand period of more than seven
days; and (6) securities the disposition of which is restricted under
Federal securities laws (excluding Rule 144A Securities, described
below).
RESTRICTED SECURITIES
The Portfolio may also purchase securities that are not registered
under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act
("Rule 144A securities"). The Trust's Board of Trustees confirms
based upon information and recommendations provided by the Portfolio
Manager that a specific Rule 144A security is liquid and thus not
subject to the limitation on investing in illiquid investments. The
Board of Trustees has adopted guidelines and has delegated to the
Portfolio Manager the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. This investment practice could have the effect of
decreasing the level of liquidity in the Portfolio to the extent that
qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the investment Portfolio.
Subject to limitation on investments in illiquid investments and
subject to the diversification requirements of the Internal Revenue
Code of 1986, as amended (the "Code"), the Portfolio may also invest
in restricted securities that may not be sold under Rule 144A, which
presents certain risks. As a result, the Portfolio might not be able
to sell these securities when the Portfolio Manager wishes to do so,
or might have to sell them at less than fair value. In addition,
market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the
case of unrestricted securities
LEASE OBLIGATION BONDS
Lease Obligation Bonds are mortgages on a facility that is secured
by the facility and are paid by a lessee over a long term. The rental
stream to service the debt as well as the mortgage are held by a
collateral trustee on behalf of the public bond holders. The primary
risk of such instrument is the risk of default. Under the lease
indenture, the failure to pay rent is an event of default. The remedy
to cure default is to rescind the lease and sell the assets. If the
lease obligation is not readily marketable or market quotations are
not readily available, such lease obligations will be subject to a
Portfolio's limit on illiquid securities.
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BORROWING
Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a
Portfolio's 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
Portfolio's shares. A Portfolio 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.
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 below,
except those Portfolios that are permitted to engage in short sales
of securities with respect to an additional 15% of the Portfolio's
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 a Portfolio's borrowing limitations to the extent
that a Portfolio establishes and maintains liquid assets in a
segregated account with the Trust's custodian equal to the
Portfolio's obligations under the when-issued or delayed delivery
arrangement.
HARD ASSET SECURITIES
The production and marketing of Hard Assets may be affected by
actions and changes in governments. In addition, Hard Asset Companies
and securities of Hard Asset Companies may be cyclical in nature.
During periods of economic or financial instability, the securities
of some Hard Asset Companies may be subject to broad price
fluctuations, reflecting volatility of energy and basic materials
prices and possible instability of supply of various Hard Assets. In
addition, some Hard Asset Companies may also be subject to the risks
generally associated with extraction of natural resources, such as
the risks of mining and oil drilling, and the risks of the hazards
associated with natural resources, such as fire, drought, increased
regulatory and environmental costs, and others. Securities of Hard
Asset Companies may also experience greater price fluctuations than
the relevant Hard Asset. In periods of rising Hard Asset prices,
such securities may rise at a faster rate, and, conversely, in time
of falling Hard Asset prices, such securities may suffer a greater
price decline.
REAL ESTATE SECURITIES
Real estate securities include real estate investment trusts
("REITs") and other companies in the real estate industry or
companies with substantial real estate investments. A Portfolio
investing in such real estate securities 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, REITs may be affected by
any changes in the value of the underlying property owned by the
trusts or by the quality of any credit extended. REITs are dependent
upon management skill, are not diversified, and are therefore subject
to the risk of financing single or a limited number of projects.
REITs 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 1940. Act
Finally, certain REITs may be self-liquidating in that a specific
term of existence is provided for in the trust document and such
REITs run the risk of liquidating at an economically inopportune
time.
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SWAPS
Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more
than one year. In a standard swap transaction, two parties agree to
exchange the returns (or differential in rates of return) earned or
realized on particular predetermined investments or instruments,
which may be adjusted for an interest factor. The gross returns to
be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on
or increase in value of a particular dollar amount invested at a
particular interest rate, or in a "basket" of securities representing
a particular index.
The use of swaps is a highly specialized activity which involved
investment techniques and risks different from those associated with
ordinary portfolio transactions. Whether the Portfolio's use of swap
agreements will be successful in furthering its investment objective
will depend on the Portfolio Manager's ability to predict correctly
whether certain types of investments are likely to produce greater
returns than other investments. Moreover, the Portfolio bears the
risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap
agreement counterparty. Swaps are generally considered illiquid and
will be aggregated with other illiquid positions for purposes of the
limitation on illiquid investments.
The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market,
including potential government regulation, could adversely affect the
Portfolio's ability to terminate existing swap agreements or to
realize amounts to be received under such agreements.
ZERO-COUPON BONDS
Zero-coupon bonds are issued at a significant discount from face
value and pay interest only at maturity rather than at intervals
during the life of the security. Payment-in-kind bonds allow the
issuer, at its option, to make current interest payments on the bonds
either in cash or in additional bonds. The values of zero-coupon
bonds and payment-in-kind bonds are subject to greater fluctuation in
response to changes in market interest rates than bonds which pay
interest currently, and may involve greater credit risk than such
bonds.
The discount of zero-coupon and deferred interest bonds
approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment
date at a rate of interest reflecting the market rate of the security
at the time of issuance. While zero-coupon bonds do not require the
periodic payment of interest, deferred interest bonds provide that
the issuer thereof may, at its option, pay interest on such bonds in
cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular
payments of interest. The Portfolio will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received
at the time of accrual, may require the liquidation of other
Portfolio securities to satisfy the Portfolio's distribution
obligations.
SMALL COMPANIES
Certain of the Portfolios may invest in small companies, some of
which may be unseasoned. Such companies may have limited product
lines, markets, or financial resources and may be dependent on a
limited management group. While the markets in securities of such
companies have grown rapidly in recent years, such securities may
trade less frequently and in smaller volume than more widely held
securities. The values of these securities may fluctuate more sharply
than those of other securities, and a Portfolio may experience some
difficulty in establishing or closing out positions in these
securities at prevailing market prices. There may be less publicly
available information about the issuers of these securities or less
market interest in such securities than in the case of larger
companies, and it may take a longer period of time for the prices of
such securities to reflect the full value of their issuers'
underlying earnings potential or assets.
Some securities of smaller issuers may be restricted as to resale
or may otherwise be highly illiquid. The ability of a Portfolio to
dispose of such securities may be greatly limited, and a Portfolio
may have to continue to hold such securities during periods when the
Manager or a Portfolio Manager would otherwise have sold the
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security. It is possible that the Manager or a Sub-Adviser or its
affiliates or clients may hold securities issued by the same issuers,
and may in some cases have acquired the securities at different
times, on more favorable terms, or at more favorable prices, than a
Portfolio which it manages.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of
the Portfolios as stated elsewhere in this Statement of Additional
Information certain of the Portfolios may, but are not required to,
utilize various investment strategies as described herein to hedge
various market risks, to manage the effective maturity or duration of
fixed income securities, or to seek potentially higher returns.
Utilizing these investment strategies, the Portfolio may purchase and
sell, to the extent not otherwise limited or restricted for such
Portfolios, exchange-listed and over-the-counter put and call options
on securities, equity and fixed income indexes and other financial
instruments, purchase and sell financial futures contracts and
options thereon, enter into various Interest Rate Transactions such
as swaps, caps, floors or collars, and enter into various currency
transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic
Transactions").
Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be
purchased for the Portfolios resulting from securities markets or
currency exchange rate fluctuations, to protect the Portfolio's
unrealized gains in the value of its Portfolio securities, to
facilitate the sale of such securities for investment purposes, to
manage the effective maturity or duration of the Portfolio, or to
establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. Some
Strategic Transactions may also be used to seek potentially higher
returns, although no more than 5% of the Portfolio's assets will be
used as the initial margin or purchase price of options for Strategic
Transactions entered into for purposes other than "bona fide hedging"
positions as defined in the regulations adopted by the Commodity
Futures Trading Commission. Any or all of these investment techniques
may be used at any time, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The
ability of the Portfolio to utilize these Strategic Transactions
successfully will depend on the Adviser's or Portfolio Manager's
ability to predict, which cannot be assured, pertinent market
movements. The Portfolio will comply with applicable regulatory
requirements when utilizing Strategic Transactions. Strategic
Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk
management or Portfolio management purposes.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, the relevant
Portfolios may make secured loans of portfolio securities.
Securities loans are made to banks, brokers and other financial
institutions pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the
value of the securities lent marked to market on a daily basis. The
collateral received will consist of cash, U.S. government securities,
letters of credit or such other collateral as may be permitted under
the Portfolio's investment program. While the securities are being
lent, the Portfolio will continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities, as well
as interest on the investment of the collateral or a fee from the
borrower. The Portfolio has a right to call each loan and obtain the
securities on five business day's notice or, in connection with
securities trading on foreign markets, within such longer period of
time which coincides with the normal settlement period for purchases
and sales of such securities in such foreign markets. The Fund will
not have the right to vote securities while they are being lent, but
it will call a loan in anticipation of any important vote. The risks
in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral
in the event the value of the collateral decreased below the value of
the securities loaned or of delay in recovering the securities loaned
or even loss of rights in the collateral should the borrower of the
securities fail financially. Loans will not be made unless, in the
judgement of the Portfolio Manager, the consideration to be earned
from such loans would justify the risk.
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SPECIAL SITUATIONS
A special situation arises when, in the opinion of the Portfolio
Manager, the securities of a particular company will, within a
reasonably estimable period of time, be accorded market recognition
at an appreciated value solely by reason of a development applicable
to that company, and regardless of general business conditions or
movements of the market as a whole. Developments creating special
situations might include, among others: liquidations,
reorganizations, recapitalizations, mergers, material litigation,
technical breakthroughs, and new management or management policies.
Investments in unseasoned companies and special situations often
involve much greater risk than in inherent in ordinary investment
securities.
WARRANTS
Certain Portfolios may, from time to time, invest in warrants.
Warrants are, in effect, longer-term call options. They give the
holder the right to purchase a given number of shares of a particular
company at specified prices within certain period of time. The
purchaser of a warrant expects that the market price of the security
will exceed the purchase price of the warrant plus the exercise price
of the warrant, thus giving him a profit. Of course, since the
market price may never exceed the exercise price before the
expiration date of the warrant, the purchaser of the warrant risks
the losses of the entire purchase price of the warrant. Warrants
generally trade in the open market and may be sold rather than
exercised. Warrants are sometimes sold in unit form with other
qualification as a regulated investment company and a Portfolio's
intent to continue to qualify as such. The result of a hedging
program cannot be foreseen and may cause a Portfolio to suffer losses
which it would not otherwise sustain.
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 Portfolio
will lose its entire investment in such warrant.
INVESTMENT OBJECTIVES AND ADDITIONAL
INVESTMENT STRATEGIES AND ASSOCIATED RISKS
EQUITY INCOME PORTFOLIO
Investment Objective: Substantial dividend income as well as long-
term growth of capital.
In addition to the investment strategies discussed in the
prospectus, the Portfolio may invest in foreign securities,
convertible stocks and bonds, warrants and certain potentially high-
risk derivatives described in this Statement of Additional
Information whose investment characteristics are consistent with the
Portfolio's investment program.
The Portfolio may invest in common and preferred stocks,
convertible securities and warrants, foreign securities, fixed income
securities, high-yield, high-risk bonds, hybrid instruments and
certain types of illiquid investments or private placements.
The Portfolio will hold a certain portion of its assets in money
market reserves. The Portfolio 's reserve position can consist of
shares of one or more T. Rowe Price internal money market portfolios
as well as short-term, high-quality U.S. and foreign dollar-
denominated money market securities, including repurchase agreements.
For temporary, defensive purposes, the Portfolio may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve as a short-term defense during periods of
unusual market volatility.
The Portfolio's emphasis on stocks of established, high dividend-
paying companies, as well as its possible exposure to fixed income
securities, could limit its potential for capital appreciation.
Sharply rising interest rates could also decrease the appeal of
stocks purchased by the Portfolio, further restraining total return.
In addition, the value approach includes the risks that 1) the market
will not recognize a security's intrinsic value for an
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unexpectedly long time, and 2) a stock that is judged to be undervalued
is actually appropriately priced due to intractable or fundamental
problems that are not yet apparent.
FULLY MANAGED PORTFOLIO
Investment Objective: Over the long-term, a high total investment
return, consistent with the preservation of
capital and with prudent investment risk.
The Fully Managed Portfolio seeks, over the long term, to achieve
a high total investment return, consistent with the preservation of
capital and with prudent investment risk. The Portfolio Manager uses
a value approach, which means looking for companies whose stocks and
other securities appear to be undervalued or out of favor with
investors. This value emphasis may lead to a "contrarian" approach,
resulting in purchases of stocks or other securities shunned by
investors due to earnings setbacks, unfavorable industry or economic
conditions, or negative publicity. Such investments may be
attractive if their prices appear to be excessively discounted and
prospects for appreciation are considered favorable.
The Portfolio holds a certain portion of its assets in money
market reserves. The Portfolio's reserve position can consist of
shares of one or more T. Rowe Price internal money market portfolios
as well as short-term, high-quality U.S. and foreign dollar-
denominated money market securities, including repurchase agreements.
For temporary, defensive purposes, the Portfolio may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve as a short-term defense during periods of
unusual market volatility.
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 indexes, 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, with up to 20%
of total net assets invested in foreign equities; entering into
forward currency contracts and currency exchange transactions for
hedging purposes; and borrowing from banks to purchase securities.
The Portfolio will not engage in short sales of securities other than
short sales "against the box." The Portfolio may invest up to 10% of
its total assets in illiquid securities. See "Description of
Securities and Investment Techniques" for further discussion of these
investment methods.
The Portfolio may invest in debt or preferred equity securities
and warrants. The Portfolio may also purchase foreign securities (up
to 25% total assets), debt securities, including junk bonds (up to
15% total assets) and hybrids (up to 10% total assets). In addition,
the Portfolio may purchase securities in private placements, subject
to a 15% net asset limit on illiquid securities. The total market
value of securities against which the Portfolio writes call or put
options may not exceed 25% of its total assets.
LIMITED MATURITY BOND PORTFOLIO
Investment Objective: Highest current income consistent with low
risk to principal and liquidity.
As discussed in the Prospectus, the Portfolio invests primarily in
short-to-intermediate term debt securities with actual remaining
maturities of seven years or less, and other debt securities with
special features (i.e., puts, variable floating coupon rates,
maturity extension arrangements, mortgage pass-throughs, etc.)
producing price characteristics similar to those of
short-to-intermediate term debt securities. The Portfolio will not
invest more than 25% of its total assets in a single industry. The
Portfolio will not invest more than 10% of its total assets in
foreign government securities.
The asset-backed securities in which the Portfolio may invest
include mortgage-backed U.S. government securities, mortgages pooled
by high quality financial institutions, and other asset-backed
securities representing pools of receivables unrelated to mortgage
loans. The Portfolio's investments in banking industry obligations
include certificates of deposit, time deposits, and bankers'
acceptances issued by commercial banks. The Portfolio's investments
in savings industry obligations include certificates of deposit and
time deposits issued by savings and loan associations. The
Portfolio's investments in commercial paper consist primarily of
unsecured
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notes with maturities of nine months or less issued to
finance short-term credit needs. The Portfolio's investments in
variable and floating rate securities have coupon rates which vary
with a designated money market index. The Portfolio will not invest
more than 10% of its total assets in foreign government securities.
The Portfolio may purchase securities on a when-issued and
delayed-delivery basis and may purchase or sell securities on a
forward commitment basis. When-issued or delayed-delivery
transactions arise when securities are purchased by the Portfolio
with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous price and yield to
the Portfolio at the time of entering into the transaction. A
forward commitment transaction is an agreement by the Portfolio to
purchase or sell securities at a specified future date. When the
Portfolio engages in these transactions, the Portfolio relies on the
buyer or seller, as the case may be, to consummate the sale. Failure
to do so may result in the Portfolio missing the opportunity to
obtain a price or yield considered to be advantageous. When-issued
and delayed-delivery transactions and forward commitment transactions
may be expected to occur a month or more before delivery is due.
However, no payment or delivery is made by a Portfolio until it
receives payment or delivery from the other party to the transaction.
A separate account containing only liquid assets, such as cash, U.S.
government securities, or other liquid assets equal to the value of
purchase commitments will be maintained until payment is made. Such
transactions have the effect of leverage on the Portfolio and may
contribute to volatility of a Portfolio's net asset value.
To increase current income, the Portfolio may lend its portfolio
securities in an amount up to 33% of its total assets to brokers,
dealers and financial institutions, provided certain conditions are
met, including the condition that each loan is secured continuously
by collateral maintained on a daily mark-to-market basis in an amount
at least equal to the current market value of the securities loaned.
These transactions involve a loan by the applicable Fund and are
subject to the same risks as repurchase agreements.
The Portfolio may enter into repurchase agreements with any bank
or broker-dealer which, in the opinion of the Board of Trustees,
presents a minimal risk of bankruptcy. Under a repurchase agreement,
the Portfolio acquires securities and obtain a simultaneous
commitment from the seller to repurchase the securities at a
specified time and at an agreed-upon yield. The agreements will be
fully collateralized and the value of the collateral, including
accrued interest, marked-to-market daily.
The Portfolio 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 Portfolio
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 Portfolio 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 Portfolio's dollar-weighted average maturity 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
Portfolio may invest in futures contracts, purchase and sell interest
rate futures contracts, and purchase and write options on such
futures contracts.
The Portfolio may invest in private placements of debt securities.
These investments may be considered to be restricted securities. The
Portfolio may invest up to 10% of its net assets in these and other
illiquid securities. The
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Portfolio 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 Statement of Additional Information
entitled "Description of Securities and Investment Techniques."
The Portfolio may write covered call options and purchase put
options, and purchase call and write put options to close out options
previously written by the Portfolio. The Portfolio may engage in
options transactions to reduce the effect of price fluctuations of
securities owned by the Portfolio (and involved in the options) on
the Portfolio's net asset value per share. This Portfolio 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. The Portfolio will engage only in short
sales "against the box."
In addition to the limited maturity debt in which the Portfolio
invests, other investments may include other debt securities with
special features (e.g., puts, variable or floating coupon rates,
maturity extensions arrangements, mortgage pass-throughs, etc.)
producing price characteristics similar to those of short-to medium-
term debt securities. Generally, the Portfolio securities are
selected from as many as ten sectors of the fixed income market, each
representing a different type of fixed income investment.
HARD ASSETS PORTFOLIO
Investment Objective: Long-term capital appreciation.
The Hard Assets Portfolio provides a diversified portfolio with
the goal of providing protection against inflation or rapid
economic activity. In economic periods of rising inflation
or when activity of companies within the Hard Assets
Portfolio tend to show rapid rises in earnings, it is
common to find that bonds and other equities perform poorly.
As such, the Hard Assets Portfolio may provide a source of
diversification to an overall portfolio. There can be no assurance
that an increased rate of return or reduced fluctuation of the
Portfolio will be achieved. Thus, an investment in the Portfolio's
shares should be considered part of an overall investment program
rather than a complete investment program.
The Portfolio may invest in securities of foreign issuers,
including up to 35% of its assets in securities of South African
issuers. The relative amount of the Portfolio's investment in foreign
issuers will change from time to time, and the Portfolio is subject
to certain guidelines for diversification of foreign security
investments. Investments by the Portfolio in securities of foreign
issuers may involve particular investment risks. See "Description of
Securities and Investment Techniques". The Portfolio normally
invests at least 65% of its total assets in Hard Asset Securities,
that is equity and debt securities of companies engaged in the
exploration, development, production, management and distribution of
assets such as gold and other precious metals, strategic metals, oil,
natural gas, coal and real estate investment trusts.
The Portfolio may invest over 25% of its assets in securities of
companies predominantly engaged in gold operations, although the
Portfolio will not invest in any such security or in gold bullion and
coins if, after such acquisition, more than 50% of the Portfolio's
assets (taken at market value at the time of such investment) would
be invested in securities of companies predominantly engaged in gold
operations and gold bullion and coins. The Portfolio may also invest
directly in other commodities including petroleum and strategic
metals. The Portfolio may invest up to 35% of the value of its total
assets in non-hard asset securities.
Since a large percentage of the Portfolio's assets will be
invested in Hard Assets, the Portfolio might be deemed to have
concentrated in such investments. This may cause the Portfolio to
have greater exposure to risks associated with Hard Assets in
general.
During periods of less favorable economic and/or market
conditions, the Portfolio may make substantial investments for
temporary defensive purposes in obligations of the U.S. Government,
certificates of deposit, bankers acceptances, investment grade
commercial paper, asset-backed securities, mortgage-backed securities
and repurchase agreements.
The Portfolio may engage in short sales, and may lend portfolio
securities. The Portfolio may not exceed a total of 25% of net assets
in short sales, but this amount is decreased by the amount the
Portfolio has borrowed.
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Short sales of unlisted securities may not exceed 10% of net assets.
The Portfolio will not make short sales of more than 2% of net assets
in any one issuer or more than 2% of the outstanding class of shares of
any one issuer. The Portfolio may purchase securities on margin.
The Portfolio may borrow up to 10% of the value of its net assets and for
temporary purposes may increase this amount to 25%. The Portfolio 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 Portfolio may purchase and sell interest rate, gold,
and other futures contracts. The Portfolio may also purchase and sell
stock index futures contracts and other futures contracts based upon
other financial instruments, and purchase options on those contracts.
These techniques are described in "Description of Securities and
Investment Techniques."
The Portfolio Manager believes the Portfolio may offer a hedge
against inflation, particularly commodity price driven inflation.
However, there is no assurance that rising commodity (or other hard
asset) prices will result in higher earnings or share prices for the
Hard Asset Companies in the Portfolio. Hard Asset Companies'
equities are affected by many factors, including movements in the
overall stock market. Inflation may cause a decline in the overall
stock market, including the stocks of Hard Asset Companies.
The Portfolio seeks investment opportunities in the world's major
stock, bond and commodity markets. The Portfolio may invest in
securities issued anywhere in the world, including the United States.
There is no limitation or restriction on the amount of assets to be
invested in any one country with the exception of South Africa.
There is no limitation on the amount the Portfolio can invest in
emerging markets. The Portfolio may purchase securities in any
foreign country, developed or underdeveloped. Investors should
consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic
investments. Global investing involves economic and political
considerations not typically applicable to the U.S. markets. See
"Description of Securities and Investment Techniques."
The equity securities in which the Portfolio may invest include
common stocks; preferred stocks (either convertible or non-
convertible); rights; warrants; direct equity interests in trusts;
partnerships; joint ventures and other incorporated entities or
enterprises; "when-issued" securities; "partly paid" securities
(securities paid for over a period of time); restricted securities
and special classes of shares available only to foreign persons in
those markets that restrict ownership of certain classes of equity to
nationals or residents of that country. These securities may be
listed on the U.S. or foreign securities exchanges or traded over-the-
counter. Direct investments are generally considered illiquid and
will be aggregated with other illiquid investments for purposes of
the 10% limitation on illiquid investments. The Portfolio may invest
in certain derivatives. Derivatives are instruments whose value is
"derived" from an underlying asset. Derivatives in which the
Portfolio may invest include futures contracts, forward contracts,
options, swaps and structured notes and other similar securities as
may become available in the market. These instruments offer certain
opportunities and are subject to additional risks that are described
in the "Description of Securities and Investment Techniques." In
addition, the Portfolio may invest in futures and forward contracts
and options on precious metals and other Hard Assets. See "Investment
in Gold and Other Precious Metals."
Since the Portfolio 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 energy, base metal or agriculturals and their operations, the
Portfolio may be subject to greater risks and market fluctuations
than other investment companies with more diversified portfolios.
These risks are described further in "Description of Securities and
Investment Techniques."
Investors should be aware that some of the instruments in which
the Portfolio may invest, such as structured or indexed notes, swaps
and foreign securities, may be subject to periods of extreme
volatility and illiquidity and may be difficult to value. These
techniques are described in "Description of Securities and
Investment Techniques."
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REAL ESTATE PORTFOLIO
Investment Objective: Capital appreciation. Current income as a
secondary objective.
The Portfolio 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 REITs which own
properties, and listed mortgage REITs which make short-term
construction and development mortgage loans or which invest in long-
term mortgages or mortgage pools. The Portfolio may invest more than
25% of its total assets in any of the foregoing sectors of the real
estate industry. The Portfolio's 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 Portfolio 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 Portfolio may invest in mortgage- and asset-backed securities,
repurchase agreements, restricted securities up to 10% of its assets
in illiquid securities, may purchase and write put and call options
on securities it covered or secured, and may purchase or sell options
to effect closing transactions, and on stock indexes, and may borrow
up to 10% of its net assets, and for temporary purposes may borrow up
to 25% of its assets for such items as large redemptions. The
Portfolio will engage only in short sales "against the box."
In addition to the common and preferred stocks described above,
the Portfolio 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 up to 5% of total assets in
warrants and other rights to purchase securities, bonds, convertible
securities, and publicly traded limited partnerships listed on
national securities exchanges or NASDAQ. The Portfolio 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 Portfolio 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 equivalent quality by the Portfolio
Manager). See " Description of Securities and Investment Techniques--
High Yield Bonds." Since a large percentage of the Portfolio's assets
will be invested in the real estate industry, the Portfolio might be
deemed to have concentrated in this area. This may cause the
Portfolio to have greater exposure to risks associated with real
estate in general.
There are risks inherent in the Portfolio's investment policies.
These risks are discussed in "Description of Securities and
Investment Techniques."
ALL-GROWTH PORTFOLIO
Investment Objective: Capital appreciation.
While it has no present intention to do so, the Portfolio reserves
the right to invest up to 10% of its net assets in restricted
securities and securities of foreign issuers traded outside the
United States and Canada and, for hedging purposes only, to purchase
and sell options on stocks and stock indexes. The Portfolio also may
invest up to 15% of its net assets in illiquid securities, but will
not invest more than 5% of its net assets in restricted securities
that the Portfolio Manager determines are illiquid based on
guidelines approved by the Board of Trustees of the Trust. The
Portfolio may invest in repurchase agreements. The Portfolio may make
short sales of securities but may not exceed a total of 25% of net
assets in short sales. Short sales of unlisted securities may not
exceed 10% of net assets. The Portfolio will not make short sales of
more than 2% of net assets in any one issuer or more than 2% of the
outstanding class of shares of any one issuer. The Portfolio 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. The Portfolio will borrow
only up to 10% (for temporary purposes 25%) of its total net assets.
In connection with permissible borrowings the Portfolio may transfer
as collateral securities owned by the Portfolio.
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For discussion of the risks involved in these investment techniques
see "Description of Securities and Investment Techniques."
Securities will be sold when the Portfolio Manager believes that
anticipated appreciation is no longer probable, when alternative
investments offer superior appreciation prospects, or when the risk
of a decline in the market price is too great. Because of its policy
with respect to sales of investments, the Portfolio may from time to
time realize short-term gains and losses. the Portfolio will likely
have somewhat greater volatility than the stock market in general, as
measured by the Standard & Poor's 500 Composite Stock Price Index
("S&P 500 Index"). Because the investment techniques employed by the
Portfolio Manager are responsive to near-term earnings trends of the
companies whose securities are owned by the Portfolio, portfolio
turnover can be expected to be fairly high.
The Portfolio may invest 100% of its assets in cash or U.S. dollar
denominated high quality instruments for temporary defensive
purposes, to maintain liquidity or when economic or market conditions
are unfavorable for investing. While these investments are generally
designed to limit the Portfolio's losses, they can prevent the
Portfolio from achieving its investment objective.
RISING DIVIDEND PORTFOLIO
Investment Objective: Capital appreciation. A secondary objective
is dividend income.
In seeking its objectives, the Portfolio normally invests its net
assets in equity securities of companies determined to be of high
quality by the Portfolio Manager, including, but not limited to,
companies with substantial dividend increases.
The individual security selection is overlaid with a sector
allocation discipline to avoid over-concentration in any single
sector. It is anticipated that the Portfolio's portfolio will
generally contain a minimum of 25 to 30 issues. It is the policy of
the Portfolio that no equity security will be acquired if, after its
acquisition, more than 15% of the Portfolio's 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 Portfolio's assets in securities that, at the time of investment,
it believes to be illiquid, but may hold up to 15% of its assets in
these securities. The Portfolio Manager periodically monitors the
Portfolio's equity securities to assure they meet the quality
criteria which include; regular dividend increases and at least 35%
of earnings reinvested annually; and a credit rating of "A" to "AAA".
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. 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. Equity
securities are deemed to include common stocks, securities
convertible into common stocks, or rights or warrants to subscribe
for or purchase common stocks.
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 Portfolio
may invest any amount of its assets in short-term fixed income
securities or in cash or cash equivalents.
EMERGING MARKETS PORTFOLIO
Investment Objective: Long-term capital appreciation.
At least 65% of the Portfolio's 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.
For purposes of allocating the Portfolio's investments, a company
will be considered located in the country in which the company is
domiciled, or in which it is primarily traded, or from which it derives
a significant portion of its revenues, or in which it has 50% more of
its assets, or in which a significant portion of its goods or services
are produced.
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The Emerging Markets Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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
Portfolio 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" and "Debt Securities--Sovereign Debt"
in this Statement of Additional Information.
For temporary defensive purposes, the Portfolio 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 Portfolio may
invest significantly in such securities after receipt of new monies.
Most of the foreign securities in which the Portfolio invests will
be denominated in foreign currencies. The Portfolio 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 Statement of Additional
Information.
The Emerging Markets Portfolio may use various investment
strategies and techniques to meet its investment objective, including
purchasing options on securities and writing (selling) secured put
and covered call options on securities, securities index, foreign
securities and foreign currencies. The Portfolio may purchase and
sell interest rate, stock indexes and other financial instrument
futures contracts, and may purchase and write options on such futures
contracts. The Portfolio may engage in options transactions not only
on U.S. domestic markets but also exchanges and other markets outside
the United States. When deemed appropriate by the Portfolio Manager,
the Portfolio 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
Portfolio may invest in shares of other investment companies when the
Portfolio Manager believes such investment is an appropriate method
of investing in one or more emerging capital markets. The Portfolio
may invest in up to 15% of its assets in illiquid securities. The
Portfolio may invest in warrants and restricted securities. The
Portfolio may make short sales "against the box." These investment
techniques are described under the heading "Description of Securities
and Investment Techniques" in this Statement of Additional
Information.
VALUE EQUITY PORTFOLIO
Investment Objective: Capital appreciation. Dividend income is a
secondary objective.
At least 65% of the Portfolio's assets normally will be invested
in equity securities. However, during adverse market conditions, as a
temporary investment posture, the Portfolio may invest significantly
in the debt securities and money market instruments.
The Portfolio may invest without limit in equity securities of
foreign issuers, including ADRs. However, it is expected that under
ordinary circumstances, the Portfolio 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 Statement of Additional Information.
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It is the policy of the Portfolio that no equity security will be
acquired, if, with respect to 75% of the Portfolio's total assets,
after its acquisition, more than 25% of the Portfolio's 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 Portfolio's equity securities to assure they meet the
selection criteria. A security may be sold from the portfolio when
(i) its price approaches its intrinsic value; (ii) a temporary,
dramatic, short-term price appreciation occurs; (iii) its
fundamentals deteriorate; or (iv) its relative attractiveness
diminishes. From time to time, the Portfolio 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 Portfolio's 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 Portfolio may also
invest in Standard & Poor's Depositary Receipts ("SPDR's"), which are
publicly traded interests in a unit investment trust that invests in
substantially all of the common stocks in the S&P 500 Index. SPDR's
are not subject to the Portfolio's policy that no more than 5% of the
Portfolio's total assets be invested in any one issuer. The
Portfolio may make short sales "against the box."
The Portfolio may also invest in restricted or illiquid
securities; however, the Portfolio Manager can not invest more than
15% of the Portfolio's assets in securities that, at the time of
investment, it believes to be illiquid. In pursuing its investment
objective or for hedging purposes, the Portfolio may, but is not
required to, utilize the following investment techniques: writing
"covered" listed put and call options with respect to 25% of its net
assets, may purchase protective puts up to 25% of its net assets and
may purchase calls and puts other than protective puts up to 5% of
its assets; entering into stock index, interest rate, foreign
currency and other financial futures contracts, and purchasing
options on such futures contracts; entering into forward currency
contracts, currency exchange transactions; purchasing mortgage-backed
securities and asset-backed securities; and borrowing from banks up
to 10% of its net assets to purchase securities and up to 25% of its
net assets for temporary purposes. See "Description of Securities and
Investment Techniques" for a discussion of the risks associated with
these investment techniques.
During unusual or adverse market conditions, the Portfolio may
invest significantly in U.S. Government and agency debt securities,
and in money market instruments such as certificates of deposit,
bankers' acceptances, high quality commercial paper, U.S. Treasury
bills, and repurchase agreements.
STRATEGIC EQUITY PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
Investment Objective
Strategic Equity: Capital appreciation.
Investment Objective
Capital Appreciation: Long-term capital growth.
Each Portfolio may invest, for temporary defensive purposes, all
or substantially all of its assets in investment grade (high quality)
corporate bonds, commercial paper, or U.S. Government obligations.
In addition, a portion of each Portfolio's assets may be held, from
time to time, in cash, repurchase agreements or other short-term debt
securities when such positions are deemed advisable in light of
economic or market conditions. Each Portfolio will invest in common
stocks, which fluctuate in price in response to many factors
including historical and prospective earnings of the issuer, the
value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity. Each Portfolio may also
invest in preferred stocks (which may be subject to optional or
mandatory redemption provisions) and convertible securities, without
regard to corporate bond ratings. Each Portfolio may invest in
corporate debt, which may be subject to call provisions that entitle
the issuer to repurchase such securities at a predetermined price
prior to their stated maturity. In the event that a security is
called during a period of declining interest rates, the portfolio may
be required to reinvest the proceeds in securities having a lower
yield. In addition, in the event that a security was purchased at a
premium over the call price, the portfolio will experience a capital
loss if the security is called. Adjustable rate corporate debt
securities may have interest rate caps and floors. The Portfolios
may invest in equity and/or debt securities issued by REITs. Such
investments will not exceed 25% of the total assets of each
Portfolio. To the extent that the Portfolios have the ability to
invest in REITs, each could conceivably own real estate directly as a
result of a default on securities it owns. The Portfolio, therefore,
may be subject to certain risks associated with the direct ownership
of real estate including difficulties in valuing and trading real
estate, declines in the value of real estate, risks related to
general and local economic
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conditions, and changes in zoning laws. Such trusts are also subject
to heavy cash flow dependency, defaults by borrowers, self liquidation,
and the possibility of failing to maintain exemption from the 1940 Act.
To the extent consistent with its respective investment objective,
each of the Portfolios may invest in foreign securities. The Capital
Appreciation Portfolio may invest up to 25% of its total assets in
foreign securities. The Strategic Equity Portfolio may invest up to
20% of its total assets in foreign securities.
For purposes of computing such limitation, American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other
securities representing underlying securities of foreign issuers are
treated as foreign securities. Each of the Portfolios may also
invest in foreign securities listed on recognized U.S. securities
exchanges or traded in the U.S. over-the-counter market. Each
Portfolio has the authority to deal in foreign exchange between
currencies of the different countries in which each will invest
either for the settlement of transactions or as a hedge against
possible variations in the foreign exchange rates between those
currencies. Each Portfolio will not speculate in foreign exchange,
nor commit a larger percentage of its total assets to foreign hedges
than the percentage of its assets that it could invest in foreign
securities.
The Strategic Equity Portfolio will not invest more than 15% of
its net assets in illiquid securities, including repurchase
agreements with maturities in excess of seven days. The Capital
Appreciation Portfolio will not invest more than 10% of its assets in
illiquid securities. The Portfolio may purchase privately placed
securities that are eligible for purchase and sale pursuant to Rule
144A under the Securities Act of 1933.
For the purpose of realizing additional income, the Portfolios may
each make secured loans of portfolio securities amounting to not more
than 33 1/3% of its total assets. Although it does not currently
intend to do so, the Strategic Equity Portfolio may invest in
"special situations, as described in this Statement of Additional
Information.
The Portfolio may also invest in U.S. Government Securities,
Repurchase Agreements, short sales and has the ability to use forward
contracts, futures contracts, options on securities, options on
indices, options on currencies and options on futures and in other
investment companies to the extent permitted by the 1940 Act, and
rules and regulation thereunder.
SMALL CAP PORTFOLIO
Investment Objective: Long-term capital appreciation.
The Portfolio invests at least 65% of its total assets in equity
securities of companies that, at the time of purchase of the
securities, have total market capitalization within the range of
companies included in the Russell 2000 Growth Index ("Russell Index")
or the S&P Small-Cap 600 Index ("S&P 600 Index"), updated quarterly.
In order to afford the Portfolio 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), 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.
The Portfolio 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 Portfolio's investment
objective: short sales of securities; investing in securities of
foreign issuers (including Depositary Receipts), including not more
than 10% of its total assets in foreign government securities
denominated in U.S. dollars; 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 and reverse repurchase agreements; purchase
mortgage- and asset-backed securities; and lending portfolio
securities to brokers, dealers, bankers, and other recognized
institutional borrowers of securities. The Portfolio may not exceed a
total of 25% of net assets in short sales, but this amount is
decreased by any amount the Portfolio has borrowed. The Portfolio
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.
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The Portfolio may borrow up to 10% of its net assets to purchase
securities and up to 25% of its net assets for temporary purposes.
In connection with permissible borrowings the Portfolio may transfer
as collateral securities owned by the Portfolio. The Portfolio may
invest up to 15% of its net assets in illiquid securities.
MANAGED GLOBAL PORTFOLIO
Investment Objective: Capital appreciation. Current income is
only an incidental consideration.
As discussed in the Prospectus, the Managed Global Portfolio may
invest in common stock traded in securities market around the world,
issued by any type of company, large or small. Investing in
securities of smaller, less well known companies may present greater
opportunities for capital appreciation, but may also involve greater
risks. The Portfolio may not acquire the securities of any issuer
if, as a result of such investment, more than 10% of the Portfolio's
assets would be invested in the securities of any issuer, except that
this restriction does not apply to U.S. Government securities or
foreign government securities, and the Portfolio may not invest in a
security if, as a result of such investment, it would hold more than
10% of the outstanding voting securities of any one issuer.
At times, the Portfolio Manager may judge that conditions in the
international securities markets make pursuing the Portfolio's basic
investment strategy inconsistent with the best interests of
shareholders. The Portfolio Manager may temporarily use alternative
strategies, primarily designed to reduce fluctuations in the value of
the Portfolio's assets. In implementing these "defensive" strategies
the Portfolio may invest in some of the following securities.
The Portfolio may invest solely in equity securities traded
primarily in U.S. markets. Also the Portfolio may add preferred
stocks to the portfolio. The Portfolio may purchase mortgage- and
asset-backed securities.
The Portfolio may invest in the following debt instruments
(includes debt instruments convertible into equity): (i) fixed-income
instruments issued or guaranteed by the U.S. Government, its
agencies, or instrumentalities ("U.S. Government securities"); (ii)
obligations issued or guaranteed by a foreign government or any of
its political subdivisions, authorities, agencies, or
instrumentalities, or by supranational entities ("foreign government
securities"); and (iii) debt securities of domestic or foreign
issuers. Debt securities purchased by the Portfolio may be of any
maturity, at the discretion of the Portfolio Manager.
The Portfolio may invest in money market instruments. These
include the following: (i) short-term U.S. Government securities;
(ii) short-term foreign government securities; (iii) certificates of
deposit, time deposits, bankers' acceptances, and short-term
obligations of banks and other depository institutions, both U.S. and
foreign, that have total assets of at least $10 billion (U.S.); and
(iv) commercial paper and other short-term corporate obligations.
The Managed Global Portfolio may use various investment strategies
and techniques to meet its investment objective, including purchasing
options on securities and writing (selling) secured put and covered
call options on securities and securities indexes. The Managed Global
Portfolio will only purchase and write options that are standardized
and traded on a U.S. or foreign exchange or board of trade, or for
which an established over-the-counter market exists. The Portfolio
may purchase and sell futures contracts, and may purchase and write
options on such futures contracts, including stock index futures
contracts. The Portfolio may enter into foreign currency contracts
and currency exchange contracts on a spot basis. When deemed
appropriate by the Portfolio Manager, the Portfolio 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 Portfolio may invest in shares of
other investment companies when the Portfolio Manager believes such
investment is an appropriate method of investing in one or more
emerging capital markets. The Portfolio may invest in restricted
securities and warrants. The Portfolio may not invest more than 15%
of its net assets in illiquid securities. The Portfolio may not
exceed a total of 25% of net assets in short sales, but this amount
is decreased by any amount the Portfolio has borrowed. The Portfolio
may borrow up to 10% of its net assets to purchase securities and up
to 25% of its net assets for temporary purposes. In connection with
permissible borrowings the Portfolio may transfer as collateral
securities owned by the Portfolio.
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For more information about the Portfolio's investments including
the risks of such investing see "Description of Securities and
Investment Techniques." The Portfolio Manager may invest in the above
or any other securities that it considers consistent with the
defensive strategies of the Portfolio. It is impossible to predict
when or for how long the Portfolio will use such alternative
strategies.
The Portfolio is the successor for accounting purposes to the
Managed Global Account of Separate Account D of Golden American. For
additional information, see "Other Information--The History of the
Managed Global Portfolio."
GROWTH OPPORTUNITIES PORTFOLIO
Investment Objective: Capital appreciation.
The Portfolio invests at least 65% of its total assets in equity
securities of domestic companies. Although such companies may be of
any size, the Portfolio targets companies having total market
capitalizations of $1 billion or more. The Portfolio Manager for the
Portfolio is Montgomery Asset Management, LLC.
The Portfolio also may invest up to 35% of its total assets in
highly rated debt securities. The Portfolio Manager does not expect
the Portfolio to be consistently totally invested in equity
securities. During periods that the Portfolio Manager deems
appropriate, the Portfolio may take a more defensive position and be
significantly invested in cash and cash equivalents.
The Portfolio may enter into repurchase agreements and reverse
repurchase agreements, invest in U.S. Government securities, up to
10% of its total net assets in investment companies, leverage
transactions, lend portfolio securities up to 30% of Portfolio total
net assets, when-issued and forward commitment securities, purchase
and write put and call options on securities, currencies and stock
indexes, write "covered" call and put options,. The Portfolio will
not enter into any options on securities, securities indexes or
currencies or related options (including options on futures) if the
sum of the initial margin deposits and premiums paid for any such
option or options would exceed 5% of its total assets, and it will
not enter into options with respect to more than 25% of its total
assets. The Portfolio may borrow up to one-third of its total net
assets, but will not purchase any securities while borrowings exceed
10%. The Portfolio may invest in interest rate futures contracts or
related options only if the sum of initial margin deposits on futures
contracts, related options (including options on securities,
securities indexes and currencies) and premiums paid for any such
related options would exceed 5% of its total assets. The Portfolio
does not purchase futures contracts or related options if, as a
result, more than one-third of its total assets would be so invested.
The Portfolio may invest in forward currency contracts, but may not
invest more than one-third of its assets in such contracts. The
Portfolio may invest in futures, swaps, including equity swaps, and
options on futures. The Portfolio may invest up to 15% of its total
net assets in illiquid securities. See "Description of Securities
and Investment Techniques."
DEVELOPING WORLD PORTFOLIO
Investment Objective: Capital appreciation.
As discussed in the Prospectus, the Developing World Portfolio
invests primarily in the equity securities of emerging market
companies. The Portfolio also may enter into repurchase agreements,
purchase U.S. Government securities, invest up to 10% of its total
net assets in investment companies, leverage transactions, lend
portfolio securities up to 30% of Portfolio total net assets, invest
in when-issued and forward commitment securities, purchase and write
put and call options on securities, currencies and stock indexes, and
write "covered" call and put options. The Portfolio will not enter
into any options transactions on securities, securities indexes or
currencies or related options (including options on futures) if the
sum of the initial margin deposits and premiums paid for any such
option or options would exceed 5% of its total assets, and it will
not enter into options' transactions with respect to more than 25% of
its total assets. The Portfolio may borrow up to one third of its
total net assets, but will not purchase any securities while
borrowings exceed 10%. The Portfolio may invest in interest rate
futures contracts or related options only if the sum of initial
margin deposits on futures contracts, related options (including
options on securities, securities indexes and currencies) and
premiums paid for any such related options would not exceed 5% of its
total assets. The Portfolio does not purchase futures contracts or
related options if, as a result, more than one-third of its total
assets would be so invested. The Portfolio may invest in forward
currency
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contracts, but may not invest more than one-third of its
assets in such contracts. The Portfolio may invest in futures,
swaps, including equity swaps, and options on futures. The Portfolio
may invest up to 15% of its total net assets in illiquid securities.
See "Description of Securities and Investment Techniques."
MID-CAP GROWTH PORTFOLIO
Investment Objective: Long-term growth of capital.
The Portfolio seeks to achieve its objective by investing
primarily or at least 65% 0f it assets in equity securities of
companies with medium market capitalization which the Portfolio
Manager believes have above-average growth potential under normal
circumstances.
Shares of the Portfolio are subject to greater fluctuation in
value than shares of a conservative equity fund or of a growth fund
that invests entirely in proven growth stocks. Therefore, the
Portfolio is intended for long-term investors who understand and can
accept the risks entailed in seeking long-term growth of capital. The
Portfolio is not meant to provide a vehicle for those who wish to
play short-term swings in the stock market. Accordingly, an
investment in shares of the Portfolio should not be considered a
complete investment program. Each prospective purchaser should take
into account his investment objectives as well as his other
investments when considering the purchase of shares of the Portfolio.
Debt securities of issuers in which the Portfolio may invest
include all types of long- or short-term debt obligations, such as
bonds, debentures, notes and commercial paper. Fixed income
securities in which the Portfolio may invest include securities in
the lower rating categories of recognized rating agencies (and
comparable unrated securities). Fixed income securities in which the
Portfolio may invest also include zero-coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind.
Such investments involve certain risks. See "Description of
Securities and Investment Techniques--High Yield Bonds" for a
discussion of the risks involved in investing in lower-rated
securities.
When the Portfolio Manager believes that investing for temporary
defensive purposes is appropriate, such as during periods of unusual
market conditions, part or all of the Portfolio's assets may be
temporarily invested in cash (including foreign currency) or cash
equivalent short-term obligations including, but not limited to,
certificates of deposit, commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities, and repurchase agreements.
The Portfolio may invest 20% of its net assets in foreign
securities. Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities
of domestic issuers. (See "Description of Securities and Investment
Techniques--Foreign Securities" for a discussion of the risks
involved in foreign investing.)
The Portfolio may invest in ADRs which are certificates issued by
a U.S. depository (usually a bank) and represent a specified quantity
of shares of an underlying non-U.S. stock on deposit with a custodian
bank as collateral. Although ADRs are issued by a U.S. depository,
they are subject to many of the risks of foreign securities such as
changes in exchange rates and more limited information about foreign
issuers.
The Portfolio may also purchase illiquid or restricted securities
(such as private placements). The Portfolio's may not invest more
than 15% of its net assets in illiquid securities.
The Portfolio is classified as a "non-diversified" investment
company as described above under "Diversification." See
"Diversification" for risks associated with investing in a non-
diversified Portfolio.
While it is not generally the Portfolio's policy to invest or
trade for short-term profits, the Portfolio may dispose of a
portfolio security whenever the Portfolio Manager is of the opinion
that such security no longer has an appropriate appreciation
potential or when another security appears to offer relatively
greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a
sale would result in a profit or loss. Therefore, the rate of
Portfolio turnover is not a limiting factor when a change in the
Portfolio is otherwise appropriate. Because the Portfolio is
expected to have a Portfolio turnover rate of over
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100%, transaction costs incurred by the Portfolio and the realized capital
gains and losses of the Portfolio may be greater than that of a Portfolio
with a lesser turnover rate.
The Portfolio may also enter into repurchase agreements, lend
securities, purchase securities on a "when-issued" or on a "forward
delivery" basis (which means that the securities will be delivered to
the Portfolio at a future date usually beyond customary settlement
time), purchase restricted securities, options on securities, options
on stock indexes, options on foreign currencies, futures contracts,
options on futures contracts and forward foreign currency exchange
contracts.
RESEARCH PORTFOLIO
Investment Objective: Long-term growth of capital and future
income.
The Portfolio invests in debt securities, and may invest up to 10%
of its net assets in lower rated debt securities (e.g., rated BA or
lower by Moody's or BB or lower by S&P or Fitch), or in securities
the Portfolio Manager believes to be of comparable quality.
It is not the Portfolio's policy to rely exclusively on ratings
issued by established credit rating agencies but rather to supplement
such ratings with the Portfolio Manager's own independent and ongoing
review of credit quality. The Portfolio's achievement of its
investment objective may be more dependent on the Portfolio Manager's
own credit analysis than in the case of a Portfolio investing in
primarily higher quality bonds. From time to time, the Portfolio's
management will exercise its judgment with respect to the proportions
invested in growth stocks, income-producing securities or cash
(including foreign currency) and cash equivalents depending on its
view of their relative attractiveness.
The Portfolio may enter into repurchase agreements, make loans of
its securities, invest in ADRs, invest up to 20% of its net assets in
foreign securities, invest in emerging markets or countries with
limited or developing capital markets and purchase "Rule 144A
securities." Investing in these type of securities involves certain
risks. See "Description of Securities and Investment Techniques" and
the Statement of Additional Information for a discussion of the risks
involved with investing in the above listed securities transactions.
While it is not generally the Portfolio's policy to invest or
trade for short-term profits, the Portfolio may dispose of a
portfolio security whenever the Portfolio Manager is of the opinion
that such security no longer has an appropriate appreciation
potential or when another security appears to offer relatively
greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a
sale would result in a profit or loss. Therefore, the rate of
Portfolio turnover is not a limiting factor when a change in the
Portfolio is otherwise appropriate.
TOTAL RETURN PORTFOLIO
Investment Objective: Above-average income (compared to a
portfolio entirely invested in equity
securities) consistent with the prudent
employment of capital. A secondary goal
is the reasonable opportunity for growth
of capital and income.
As discussed in the Prospectus, the Total Return Portfolio is a
"balanced fund that invests in a combination of equity and fixed
income securities. The Portfolio may invest in mortgage pass-through
securities, which are securities representing interests in "pools" of
mortgage loans. Monthly payments of interest and principal by the
individual borrowers on mortgages are passed through to the holders
of the securities (net of fees paid to the issuer or guarantor of the
securities) as the mortgages in the underlying mortgage pools are
paid off. Payment of principal and interest on some mortgage pass-
through securities (but not the market value of the securities
themselves) may be guaranteed by the full faith and credit of the
U.S. government (in the case of securities guaranteed by GNMA); or
guaranteed by U.S. government-sponsored corporations (such as FNMA or
FHLMC, which are supported only by the discretionary authority of the
U.S. government to purchase the agency's obligations). Mortgage pass-
through securities may also be issued by non-governmental issuers
(such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary
market issuers). Fixed income securities that the Portfolio may
invest in also include zero coupon bonds, deferred interest bonds and
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bonds on which the interest is payable in kind ("PIK bonds"). See
"Description of Securities and Investment Techniques" for a further
discussion of these securities.
The Portfolio may invest in ADRs which are certificates issued by
a U.S. depository (usually a bank), that represent a specified
quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. Although ADRs are issued by a U.S.
depository, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited
information about foreign issuers.
The Portfolio may invest up to 20% of its net assets in foreign
securities (including investments in emerging markets or countries
with limited or developing capital markets). Investing in securities
of foreign issuers generally involves risks not ordinarily associated
with investing in securities of domestic issuers. (See "Description
of Securities and Investment Techniques--Foreign Investments" for a
discussion of the risks involved in foreign investing.)
In order to protect the value of the Portfolio's investments from
interest rate fluctuations, the Portfolio may enter into various
hedging transactions, such as interest rate swaps, and the purchase
or sale of interest rate caps, floors and collars.
The Portfolio may purchase "Rule 144A securities"; enter into
repurchase agreements; lend portfolio securities; purchase securities
on a "when-issued" or on a "delayed delivery" basis; invest in
indexed securities linked to foreign currencies, indexes, or other
financial indicators; enter into mortgage "dollar roll" transactions;
invest a portion of its assets in loan participations and other
direct indebtedness; purchase restricted securities, corporate asset-
backed securities, options on securities, options on stock indexes,
options on foreign currencies, futures contracts, options on futures
contracts and forward foreign currency exchange contracts. See
"Description of Securities and Investment Techniques" for more
information regarding these transactions and the risks associated
with them.
While it is not generally the Portfolio's policy to invest or
trade for short-term profits, the Portfolio may dispose of a
portfolio security whenever the Portfolio Manager is of the opinion
that such security no longer has an appropriate appreciation
potential or when another security appears to offer relatively
greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a
sale would result in a profit or loss. Therefore, the rate of
Portfolio turnover is not a limiting factor when a change in the
Portfolio is otherwise appropriate. Because the Portfolio is expected
to have a Portfolio turnover rate of over 100%, transactions costs
incurred by the Portfolio and the realized capital gains and losses
of the Portfolio may be greater than that of a Portfolio with a
lesser turnover rate.
GROWTH & INCOME PORTFOLIO
Investment Objective: Long-term total return.
As discussed in the Prospectus, the Growth & Income Portfolio
invests primarily in common stocks of companies where the potential
for change is significant. The Portfolio may at times invest a
substantial portion of its assets in securities traded in the over-
the-counter markets in foreign countries and not on any exchange,
which may affect the liquidity of the investment and expose the
Portfolio to the credit risk of its counterparties in trading those
investments. International investing in general may involve greater
risks than U.S. investments. These risks may be intensified in the
case of investments in emerging markets or countries with limited or
developing capital markets.
To hedge against changes in net asset value or to attempt to
realize a greater current return, the Portfolio may use the following
investment strategies and techniques. The Portfolio may buy and sell
put and call options; index futures contracts and options on index
futures and on indexes; warrants on foreign securities indexes;
purchase and sell options in the over-the-counter markets only when
appropriate exchange-traded transactions are unavailable and when, in
the opinion of the Portfolio Manager, the pricing mechanism and
liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their
obligations. The Portfolio will not purchase futures or options on
futures or sell futures if, as a result, the sum of the initial
margin deposits on the Portfolio's existing futures positions and
premiums paid for outstanding options on futures contracts would
exceed 5% of the Portfolio's assets. (For options that are "in-the-
money" at the time of purchase, the amount by
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which the option is "in-the-money" is excluded from this calculation.)
The Portfolio may lend portfolio securities to broker-dealers and may
enter into repurchase agreements.
At times, the Portfolio Manager may judge that market conditions
make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times, the
Portfolio Manager may temporarily use alternative strategies,
primarily designed to reduce fluctuations in the values of the
Portfolio's assets. In implementing these "defensive" strategies, the
Portfolio may invest in U.S. Government securities, other high-
quality debt instruments, and other securities the Portfolio Manager
believes to be consistent with the Portfolio's best interests. The
Portfolio may invest in domestic or foreign securities
GROWTH PORTFOLIO
Investment Objective: Capital appreciation.
In addition to the Growth Portfolio's primary strategies discussed
in the Prospectus, the Portfolio may engage in several other
strategies. To hedge against changes in net asset value or to
attempt to increase its investment return, the Portfolio may buy and
sell: put and call options; futures contracts; options on futures
contracts; index futures contracts and options on index futures and
on indexes; warrants; foreign securities indexes; and options in the
over-the-counter markets but only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of the
Portfolio Manager, the pricing mechanism and liquidity of over-the-
counter markets are satisfactory and the participants are responsible
parties likely to meet their obligations.
To the extent that the Portfolio hold positions is futures
contracts and related options that do not fall within the definition
of bona fide hedging transactions, the aggregate initial margin and
premiums required to establish such positions will not exceed 5% of
the fair market value of the Portfolio's net assets, after taking
into account unrealized profits and unrealized losses on any such
contracts it has entered into.
When the Portfolio Manager believes that market conditions are not
favorable for profitable investing or when the Portfolio Manager is
otherwise unable to locate favorable investment opportunities, a
Portfolio's investments may be hedged to a greater degree and/or its
cash or similar investments may increase. In other words, the
Portfolio does not always stay fully invested in stocks and bonds.
Cash or similar investments are a residual -- they represent the
assets that remain after a portfolio manager has committed available
assets to desirable investment opportunities. Larger hedged
positions and/or larger cash positions may serve as a means of
preserving capital in unfavorable market conditions.
Securities that the Portfolio may invest in as a means of
receiving a return on idle cash include high-grade commercial paper,
certificates of deposit, repurchase agreements or other short-term
obligations. The Portfolio may also invest in money market funds
(including funds managed by the Portfolio Manager). When a Portfolio
is hedged or its investments in cash or similar investments increase,
it may not participate in stock or bond market advances or declines
to the same extent that it would if the Portfolio was not hedged or
remained more fully invested in stocks or bonds.
At times the Portfolio may invest more than 25% of its assets in
securities of issuers in one or more market sectors such as, for
example, the technology sector. A market sector may be made up of
companies in a number of related industries. The Portfolio would only
concentrate its investments in a particular market sector if the
Portfolio's Portfolio Manager were to believe the investment return
available from concentration in that sector justifies any additional
risk associated with concentration in that sector. When the Portfolio
concentrates its investments in a market sector, financial, economic,
business, and other developments affecting issuers in that sector
will have a greater effect on the Portfolio than if it had not
concentrated its assets in that sector.
The Portfolio may enter into repurchase agreements. These
transactions must be fully collateralized at all times, but involve
some risk to the Portfolio if the other party should default on its
obligations and the Portfolio is delayed or prevented from recovering
the collateral.
At times, the Portfolio Manager may judge that market conditions
make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times, the
Portfolio Manager may temporarily use alternative strategies,
primarily designed to reduce fluctuations in the values of the
Portfolio's
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assets. In implementing these "defensive" strategies, the
Portfolio may invest in U.S. Government securities, other high-
quality debt instruments, and other securities the Portfolio Manager
believes to be consistent with the Portfolio's best interests.
During extremely unusual conditions, the Portfolio may take a
position of cash and cash equivalents.
The length of time a Portfolio has held a particular security is
not generally a consideration in investment decisions. The
investment policies of a Portfolio may lead to frequent changes in
the Portfolio's investments, particularly in periods of volatile
market movements. Such portfolio turnover generally involves some
expense to a Portfolio, including brokerage commissions or dealer
markups and other transaction costs on the sale of securities and
reinvestment in other securities. Such sales may result in
realization of taxable capital gains.
GLOBAL FIXED INCOME PORTFOLIO
Investment Objective: High total return
The investment objective of the Global Fixed Income Portfolio is
to provide high total return. The Portfolio will seek to achieve its
objective by investing at least 65% of its assets in both domestic
and foreign debt securities and related foreign currency
transactions. The total return will be sought through a combination
of current income, capital gains and gains in currency positions.
International investing in general may involve greater risks than
U.S. investments. These risks may be intensified in the case of
investments in emerging markets or countries with limited or
developing capital markets.
The Portfolio may engage in certain transactions, which include
dollar roll transactions, reverse repurchase agreements, interest
rate transactions, options on securities and indexes, futures and
options on futures, options on foreign currencies, foreign exchange
transactions and over the counter options. (See "Description of
Securities and Investment Techniques.")
The Portfolio's net asset value per share fluctuates, depending on
(i) current worldwide market interest rates, (ii) the value of the
currencies in which the Portfolio's securities are denominated when
compared to the U.S. dollar, (iii) the success of the Portfolio
Manager's currency hedging techniques, and (iv) the creditworthiness
of the issuers in which the Portfolio is invested. In pursuing the
Portfolio's investment objective, however, the Portfolio Manager
actively manages the Portfolio in an effort to minimize the effect of
such factors on the Portfolio's net asset value per share. In
extremely unusual conditions the Portfolio may take a defensive
position of 100% U.S. cash.
LIQUID ASSET PORTFOLIO
Investment Objective: High level of current income consistent with
the preservation of capital and liquidity.
The Liquid Asset Portfolio seeks to achieve a high level of
current income consistent with the preservation of capital and
liquidity. The Portfolio is permitted to invest in asset-backed
securities, subject to the rating and quality requirements specified
with respect to the Portfolio. Through the use of trusts and special
purpose subsidiaries, various types of assets, primarily home equity
loans and automobile and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-
through structures described above. Consistent with the Portfolio's
investment objectives, policies and quality standards, the Portfolio
may invest in these and other types of asset-backed securities which
may be developed in the future.
Asset-backed securities involve certain risks that are not posed
by mortgage-related securities, resulting mainly from the fact that
asset-backed securities do not usually contain the benefit of a
complete security interest in the related collateral. For example,
credit card receivables generally are unsecured and the debtors are
entitled to the protection of a number of state and Federal consumer
credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal
and economic factors, proceeds from repossessed collateral may not
always be sufficient to support payments on these securities. The
risks
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associated with asset-backed securities are often reduced by
the addition of credit enhancements such as a letter of credit from a
bank, excess collateral or a third-party guarantee.
The Portfolio may invest in shares of other open-end management
investment companies, subject to the limitations of the 1940 Act and
subject to such investments being consistent with the overall
objective and policies of the Portfolio, provided that any such
purchases will be limited to short-term investments in shares of
unaffiliated investment companies, and will not, in the aggregate,
exceed 10% of the Portfolio's net assets. The purchase of securities
of other mutual funds results in duplication of expenses such that
investors indirectly bear a proportionate share of the expenses of
such mutual funds including operating costs and investment advisory
and administrative fees.
The Portfolio may also make limited investments in guaranteed
investment contracts ("GIC") issued by U.S. insurance companies. The
Portfolio will purchase a GIC only when the Manager has determined,
under guidelines established by the Board of Trustees, that the GIC
presents minimal credit risks to the Portfolio and is of comparable
quality to instruments that are rated high quality by certain
nationally recognized statistical rating organizations.
The Portfolio may purchase securities on a when-issued and
delayed-delivery basis and may purchase or sell securities on a
forward commitment basis. When-issued or delayed-delivery
transactions arise when securities are purchased by a Portfolio with
payment and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield to the
Portfolio at the time of entering into the transaction. A forward
commitment transaction is an agreement by a portfolio to purchase or
sell securities at a specified future date. When a portfolio engages
in these transactions, the Portfolio relies on the buyer or seller,
as the case may be, to consummate the sale. Failure to do so may
result in the Portfolio missing the opportunity to obtain a price or
yield considered to be advantageous. When-issued and delayed-
delivery transactions and forward commitment transactions may be
expected to occur a month or more before delivery is due. However,
no payment or delivery is made by a Portfolio until it receives
payment or delivery from the other party to the transaction. A
separate account containing only liquid assets, such as cash, U.S.
government securities, or other liquid assets equal to the value of
purchase commitments will be maintained until payment is made. Such
transactions have the effect of leverage on the Portfolio and may
contribute to the volatility of a Portfolio's net asset value.
To increase current income, the Portfolio may lend its portfolio
securities in an amount up to 33% of each such Portfolio's total
assets to brokers, dealers and financial institutions, provided
certain conditions are met, including the condition that each loan is
secured continuously by collateral maintained on a daily mark-to-
market basis in an amount at least equal to the current market value
of the securities loaned. These transactions involve a loan by the
applicable Portfolio and are subject to the same risks as repurchase
agreements.
The Portfolio may enter into repurchase agreements with any bank
or broker-dealer which, in the opinion of the Board of Trustees,
presents a minimal risk of bankruptcy. Under a repurchase agreement,
the Portfolio acquire securities and obtain a simultaneous commitment
from the seller to repurchase the securities at a specified time and
at an agreed-upon yield. The agreements will be fully collateralized
and the value of the collateral, including accrued interest, marked-
to-market daily.
The Portfolio may not invest more than 5% of its total assets,
measured at the time of investment, in securities of any one issuer,
except that this limitation shall not apply to U.S. government
securities and repurchase agreements thereon. The Portfolio 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 rated 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 Portfolio is downgraded or
otherwise ceases to be of the quality that is eligible for the
Portfolio, 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 (within the first or second highest rating category) and the
Portfolio Manager does not dispose of the security or such security
does not
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mature within five business days), shall promptly reassess
whether such security presents minimal credit risk and determine
whether to retain the instrument.
The Portfolio shall engage only in short sales "against the box."
The Portfolio may also invest up to 10% in illiquid securities and
may borrow up to 10% of its net assets to purchase securities and up
to 25% of its net assets for temporary purposes. In connection with
permissible borrowings the Portfolio may transfer as collateral
securities owned by the Portfolio. See "Description of Securities and
Investment Techniques" for descriptions of these techniques.
MARKET MANAGER PORTFOLIO
Investment Objective: The Portfolio seeks 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.
The call options into which the Portfolio will enter will be
negotiated on behalf of the Portfolio by the Portfolio Manager in an
attempt to provide the Portfolio 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 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 Portfolio 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
Portfolio's relative positions in call options on these indexes.
The Portfolio 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).
This strategy for pursuit of preservation of capital does not take
into account expenses of the Portfolio so that if the Portfolio
Manager is successful in its strategy, an investor in the Portfolio
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 Portfolios.
The purchaser of a Variable Contract would pay the expenses 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 prospectus.
INVESTORS PORTFOLIO
Investment Objective: Seek long-term growth of capital.
Current income is a secondary objective.
The Investors Portfolio from time to time may invest up to 5% of its
net assets in non-convertible debt securities rated below investment
grade by S&P and Moody's (with no minimum rating required), or comparable
unrated securities. There is no limit on the amount of Investors
Portfolio's assets that can be invested in convertible securities rated
below investment grade. For additional information on these high yield
debt securities, which involve a high degree of risk, see "Description
of Securities and Investment Techniques -- High Yield Bonds" in this
Statement of Additional Information.
The Investors Portfolio maintains a carefully selected portfolio of
securities diversified among industries and companies. The Portfolio may
invest up to 25% of its net assets in any one industry. The Portfolio
generally purchases marketable securities, primarily those traded on the
New York Stock Exchange ("NYSE") or other national securities exchanges,
but also purchases securities traded in the over-the-counter market. The
Portfolio will not invest more than 10% of the value of its total assets
in illiquid securities, such as "restricted securities" which are illiquid,
and securities that are not readily marketable. As more fully described below,
the Portfolio may purchase certain Rule 144A securities for which there is
a secondary market of qualified institutional buyers as contemplated by Rule
144A under the 1933 Act. The Portfolio's holdings of Rule 144A securities
which are liquid securities will not be subject to the 10% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see "Description of Securities and
Investment Techniques--Illiquid Securities."
From time to time, the Investors Portfolio may lend portfolio
securities to brokers or dealers or other financial institutions. Such
loans will not exceed 33 1/3% of the Portfolio's total assets, taken at
value. For a discussion of the risks associated with lending portfolio
securities, see "Description of Securities and Investment Techniques--
Lending Portfolio Securities."
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As indicated under "Investment Restrictions" the Investors Portfolio
may invest in repurchase agreements in an amount up to an aggregate of
25% of its total assets. For a description of repurchase agreements and
their associated risks, see "Description of Securities and Investment
Techniques--Repurchase Agreements." In addition, in order to meet
redemption requests or as a temporary measure, the Portfolio may borrow
up to an aggregate of 5% of its total assets taken at cost or value,
whichever is less. The Portfolio shall borrow only from banks.
As a hedge against either a decline in the value of securities
included in the Investors Portfolio's investments or against an increase
in the price of securities which it plans to purchase or in order to
preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash
balances, or in order to increase income or gain, the Investors Portfolio
may use all of the various investment strategies referred to under
"Description of Securities and Investment Techniques--Derivatives." The
Portfolio's ability to pursue certain of these strategies may be limited
by applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies.
The foregoing investment policies, other than the Investors
Portfolio's investment objectives and the Portfolio's policies with
respect to repurchase agreements, borrowing of money and lending of
portfolio securities, are not fundamental policies and may be changed by
vote of the Board of Trustees without the approval of shareholders.
LARGE CAP VALUE PORTFOLIO
Investment Objective: Seek long-term growth of capital and income.
The Large Cap Value Portfolio may lend its securities so long as such
loans do not represent more than 33 1/3% of the Portfolio's total assets.
As with other extensions of credit, there are risks of delay in recovery
or even loss of rights in the collateral should the borrower of the
securities fail financially. For additional information on the risks of
lending the Portfolio's securities, see "Description of Securities and
Investment Techniques--Lending Portfolio Securities" in this Statement of
Additional Information.
In order to help ensure the availability of suitable securities, The
Portfolio may purchase debt securities on a "when-issued" or on a
"forward delivery" basis. For a discussion of the risks associated with
"when issued" and "Forward delivery" securities, see "Description of
Securities and Investment Techniques--When Issued or Delayed Securities"
in this Statement of Additional Information.
The Portfolio may also enter into repurchase agreements. Securities
subject to repurchase agreements will be valued every business day and
additional collateral will be requested if necessary so that the value of
the collateral is at least equal to the value of the repurchased
obligation, including the interest accrued thereon. In addition, the
Portfolio may also enter into "reverse" repurchase agreements. Here too,
the portfolio will maintain in a segregated custodial account cash,
Treasury bills or other U.S. Government Securities having an aggregate
value equal to the amount of such commitment to repurchase including
accrued interest, until payment is made. For a discussion of the risks
associated with repurchase arrangements and reverse repurchase
agreements, see "Description of Securities and Investment Techniques--
Repurchase Agreements" and "Description of Securities and Investment
Techniques--Reverse Repurchase Agreements" in this Statement of Additional
Information.
The Portfolio may enter into mortgage dollar rolls. At the time
the Portfolio enters into a mortgage dollar roll, it will establish a
segregated account with its custodian bank in which it will maintain
cash, U.S. Government Securities or other liquid assets equal in value to
its obligations in respect of dollar rolls, and accordingly, such dollar
rolls will not be considered borrowings.
Subject to certain restrictions, the Portfolio may purchase warrants,
including warrants traded independently of the underlying securities. For
a discussion of the risks associated with warrants,
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see "Description of Securities and Investment Techniques--Warrants" in
this Statement of Additional Information.
The Portfolio is precluded from investing in excess of 15% of its net
assets in securities that are not readily marketable. Also, the Portfolio
may be authorized to use a variety of investment strategies for hedging
purposes only, including hedging various market risks (such as interest
rates, currency exchange rates and broad or specific market movements)
and managing the effective maturity or duration of debt instruments held
by the portfolio. Hedging refers to protecting against possible changes
in the market value of securities a portfolio already owns or plans to
buy or protecting unrealized gains in the portfolio. Hedging and other
strategic transactions which may be used are described below:
(a) exchange-listed and over-the-counter put and call options on
securities, financial futures contracts and fixed-income
indices and other financial instruments,
(b) financial futures contracts (including stock index futures),
(c) interest rate transactions, and
(d) currency transactions.
These transactions are referred to in this Statement of Additional
Information under each transaction's respective title under "Description
of Securities and Investment Techniques".
The Portfolio may invest in investment grade fixed income securities
in the lowest rating category (rated "Baa" by Moody's or "BBB" by
Standard & Poor's and comparable unrated securities).
The Portfolio will not maintain open short positions in futures
contracts, call options written on futures contracts, and call options
written on securities indices if, in the aggregate, the current market
value of the open positions exceeds the current market value of that
portion of its securities portfolio being hedged by those futures and
options, plus or minus the unrealized gain or loss on those open
positions. The gain or loss on these open positions will be adjusted for
the historical volatility relationship between that portion of the
portfolio and the contracts (e.g., the Beta volatility factor).
For purposes of this limitation, to the extent the Portfolio has
written call options on specific securities in that portion of its
portfolio, the value of those securities will be deducted from the
current market value of that portion of the securities portfolio. If this
limitation should be exceeded at any time, the portfolio will take prompt
action to close out the appropriate number of open short positions to
bring its open futures and options positions within this limitation.
To meet redemption requests or pending investment of its assets or
during unusual market conditions, the Portfolio may invest all or a
portion of its assets in preferred stocks, bonds, cash and cash
equivalents. The Portfolio Manager's judgment regarding the current
investment outlook will determine the relative amounts to be invested in
these different asset classes.
The Portfolio is currently authorized to use hedging, futures, options
on futures, currency transactions, swaps, floors and collars referred
to in this Statement of Additional Information under "Description of
Securities and Investment Techniques". However, it is not presently
contemplated that any of these strategies will be used to a significant
degree by the portfolio.
ALL CAP PORTFOLIO
Investment Objective: Appreciation through investment in
securities which the Portfolio Manager believes
have above-average appreciation potential.
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In seeking appreciation, the All Cap Portfolio may purchase
securities of seasoned issuers, relatively smaller and newer companies as
well as in new issuers, and may be subject to wide fluctuations in market
value. Portfolio securities may have limited marketability or may be
widely and publicly traded. The Portfolio will not concentrate its
investment in any particular industry.
To meet operating expenses, to serve as collateral in connection with
certain investment techniques and to meet anticipated redemption requests,
the Portfolio generally holds a portion of its assets in short-term fixed
income securities (government obligations or investment grade debt securities)
or cash or cash equivalents. As described below, short-term investments may
include repurchase agreements with banks or broker-dealers. When management
deems it appropriate, for temporary defensive purposes, the Portfolio may
invest without limitation in investment grade fixed-income securities or hold
assets in cash or cash equivalents. Investment grade debt securities are
debt securities rated BBB or better by S&P or Baa or better by Moody's,
or if rated by other rating agencies or if unrated, securities deemed by
the Portfolio Manager to be of comparable quality. See "Appendix 1:
Description of Bond Ratings. "Investments in such investment grade
fixed-income securities may also be made for the purpose of appreciation,
as in the case of purchases of bonds traded at a substantial discount or
when the Portfolio Manager believes interest rates may decline.
There is no limit on the amount of the Portfolio's assets that can be
invested in securities rated below investment grade. For additional
information on these high-yield debt securities, which may involve a high
degree of risk, see "Description of Securities and Investment Techniques--
High Yield Bonds" in this Statement of Additional Information.
The All Cap Portfolio may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to
the public. The Portfolio will not invest more than 10% of the value of
its total assets in illiquid securities, such as "restricted securities"
which are illiquid, and securities that are not readily marketable. For
further discussion of illiquid securities and their associated risks,
see "Description of Securities and Investment Techniques--Illiquid
Securities." The Portfolio may purchase Rule 144A securities. The
Portfolio's holding of Rule 144A securities which are liquid securities
will not be subject to the 10% limitation on investments in illiquid
securities.
As indicated in "Investment Restrictions," in this Statement
of Additional Information, the Portfolio may from time to time lend
portfolio securities to selected members of the NYSE. Such loans will
not exceed 10% of the Portfolio's total assets taken at value. For a
discussion of the risks associated with lending portfolio securities,
see "Description of Securities and Investment Techniques--Lending
Portfolio Securities."
As indicated under the title "Investment Restrictions," the Portfolio
may invest in repurchase agreements in an amount up to 25% of its
total assets. The Portfolio enters into repurchase agreements with
respect to securities in which it may otherwise invest. For a description
of repurchase agreements and their associated risks, see "Description of
Securities and Investment Techniques--Repurchase Agreements." In
addition, in order to meet redemptions or to take advantage of promising
investment opportunities without disturbing an established portfolio, the
Portfolio may borrow up to an aggregate of 15% of the value of its total
assets taken at the time of borrowing. In addition, the Portfolio may
borrow for temporary or emergency purposes an aggregate amount which may
not exceed 5% of the value of its total assets at the time of borrowing.
The Portfolio shall borrow only from banks. Borrowings may be unsecured,
or may be secured by not more than 15% of the value of the Portfolio's
total assets. As a matter of operating policy, however, the Portfolio
will not secure borrowings by more than 10% of the value of the
Portfolio's total assets. For a discussion of the risks associated with
borrowings, see "Description of Securities and Investment Techniques--
Borrowing."
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As a hedge against either a decline in the value of the securities
included in the Portfolio's investments, or against an increase
in the price of the securities which it plans to purchase, or in order to
preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash
balances, or in order to increase income or gain, the Portfolio
may use all of the investment strategies referred to under "Description
of Securities and Investment Techniques--Derivatives." The Portfolio's
ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies.
The foregoing investment policies (other than the policy of the
Portfolio with respect to the borrowing of money and the lending
of portfolio securities) are not fundamental policies and may be changed
by vote of the Board of Trustees without the approval of shareholders.
The Portfolio may sell portfolio securities in anticipation of an
adverse market movement. Other than for tax purposes, frequency of
portfolio turnover will not be a limiting factor if the Portfolio Manager
considers it advantageous to purchase or sell securities. The Portfolio
does not anticipate that its annual portfolio turnover rate will exceed
160%. A high rate of portfolio turnover involves correspondingly
greater transaction expenses than a lower rate, which expenses must be
borne by the Portfolio and to shareholders.
LARGE CAP GROWTH PORTFOLIO
Investment Objective: Seek long-term growth of capital through
investment primarily in common stocks of established companies with
above average growth prospects. Dividend income from investments will
be incidental.
The Portfolio may, from time to time, invest in warrants on common
stocks. A warrant is a right to buy a number of shares of stock at a
specified price during a specified period of time. The Portfolio may
invest up to 30% of its total assets in non-U.S. currency denominated
common stock and fixed income securities convertible into common stock
of foreign and U.S. issuers. American Depository Receipts are not
considered "foreign securities" for purposes of the percentage
limitations set forth above. The Portfolio may write put and call
options on equity securities that are trades on securities exchanges,
listed on National Association of Securities Dealers Automated
Quotation System (NASDAQ), or privately negotiated with broker-dealer
(OTC equity options).
The Portfolio may purchase "protective puts" on equity securities.
These are acquired to protect a Portfolio's security from a decline in
market value. The Portfolio will only sell or "write" covered options
on stock indexes.
The Portfolio may purchase and write put and call options on foreign
currencies traded on U.S. or foreign securities exchanges or boards of
trade for hedging purposes in a manner similar to that in which forward
foreign currency exchange contracts and futures contracts on foreign
currencies are employed. Options on foreign currencies are similar to
options on stocks, except that the option holder has the right to take
or make delivery of a specified amount of foreign currency rather than
stock.
The Portfolio may purchase and sell stock index futures contracts and
may purchase and sell futures contracts on foreign currencies. The
Portfolio may purchase or sell futures contracts without limit for
hedging purposes. This would be the case, for example, if a portfolio
manager is using a futures contract to reduce the risk of a particular
position on a security. The Portfolio can also purchase or sell futures
contracts for non-hedging purposes provided the initial margins and
premiums associated with the contracts do not exceed 5% of the fair
market value of the Portfolio's assets, taking into account unrealized
profits or unrealized losses on any such futures. This would be the
case if the portfolio manager uses futures for investment purposes, to
increase income or to adjust the Portfolio's asset mix.
The Portfolio may enter into foreign currency exchange contracts to
protect the value of their foreign holdings against future changes in
the level of currency exchange rates.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective should be read, together
with the investment restrictions set forth below. These are broken
into two sections for different groups of Portfolios into fundamental
and non-fundamental policies. Fundamental policies and restrictions
of each Portfolio may not be changed with respect to any Portfolio
without the approval of a majority of the outstanding voting shares
of that Portfolio. The vote of a majority of the outstanding voting
securities of a Portfolio 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 Portfolio are present or
represented by proxy; or (b) more than 50% of the outstanding voting
securities of such Portfolio. Non-fundamental policies and
restrictions may be changed by a vote of the Board of Trustees and
without shareholder approval, consistent with the Investment Company
Act of 1940 and changes in relevant SEC interpretations.
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FUNDAMENTAL INVESTMENT RESTRICTIONS
FOR THE EQUITY INCOME PORTFOLIO, THE FULLY MANAGED PORTFOLIO, THE
LIMITED MATURITY BOND PORTFOLIO, THE HARD ASSETS PORTFOLIO, THE REAL
ESTATE PORTFOLIO, THE ALL-GROWTH PORTFOLIO, THE CAPITAL APPRECIATION
PORTFOLIO, THE RISING DIVIDENDS PORTFOLIO, THE EMERGING MARKETS
PORTFOLIO, THE VALUE EQUITY PORTFOLIO, THE STRATEGIC EQUITY
PORTFOLIO, THE SMALL CAP PORTFOLIO, THE MANAGED GLOBAL PORTFOLIO, THE
MARKET MANAGER PORTFOLIO, AND THE LIQUID ASSET PORTFOLIO:
Under these restrictions, a Portfolio 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
Portfolio;
(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
Portfolio, to securities or obligations issued by U.S. banks,
(c) with respect to the Market Manager Portfolio, to options
on stock indexes issued by eligible broker-dealers or banks,
as described in the Market Manager Portfolio's Prospectus; (d)
with respect to the Managed Global Portfolio, to securities
issued or guaranteed by foreign governments or any political
subdivisions thereof, authorities, agencies, or
instrumentalities (or repurchase agreements with respect
thereto); and (e) to the Real Estate Portfolio, 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 Hard Assets Portfolio, which will
normally invest more than 25% of its total assets in the group
of industries engaged in hard assets activities, provided that
such concentration for these two Portfolios 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 Portfolio 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;
(5) Purchase securities on margin (except for use of short-
term credit necessary for clearance of purchases and sales of
portfolio securities), except a Portfolio 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 Hard Assets Portfolio 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 Portfolio
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;
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(7) Issue senior securities, except insofar as a Portfolio
may be deemed to have issued a senior security by reason of
borrowing money in accordance with that Portfolio's 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 Portfolio may be deemed to be an underwriter
under the federal securities laws;
(9) With respect to the Equity Income, Fully Managed, Limited
Maturity Bond, Hard Assets, Real Estate, All-Growth, Capital
Appreciation and Liquid Asset Portfolio, make short sales of
securities, except short sales against the box, and except
that this restriction shall not apply to the, Hard Assets, All-
Growth or Capital Appreciation Portfolio, which may engage in
short sales within the limitations described in the Statement
of Additional Information;
(10) Borrow money or pledge, mortgage, or hypothecate its
assets, except that a Portfolio 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 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 Portfolio's assets);
(11) With respect to the Equity Income, Fully Managed, Limited
Maturity Bond, Hard Assets, Real Estate, All-Growth, Capital
Appreciation, and Liquid Asset Portfolio, 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 Portfolio, except for the All-Growth Portfolio, and
more than 15% of the total assets (10% for the Capital
Appreciation Portfolio) of the Portfolio, (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 Portfolio 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 Equity Income and Strategic Equity Portfolio may
engage in futures contracts on gold; and
(d) this restriction shall not apply to the Managed Global
and the Hard Assets Portfolio.
(13) With respect to all Portfolios except the Managed Global
Portfolio, 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 Portfolio may engage in
transactions in options, futures contracts, and options on
futures.
FOR THE TOTAL RETURN PORTFOLIO, RESEARCH PORTFOLIO, MID-CAP GROWTH
PORTFOLIO AND GLOBAL FIXED INCOME PORTFOLIO:
A Portfolio may not:
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(1) With respect to 75% of its total assets, purchase the
securities of any issuer if such purchase would cause more
than 5% of the value of a Portfolio total assets to be
invested in securities of any one issuer (except securities
issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof), or purchase more than 10% of the
outstanding voting securities of any one issuer; provided that
this restriction shall not apply to the Global Fixed Income
Portfolio or the Mid-Cap Growth Portfolio;
(2) invest more than 25% of the value of the Portfolio total
assets in the securities of companies engaged in any one
industry (except securities issued by the U.S. Government, its
agencies and instrumentalities);
(3) borrow money except from banks as a temporary measure for
extraordinary or emergency purposes or by entering into
reverse repurchase agreements (each Portfolio of the Trust is
required to maintain asset coverage (including borrowings) of
300% for all borrowings), except Global Fixed Income Portfolio
may also borrow to enhance income;
(4) make loans to other persons, except loans of portfolio
securities and except to the extent that the purchase of debt
obligations in accordance with its investment objectives and
policies or entry into repurchase agreements may be deemed to
be loans;
(5) purchase or sell any commodity contract, except that each
Portfolio may purchase and sell futures contracts based on
debt securities, indexes of securities, and foreign currencies
and purchase and write options on securities, futures
contracts which it may purchase, securities indexes, and
foreign currencies and purchase forward contracts. (Securities
denominated in gold or other precious metals or whose value is
determined by the value of gold or other precious metals are
not considered to be commodity contracts.) The Mid-Cap Growth,
Research and Total Return Portfolio reserve the freedom of
action to hold and to sell real estate or mineral leases,
commodities or commodity contracts acquired as a result of the
ownership of securities. The Mid-Cap Growth, Research and
Total Return Portfolio will not purchase securities for the
purpose of acquiring real estate or mineral leases,
commodities or commodity contracts (except for options,
futures contracts, options on futures contracts and forward
contracts).
(6) underwrite securities of any other company, although it
may invest in companies that engage in such businesses if it
does so in accordance with policies established by the Trust's
Board of Trustees, and except to the extent that the Portfolio
may be considered an underwriter within the meaning of the
Securities Act of 1933, as amended, in the disposition of
restricted securities;
(7) purchase or sell real estate, although it may purchase
and sell securities which are secured by or represent
interests in real estate, mortgage-related securities,
securities of companies principally engaged in the real estate
industry and participation interests in pools of real estate
mortgage loans, and it may liquidate real estate acquired as a
result of default on a mortgage; and
(8) issue any class of securities which is senior to a
Portfolio shares of beneficial interest except as permitted
under the Investment Company Act of 1940 or by order of the
SEC.
FOR THE GROWTH PORTFOLIO:
The Portfolio may not:
(1) purchase or sell commodities or commodity contracts, or
interests in oil, gas, or other mineral leases, or other
mineral exploration or development programs, although it may
invest in companies that engage in such businesses to the
extent otherwise permitted by the Portfolio investment
policies and restrictions and by applicable law, except as
required in connection with otherwise permissible options,
futures and commodity activities as described elsewhere this
Statement;
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(2) purchase or sell real estate, although it may invest in
securities secured by real estate or real estate interests, or
issued by companies, including real estate investment trusts,
that invest in real estate or real estate interests;
(3) make short sales or purchases on margin, although it may
obtain short-term credit necessary for the clearance of
purchases and sales of its portfolio securities and except as
required in connection with permissible options, futures,
short selling and leverage activities as described elsewhere
in the Prospectus and this Statement (the short sale
restriction is non-fundamental);
(4) with respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. Government
and its agencies and instrumentalities) if immediately after
and as a result of such investment more than 5% of the total
assets of a Portfolio would be invested in such issuer. There
are no limitations with respect to the remaining 25% of its
total assets, except to the extent other investment
restrictions may be applicable.
(5) mortgage, hypothecate, or pledge any of its assets as
security for any of its obligations, except as required for
otherwise permissible borrowings (including reverse repurchase
agreements), short sales, financial options and other hedging
activities;
(6) make loans to other persons, except loans of portfolio
securities and except to the extent that the purchase of debt
obligations in accordance with its investment objectives and
policies or entry into repurchase agreements may be deemed to
be loans;
(7) borrow money, except from banks for temporary or
emergency purposes or in connection with otherwise permissible
leverage activities, and then only in an amount not in excess
of 5% of the Portfolio total assets (in any case as determined
at the lesser of acquisition cost or current market value and
excluding collateralized reverse repurchase agreements);
(8) underwrite securities of any other company, although it
may invest in companies that engage in such businesses if it
does so in accordance with policies established by the Trust's
Board of Trustees, and except to the extent that the Portfolio
may be considered an underwriter within the meaning of the
Securities Act of 1933, as amended, in the disposition of
restricted securities;
(9) invest more than 25% of the value of the Portfolio total
assets in the securities of companies engaged in any one
industry (except securities issued by the U.S. Government, its
agencies and instrumentalities);
(10) issue senior securities, as defined in the 1940 Act,
except that this restriction shall not be deemed to prohibit
the Portfolio from making any otherwise permissible
borrowings, mortgages or pledges, or entering into permissible
reverse repurchase agreements, and options and futures
transactions;
(11) own, directly or indirectly, more than 25% of the voting
securities of any one issuer or affiliated person of the
issuer; and
(12) purchase the securities of other investment companies,
except as permitted by the 1940 Act or as part of a merger,
consolidation, acquisition of assets or similar reorganization
transaction.
FOR THE GROWTH & INCOME PORTFOLIO:
The Portfolio may not:
(1) issue any class of securities which is senior to the
Portfolio shares of beneficial interest, except that the
Portfolio may borrow money to the extent contemplated by
Restriction 3 below;
(2) purchase securities on margin (but a Portfolio may obtain
such short-term credits as may be necessary for the clearance
of transactions). (Margin payments or other arrangements in
connection with transactions in short sales, futures
contracts, options, and other financial instruments are not
considered to constitute the purchase of securities on margin
for this purpose);
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(3) borrow more than one-third of the value of its total
assets less all liabilities and indebtedness (other than such
borrowings) not represented by senior securities;
(4) underwrite securities of any other company, although it
may invest in companies that engage in such businesses if it
does so in accordance with policies established by the Trust's
Board of Trustees, and except to the extent that the Portfolio
may be considered an underwriter within the meaning of the
Securities Act of 1933, as amended, in the disposition of
restricted securities;
(5) as to 75% of the Portfolio total assets, purchase any
security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result: (i) more than
5% of the Portfolio total assets (taken at current value)
would then be invested in securities of a single issuer, or
(ii) more than 25% of the Portfolio total assets (taken at
current value) would be invested in a single industry;
(6) invest in securities of any issuer if any officer or
Trustee of the Trust or any officer or director of the
Portfolio Manager owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers, Trustees and
directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer; and
(7) make loans to other persons, except loans of portfolio
securities and except to the extent that the purchase of debt
obligations in accordance with its investment objectives and
policies or entry into repurchase agreements may be deemed to
be loans.
FOR THE GROWTH OPPORTUNITIES AND DEVELOPING WORLD PORTFOLIO:
A Portfolio may not:
(1) With respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. Government
and its agencies and instrumentalities) if immediately after
and as a result of such investment more than 5% of the total
assets of a Portfolio would be invested in such issuer. There
are no limitations with respect to the remaining 25% of its
total assets, except to the extent other investment
restrictions may be applicable.
(2) Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective
and policies, (b) through the lending of up to 30% of its
portfolio securities as described above and in its Prospectus,
or (c) to the extent the entry into a repurchase agreement or
a reverse dollar roll transaction is deemed to be a loan.
(3) (a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse repurchase
agreements or dollar roll transactions for a Portfolio that
uses such investment techniques and then not in excess of one-
third of the value of its total assets (at the lower of cost
or fair market value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least
300% of all borrowings (excluding any fully collateralized
reverse repurchase agreements and dollar roll transactions the
Portfolio may enter into), and no additional investments may
be made while any such borrowings are in excess of 10% of
total assets.
(b) Mortgage, pledge or hypothecate any of its assets except
in connection with permissible borrowings and permissible
forward contracts, futures contracts, option contracts or
other hedging transactions.
(4) Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite
securities. (This does not preclude a Portfolio from obtaining
such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities.)
(5) Buy or sell real estate or commodities or commodity
contracts; however, a Portfolio, to the extent not otherwise
prohibited in the Prospectus or this Statement of Additional
Information, may invest in securities secured by real estate
or interests therein or issued by companies which invest in
real estate or interests therein, including real estate
investment trusts, and may purchase or sell currencies
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(including forward currency exchange contracts), futures
contracts and related options generally as described in the
Prospectus and this Statement of Additional Information.
(6) Invest in securities of other investment companies,
except to the extent permitted by the Investment Company Act
and discussed in the Prospectus or this Statement of
Additional Information, or as such securities may be acquired
as part of a merger, consolidation or acquisition of assets.
(7) Invest more than 25% of the value of the Portfolio total
assets in the securities of companies engaged in any one
industry (except securities issued by the U.S. Government, its
agencies and instrumentalities);
(8) Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed
to prohibit a Portfolio from (a) making any permitted
borrowings, mortgages or pledges, or (b) entering into
permissible repurchase and dollar roll transactions.
(9) Invest in commodities, except for futures contracts or
options on futures contracts if, as a result thereof, more
than 5% of a Portfolio's total assets (taken at market value
at the time of entering into the contract) would be committed
to initial deposits and premiums on open futures contracts and
options on such contracts.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
FOR THE RISING DIVIDENDS PORTFOLIO, EMERGING MARKETS PORTFOLIO, VALUE
EQUITY PORTFOLIO, STRATEGIC EQUITY PORTFOLIO, SMALL CAP PORTFOLIO,
MANAGED GLOBAL PORTFOLIO AND MARKET MANAGER PORTFOLIO:
A Portfolio may not:
(1) Make short sales of securities, except short sales
against the box (this restriction shall not apply to the
Strategic Equity, Small Cap, and Managed Global Portfolio,
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 Portfolio (taken at market
value at the time of such investment) would be invested in
such securities.
FOR THE MANAGED GLOBAL PORTFOLIO:
The Portfolio may not:
Purchase or sell commodities or commodities contracts (which, for
the purpose of this restriction, shall not include foreign currency
or forward foreign currency contracts or futures contracts on
currencies), except that the Portfolio may engage in interest rate
futures contracts, stock index futures contracts, futures contracts
based on other financial instruments, and in options on such futures
contracts.
FOR THE TOTAL RETURN PORTFOLIO, RESEARCH PORTFOLIO, MID-CAP GROWTH
PORTFOLIO AND GLOBAL FIXED INCOME PORTFOLIO:
A Portfolio may not:
(1) invest more than 10% (except 15% with respect to the
Global Fixed Income Portfolio, Mid-Cap Growth Portfolio and
Total Return Portfolio) of the net assets of a Portfolio
(taken at market value) in illiquid securities, including
repurchase agreements maturing in more than seven days;
(2) purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and
sales of securities, and except that it may make margin
payments in connection with
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options, futures contracts, options on futures contracts and
forward foreign currency contracts and in connection with swap
agreements;
(3) make short sales of securities unless such Portfolio owns
an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short; and
(4) make investments for the purpose of gaining control of a
company's management.
FOR THE GROWTH PORTFOLIO:
The Portfolio may not invest, in the aggregate, more than 10% of
its net assets in illiquid securities.
FOR THE GROWTH & INCOME PORTFOLIO:
The Portfolio may not:
(1) invest in warrants (other than warrants acquired by the
Portfolio as a part of a unit or attached to securities at the
time of purchase) if, as a result, such investment (valued at
the lower of cost or market value) would exceed 5% of the
value of the Portfolio net assets, provided that not more than
2% of the Portfolio net assets may be invested in warrants not
listed on the New York or American Stock Exchanges;
(2) purchase or sell commodities or commodity contracts,
except that the Portfolio may purchase or sell financial
futures contracts, options on financial futures contracts, and
futures contracts, forward contracts, and options with respect
to foreign currencies, and may enter into swap transactions;
(3) purchase securities restricted as to resale if, as a
result, (i) more than 10% of the Portfolio total assets would
be invested in such securities, or (ii) more than 5% of the
Portfolio total assets (excluding any securities eligible for
resale under Rule 144A under the Securities Act of 1933) would
be invested in such securities;
(4) invest in (a) securities which at the time of such
investment are not readily marketable, (b) securities
restricted as to resale, and (c) repurchase agreements
maturing in more than seven days, if, as a result, more than
15% of the Portfolio net assets (taken at current value) would
then be invested in the aggregate in securities described in
(a), (b), and (c) above;
(5) invest in securities of other registered investment
companies, except by purchases in the open market involving
only customary brokerage commissions and as a result of which
not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition;
(6) invest in real estate limited partnerships;
(7) purchase any security if, as a result, the Portfolio
would then have more than 5% of its total assets (taken at
current value) invested in securities of companies (including
predecessors) less than three years old;
(8) purchase or sell real estate or interests in real estate,
including real estate mortgage loans, although it may purchase
and sell securities which are secured by real estate and
securities of companies, including limited partnership
interests, that invest or deal in real estate and it may
purchase interests in real estate investment trusts. (For
purposes of this restriction, investments by a Portfolio in
mortgage-backed securities and other securities representing
interests in mortgage pools shall not constitute the purchase
or sale of real estate or interests in real estate or real
estate mortgage loans.);
(9) make investments for the purpose of exercising control or
management;
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(10) invest in interests in oil, gas or other mineral
exploration or development programs or leases, although it may
invest in the common stocks of companies that invest in or
sponsor such programs;
(11) acquire more than 10% of the voting securities of any
issuer;
(12) invest more than 15%, in the aggregate, of its total
assets in the securities of issuers which, together with any
predecessors, have a record of less than three years
continuous operation and securities restricted as to resale
(including any securities eligible for resale under Rule 144A
under the Securities Act of 1933); or
(13) purchase or sell puts, calls, straddles, spreads, or any
combination thereof, if, as a result, the aggregate amount of
premiums paid or received by the Portfolio in respect of any
such transactions then outstanding would exceed 5% of its
total assets.
FOR THE GROWTH OPPORTUNITIES AND DEVELOPING WORLD PORTFOLIO:
A Portfolio may not:
(1) Invest, in the aggregate, more than 15% of its net assets
in illiquid securities, including (under current SEC
interpretations) restricted securities (excluding liquid Rule
144A-eligible restricted securities), securities which are not
otherwise readily marketable, repurchase agreements that
mature in more than seven days and over-the-counter options
(and securities underlying such options) purchased by a
Portfolio.
(2) Invest in any issuer for purposes of exercising control
or management of the issuer.
(3) Except as described in the Prospectus and this Statement
of Additional Information, acquire or dispose of put, call,
straddle or spread options subject to the following conditions
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of the Portfolio's
total assets.
(4) Except as described in the Prospectus and this Statement
of Additional Information, engage in short sales of
securities.
(5) Purchase more than 10% of the outstanding voting
securities of any one issuer.
If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage
resulting from a change in the values of assets will not constitute a
violation of that restriction, except as otherwise noted.
INVESTORS PORTFOLIO
The Investors Portfolio may not:
(1) purchase any securities of another issuer (other than the
United States of America) if upon said purchase more than 5% of
its net assets would consist of securities of such issuer, or
purchase more than 15% of any class of securities of such issuer;
(2) borrow money, except (i) in order to meet redemption requests
or (ii) as a temporary measure for extraordinary or emergency
purposes and, in the case of both (i) and (ii), only from banks
and only in an aggregate amount not to exceed 5% of its total
assets taken at cost or value, whichever is less, or mortgage or
pledge any of its assets and except that for purposes of this
restriction, collateral arrangements with respect to the writing
of options on stocks and stock indices, the purchase and sale of
futures contracts and options on futures contracts, and forward
currency contracts are not deemed a pledge of assets or a
borrowing of money;
(3) lend its funds or other assets to any other person other than
through the purchase of liquid debt securities pursuant to the
Portfolio's investment policies, except that (a) the Portfolio may
lend its portfolio securities in an amount up to 33 1/3% of its
total assets,
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provided that the borrower may not be affiliated,
directly or indirectly, with the Portfolio and (b) the Portfolio
may enter into repurchase agreements in an amount up to an
aggregate of 25% of its total assets;
(4) invest in the securities of issuers which have been in
operation for less than three years if such purchase at the time
thereof would cause more than 5% of the net assets of the
Portfolio to be so invested;
(5) purchase any securities on margin (except that the Portfolio
may make deposits in connection with transactions in options on
securities), make any so-called "short" sales of securities or
participate in any joint or joint and several trading accounts;
(6) act as underwriter of securities of other issuers;
(7) purchase the securities of another investment company or
investment trust except in the open market where no profit to a
sponsor or dealer, other than the customary broker's commission,
results from such purchase (but the aggregate of such investments
shall not be in excess of 10% of the net assets of the Portfolio),
or except when such purchase is part of a plan of merger or
consolidation;
(8) buy securities from, or sell securities to, any of its
officers, directors, employees, investment manager or distributor,
as principals;
(9) purchase or retain any securities of an issuer if one or more
persons affiliated with the Portfolio owns beneficially more than
1/2 of 1% of the outstanding securities of such issuer and such
affiliated persons so owning 1/2 of 1% together own beneficially
more than 5% of such securities;
(10) purchase real estate (not including investments in securities
issued by real estate investment trusts) or commodities or
commodity contracts, provided that the Portfolio may enter into
futures contracts, including futures contracts on interest rates,
stock indices and currencies, and options thereon, and may engage
in forward currency transactions and buy, sell and write options
on currencies;
(11) issue senior securities except as may be permitted by the
1940 Act.
(12) invest in warrants (other than warrants acquired by the
Investors Portfolio as part of a unit or attached to securities at
the time of purchase) if, as a result, the investments (valued at
the lower of cost or market) would exceed 5% of the value of the
Investors Portfolio's net assets or if, as a result, more than 2%
of the Investors Portfolio's net assets would be invested in
warrants that are not listed on AMEX or NYSE;
(13) invest in oil, gas and other mineral leases, provided,
however, that this shall not prohibit the Investors Portfolio from
purchasing publicly traded securities of companies engaging in
whole or in part in such activities; or
(14) purchase or sell real property (including limited partnership
interests) except to the extent described in investment
restriction number 10 above.
Investment restrictions (1) through (11) described above are fundamental
policies of the Investors Porftolio. Restrictions (12) through (14) are
non-fundamental policies of the Investors Portfolio.
LARGE CAP VALUE PORTFOLIO
The Large Cap Value Portfolio may not:
(1) issue senior securities, except to the extent that the
borrowing of money in accordance with restrictions (3) may
constitute the issuance of a senior security. (For purposes of
this
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restriction, purchasing securities on a when-issued or
delayed delivery basis and engaging in hedging and other strategic
transactions will not be deemed to constitute the issuance of a
senior security.)
(2) invest more than 25% of the value of its total assets in
securities of issuers having their principal activities in any
particular industry, excluding U. S. Government securities and
obligations of domestic branches of U.S. banks and savings and
loan associations.
(3) For purposes of this restriction, neither finance companies
as a group nor utility companies as a group are considered to be a
single industry. Such companies will be grouped instead according
to their services; for example, gas, electric and telephone
utilities will each be considered a separate industry. Also for
purposes of this restriction, foreign government issuers and
supranational issuers are not considered members of any industry.
(4) purchase the securities of any issuer if the purchase would
cause more than 5% of the value of the portfolio's total assets to
be invested in the securities of any one issuer (excluding U. S.
Government securities) or cause more than 10% of the voting
securities of the issuer to be held by the portfolio, except that
up to 25% of the value of each portfolio's total assets may be
invested without regard to these restrictions.
(5) borrow money, except that the portfolio may borrow (i) for
temporary or emergency purposes (not for leveraging) up to 33 1/3%
of the value of the portfolio's total assets (including amounts
borrowed) less liabilities (other than borrowings) and (ii) in
connection with reverse repurchase agreements, mortgage dollar
rolls and other similar transactions.
(6) underwrite securities of other issuers except insofar as the
Portfolio may be considered an underwriter under the 1933 Act in
selling portfolio securities.
(7) purchase or sell real estate, except that the Portfolio may
invest in securities issued by companies which invest in real
estate or interests therein and may invest in mortgages and
mortgage-backed securities.
(8) purchase or sell commodities or commodity contracts, except
that the Portfolio may purchase and sell futures contracts on
financial instruments and indices and options on such futures
contracts and may purchase and sell futures contracts on foreign
currencies and options on such futures contracts.
(9) lend money to other persons, except by the purchase of
obligations in which the Portfolio is authorized to invest and by
entering into repurchase agreements. For purposes of this
restriction, collateral arrangements with respect to options,
forward currency and futures transactions will not be deemed to
involve the lending of money.
(10) lend securities in excess of 33 1/3% of the value of its
total assets. For purposes of this restriction, collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve loans of securities.
(11) knowingly invest more than 15% of the value of its net assets
in securities or other investments, including repurchase
agreements maturing in more than seven days but excluding master
demand notes, that are not readily marketable;
(12) sell securities short or purchase securities on margin,
except that it may obtain such short-term credits as may be
required to clear transactions. For purposes of this restriction,
collateral arrangements with respect to hedging and other
strategic transactions will not be deemed to involve the use of
margin.
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(13) write or purchase options on securities, financial indices or
currencies, except to the extent the Portfolio is specifically
authorized to engage in hedging and other strategic transactions.
(14) purchase securities for the purpose of exercising control or
management.
(15) purchase securities of other investment companies if the
purchase would cause more than 10% of the value of the portfolio's
total assets to be invested in investment company securities,
provided that (i) no investment will be made in the securities of
any one investment company if immediately after such investment
more than 3% of the outstanding voting securities of such company
would be owned by the portfolio or more than 5% of the value of
the Portfolio's total assets would be invested in such company and
(ii) no restrictions shall apply to a purchase of investment
company securities in connection with a merger, consolidation or
reorganization;
For purposes of this restriction, privately issued collateralized
mortgage obligations will not be treated as investment company
securities if issued by "Exemptive Issuers." Exemptive Issuers are
defined as unmanaged, fixed-asset issuers that (a) invest
primarily in mortgage-backed securities, (b) do not issue
redeemable securities as defined in Section 2(a) (32) of the 1940
Act, (c) operate under general exemptive orders exempting them
from all provisions of the 1940 Act, and (d) are not registered or
regulated under the 1940 Act as investment companies.
(16) pledge, hypothecate, mortgage or transfer (except as provided
in restriction (4)) as security for indebtedness any securities
held by the Portfolio, except in an amount of not more than 33
1/3% of the value of the Portfolio's total assets and then only to
secure borrowings permitted by restrictions (3) and (10). For
purposes of this restriction, collateral arrangements with respect
to hedging and other strategic transactions will not be deemed to
involve a pledge of assets.
If a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in the investment's
percentage of the value of a portfolio's total assets resulting
from a change in such values or assets will not constitute a
violation of the percentage restriction.
Restrictions (1) through restriction (8) are fundamental.
Restrictions (9) through (15) are nonfundamental
ALL CAP PORTFOLIO
The ALL CAP Portfolio may not:
(1) hold more than 25% of the value of its total assets in the
securities of any single company or in the securities of companies
in any one industry. As to 50% of the value of its total assets,
the Portfolio's investment in any one security, other than United
States Government obligations, will not exceed 5% of the value of
its total assets and as to this 50%, the Portfolio will not invest
in more than 15% of the outstanding voting securities of any one
issuer;
(2) borrow money or pledge or mortgage its assets, except as
described under "Description of Securities and Investment
Techniques" and except that for purposes of this restriction,
collateral arrangements with respect to the writing of options on
stocks and stock indices, the purchase and sale of futures
contracts and options on futures contracts, and forward currency
contracts are not deemed a pledge of assets or a borrowing of
money;
(3) underwrite securities, except in instances where the
Portfolio has acquired portfolio securities which it may not be
free to sell publicly without registration under the 1933 Act
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("restricted securities"); in such registrations, the Portfolio
may technically be deemed an "underwriter" for purposes of the
1933 Act. No more than 10% of the value of Portfolio's total
assets may be invested in illiquid securities;
(4) make loans other than through (a) the lending of its
portfolio securities in accordance with the procedures described
under "Description of Securities and Investment Techniques--
Lending of Portfolio Securities" in this Statement of Additional
Information, or (b) entering into repurchase agreements in an
amount up to an aggregate of 25% of its total assets, but this
restriction shall not prevent the Portfolio from buying a portion
of an issue of bonds, debentures or other obligations which are
liquid, or from investing up to an aggregate of 10% (including
investments in other types of illiquid securities) of the value of
its total assets in portions of issues of bonds, debentures or
other obligations of a type privately placed with financial
institutions and which are illiquid;
(5) invest more than 10% of the value of the Portfolio's total
assets in securities of unseasoned issuers, including their
predecessors, which have been in operation for less than three
years, and equity securities which are not readily marketable;
(6) invest in companies for the purpose of exercising control or
management. (The Portfolio may on occasion be considered part of
a control group of a portfolio company by reason of the size or
manner of its investment, in which event the securities of such
portfolio company held by the Portfolio may not be publicly
saleable unless registered under the Securities Act of 1933 or
pursuant to an available exemption thereunder.);
(7) purchase securities on margin (except for such short-term
credits as are necessary for the clearance of transactions and
except that the Portfolio may make deposits in connection with
transactions in options on securities) or make short sales of
securities (except for sales "against the box", i.e., when a
security identical to one owned by the Portfolio, or which the
Portfolio has the right to acquire without payment of additional
consideration, is borrowed and sold short);
(8) purchase or sell real estate, interests in real estate,
interests in real estate investment trusts, or commodities or
commodity contracts; however, the Portfolio (a) may purchase
interests in real estate investment trusts or companies which
invest in or own real estate if the securities of such trusts or
companies are registered under the Securities Act of 1933 and are
readily marketable and (b) may enter into futures contracts,
including futures contracts on interest rates, stock indices and
currencies, and options thereon, and may engage in forward
currency contracts and buy, sell and write options on currencies;
(9) purchase more than 3% of the stock of another investment
company, or purchase stock of other investment companies equal to
more than 5% of the Portfolio's net assets in the case of any one
other investment company and 10% of such net assets in the case of
all other investment companies in the aggregate. Any such
purchase will be made only in the open market where no profit to a
sponsor or dealer results from the purchase, except for the
customary broker's commission. This restriction shall not apply to
investment company securities received or acquired by the
Portfolio pursuant to a merger or plan of reorganization. (The
return on such investments will be reduced by the operating
expenses, including investment advisory and administrative fees of
such investment Portfolios and will be further reduced by the
Portfolio's expenses, including management fees; that is, there
will be a layering of certain fees and expenses.);
(10) purchase or hold securities of an issuer if one or more
persons affiliated with the Portfolio or with Smith Barney Asset
Management owns beneficially more than 1/2 of 1% of the securities
of that issuer and such persons owning more than 1/2 of 1% of such
securities together own beneficially more than 5% of the
securities of such issuer;
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(11) buy portfolio securities from, or sell portfolio securities
to, any of the Portfolio's officers, directors or employees of its
investment manager or distributor, or any of their officers or
directors, as principals;
(12) purchase or sell warrants; however, the Portfolio may invest
in debt or other securities which have warrants attached (not to
exceed 10% of the value of the Portfolio's total assets). Covered
options with respect to no more than 10% in value of the
Portfolio's total assets will be outstanding at any one time;
(13) invest in interest in oil, gas or other mineral exploration
or development programs, or
(14) issue senior securities except as may be permitted by the
1940 Act.
LARGE CAP GROWTH PORTFOLIO
The Large Cap Growth Portfolio may not:
1. Buy or sell real estate and mortgages, although the Portfolios may
buy and sell securities that are secured by real estate and securities
of real estate investment trusts and of other issuers that engage in
real estate operation. Buy or sell commodities or commodities
contracts. The Portfolio may purchase and sell foreign currency
futures contracts and related options and forward foreign currency
exchange contracts.
2. Except as part of a merger, consolidation, acquisition or
reorganization, invest more than 5% of the value of its total assets in
the securities of any one investment company or more than 10% of the
value of its total assets, in the aggregate, in the securities of two
or more investment companies, or acquire more than 3% of the total
outstanding voting securities of any one investment company.
3. Acquire securities for the purpose of exercising control or
management of any company except in connection with a merger,
consolidation, acquisition or reorganization.
4. Make short sales of securities or maintain a short position.
Collateral arrangements entered into with respect to interest rate swap
agreements are not deemed to be short sales.
5. Purchase securities on margin or otherwise borrow money or issue
senior securities, except that the Portfolio may purchase
securities on a when-issued or a delayed delivery basis. The
Portfolio may also obtain such short-term credit as it needs for
the clearance of securities transactions and may borrow from a
bank for the account of any Portfolio as a temporary measure to
facilitate redemptions (but not for leveraging or investment) or
to exercise an option, an amount that does not exceed 5% of the
value of the Portfolio's total assets (including the amount owed
as a result of the borrowing) at the time the borrowing is made.
Interest paid on borrowings will not be available for investment.
Collateral arrangements with respect to futures contracts and
options thereon and forward foreign currency exchange contracts
(as permitted by restriction no. 1) are not deemed to be the
issuance of a senior security or the purchase of a security on
margin.
6. Enter into reverse repurchase agreements if, as a result, the
Portfolio's obligations with respect to reverse repurchase
agreements would exceed 10% of the Portfolio's net assets (defined
to mean total assets at market value less liabilities other than
reverse repurchase agreements).
7. Pledge or mortgage assets, except that no more than 10% of the
value of any Portfolio may be pledged (taken at the time the pledge is
made) to secure authorized borrowing and except that a Portfolio may
enter into reverse repurchase agreements. Collateral arrangements
entered into with respect to futures and forward contracts and the
writing of options are not deemed to be the pledge of assets.
Collateral arrangements entered into with respect to interest rate swap
agreements are not deemed to be the pledge of assets.
8. Lend money, except that loans of up to 10% of the value of each
Portfolio may be made through the purchase of privately placed bonds,
debentures, notes, and other evidences of indebtedness of a character
customarily acquired by institutional investors that may or may not be
convertible into stock or accompanied by warrants or rights to acquire
stock. Repurchase agreements and the purchase of publicly traded debt
obligations are not considered to be "loans" for this purpose and may
be entered into or purchased by a Portfolio in accordance with its
investment objectives and policies.
9. Underwrite the securities of other issuers, except where the Fund
may be deemed to be an underwriter for purposes of certain federal
securities laws in connection with the disposition of Portfolio
securities and with loans that a Portfolio may make pursuant to item 8
above.
10. Make an investment unless, when considering all its other
investments, 75% of the value of a Portfolio's assets would consist of
cash, cash items, obligations of the United States Government, its
agencies or instrumentalities, and other securities. For purposes of
this restriction, "other securities" are limited for each issuer to not
more than 5% of the value of a Portfolio's assets and to not more than
10% of the issuer's outstanding voting securities held by the Fund as a
whole. Some uncertainty exists as to whether certain of the types of
bank obligations in which a Portfolio may invest, such as certificates
of deposit and bankers' acceptances, should be classified as "cash
items" rather than "other securities" for purposes of this restriction,
which is a diversification requirement under the 1940 Act. Interpreting
most bank obligations as "other securities" limits the amount the
Portfolio may invest in the obligations of any one bank to 5% of its
total assets. If there is an authoritative decision that any of these
obligations are not "securities" for purposes of this diversification
test, this limitation would not apply to the purchase of such
obligations.
11. Purchase securities of a company in any industry if, as a result
of the purchase, a Portfolio's holdings of securities issued by
companies in that industry would exceed 25% of the value of the
Portfolio, except that this restriction does not apply to purchases of
obligations issued or guaranteed by the U.S. Government, its agencies
and instrumentalities or issued by domestic banks. For purposes of this
restriction, neither finance companies as a group nor utility companies
as a group are considered to be a single industry and will be grouped
instead according to their services; for example, gas, electric, and
telephone utilities will each be considered a separate industry. For
purposes of this exception, domestic banks shall include all banks
which are organized under the laws of the United States or a state (as
defined in the 1940 Act), U.S. branches of foreign banks that are
subject
to the same regulations as U.S. banks and foreign branches of domestic
banks (as permitted by the Securities and Exchange Commission ("SEC").
12. Invest more than 15% of its net assets in illiquid securities.
For purposes of this restriction, illiquid securities are those deemed
illiquid pursuant to SEC regulations and guidelines, as they may be
revised from time to time.
Consistent with item 5 above, the Portfolio has entered into a joint $1
billion revolving credit facility with other Prudential mutual funds to
facilitate redemptions if necessary. This credit facility, which was
entered into on March 13, 1999, is a syndicated arrangement with 12
different major banks.
The investments of the various Portfolios are generally subject to
certain additional restrictions under the laws of the State of New
Jersey. In the event of future amendments to the applicable New Jersey
statutes, each Portfolio will comply, without the approval of the
shareholders, with the statutory requirements as so modified. The
pertinent provisions of New Jersey law as they stand are, in summary
form, as follows:
1. An Account may not purchase any evidence of indebtedness issued,
.assumed or guaranteed by any institution created or existing under the
laws of the U.S., any U.S. state or territory, District of Columbia,
Puerto Rico, Canada or any Canadian province, if such evidence of
indebtedness is in default as to interest. "Institution" includes any
corporation, joint stock association, business trust, business joint
venture, business partnership, savings and loan association, credit
union or other mutual savings institution.
2. The stock of a corporation may not be purchased unless: (i) the
corporation has paid a cash dividend on the class of stock during each
of the past 5 years preceding the time of purchase; or (ii) during the
5-year period the corporation had aggregate earnings available for
dividends on such class of stock sufficient to pay average dividends of
4% per annum computed upon the par value of such stock or upon stated
value if the stock has no par value. This limitation does not apply to
any class of stock which is preferred as to dividends over a class of
stock whose purchase is not prohibited.
3. Any common stock purchased must be: (i) listed or admitted to
trading on a securities exchange in the United States or Canada; or
(ii) included in the National Association of Securities Dealers'
national price listings of "over-the-counter" securities; or (iii)
determined by the Commissioner of Insurance of New Jersey to be
publicly held and traded and have market quotations available.
4. Any security of a corporation may not be purchased if after the
purchase more than 10% of the market value of the assets of a Portfolio
would be invested in the securities of such corporation.
As a result of these currently applicable requirements of New Jersey
law, which impose substantial limitations on the ability of the
Portfolio to invest in the stock of companies whose securities are not
publicly traded or who have not recorded a 5-year history of dividend
payments or earnings sufficient to support such payments, the
Portfolios will not generally hold the stock of newly organized
corporations. Nonetheless, an investment not otherwise eligible under
items 1 or 2 above may be made if, after giving effect to the
investment, the total cost of all such non-eligible investments does
not exceed 5% of the aggregate market value of the assets of the
Portfolio.
Investment limitations also arise under the insurance laws and
regulations of Arizona and may arise under the laws and regulations of
other states. Although compliance with the requirements of New Jersey
law set forth above will ordinarily result in compliance with any
applicable laws of other states, under some circumstances the laws of
other states could impose additional restrictions on the Portfolios.
Current federal income tax laws require that the assets of the
Portfolio be adequately diversified so that Prudential and other
insurers with separate accounts which invest in the Portfolio, as
applicable, and not the Contract owners, are considered the owners of
assets held in the Accounts for federal income tax purposes. See "Other
Information - Federal Income Tax" in this Statement of Additional
Information. Prudential intends to maintain the assets of each
Portfolio pursuant to those diversification requirements.
Set forth above are certain investment restrictions applicable to the
Portfolio. Restrictions 1, 3, 5, and 8 through 11 are fundamental and
may not be changed without shareholder approval as required by the 1940
Act. Restrictions 2, 4, 6, 7, and 12 are not fundamental and may be
changed by the Board of Trustees without shareholder approval.
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 R. Brock Armstrong, Barnett
Chernow, J. Michael Earley, R. Barbara Gitenstein, Robert A. Grayson,
Elizabeth J. Newell, Stanley B. Seidler, and Roger B. Vincent. The
Executive Officers of the Trust are R. Brock Armstrong, Barnett
Chernow, Myles R. Tashman, and Mary Bea Wilkinson.
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Trustees and Executive Officers of the Trust, their business
addresses, and principal occupations during the past five years are:
NAME AND ADDRESS POSITION BUSINESS AFFILIATIONS AND
WITH THE PRINCIPAL OCCUPATIONS
TRUST
Barnett Chernow President, President and Chairman of the GCG
Golden American Life Trustee and Trust since December 1999; President
Insurance Co. Chairman and Director, Golden American
1475 Dunwoody Drive Life Insurance Company; President,
West Chester, PA 19380 Directed Services, Inc.; Executive Vice
President and then President,
First Golden American Life Insurance
Company of New York; formerly,
Senior Vice President and Chief
Financial Officer, Reliance Insurance
Company, August 1977 to April 1998.
Age 49.
John R. Barmeyer Trustee Senior Vice President, General Counsel
ING's American Region and Secretary of ING America Life
5780 Powers Ferry Road Corporation and its subsidiaries; and
Atlanta, GA 30327-4390 formerly General Counsel, Vice President
and Secretary of Life of Georgia from
1990 to 1992.
Age [ ].
J. Michael Earley Trustee President, and Chief
665 Locust Street Executive Officer, Bankers
Des Moines, IA 50309 Trust Company, Des Moines,
Iowa since July 1992; President and
Chief Executive Officer, Mid-America
Savings Bank, Waterloo, Iowa from
April, 1987 to June, 1992. Age 53.
R. Barbara Gitenstein Trustee President, The College of New Jersey
Office of the President since January, 1999; Trustee Provost,
The College of New Jersey Drake University from July 1992 to
December 1998;
55
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200 Pennington Road Assistant Provost, State University
Ewing, NJ 08628-0718 of New York from August, 1991 to
July, 1992; Associate Provost,
State University of New York
-Oswego from January, 1989 to
August, 1991. Age 50.
Robert A. Grayson Trustee Co-founder, Grayson
Grayson Associates Associates, Inc.; Adjunct
108 Loma Media Road Professor of Marketing, New
Santa Barbara, CA 93103 York University School of
Business Administration;
former Director, The Golden
Financial Group, Inc.;
former Senior Vice
President, David & Charles
Advertising. Age 71.
Myles R. Tashman Secretary Executive Vice President,
Golden American Life Secretary and General Counsel,
Insurance Co. Golden American Life Insurance
1475 Dunwoody Drive Company; Director, Executive Vice
West Chester, PA 19380 President, Secretary
and General Counsel, Directed
Services, Inc.; Director, Executive
Vice President, Secretary and General
Counsel, First Golden American Life
Insurance Company of New York;
formerly, Senior Vice President
and General Counsel, United Pacific
Life Insurance Company. Age 56.
Stanley B. Seidler Trustee President, Iowa Periodicals,
P.O. Box 1297 Inc. since 1990 and
3301 McKinley Avenue President, Excell Marketing
Des Moines, IA 50321 L.C. since 1994. Age 70.
Mary Bea Wilkinson Treasurer Senior Vice President & Treasurer,
Golden American Life First Golden American Life Insurance
Insurance Co. Company of New York; Senior
1475 Dunwoody Drive Vice President and Treasurer, Golden
West Chester, PA 19803 American Life Insurance Co.;
and President and Treasurer,
Directed Services, Inc.
October 1993 to December
1996; 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.
Age 42.
Roger B. Vincent Trustee President, Springwell
Springwell Corporation; Director
Corporation Petralone, Inc.; formerly,
230 Park Avenue Managing Director Bankers
New York, NY 10169 Trust Company. Age 53.
56
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Elizabeth J. Newell Trustee President and Chief
KRAGIE/NEWELL, Inc. Executive Officer of
2633 Fleur Drive KRAGIE/NEWELL, Inc. Age 52.
Des Moines, IA 50321
As of February 1, 2000, none of the Trustees directly owns shares of
the Portfolio. In addition, as of February 1, 2000, 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 Portfolio in the aggregate.
Each Trustee of the Trust who is not an interested person of the
Trust or Manager or Portfolio Manager receives a fee of $6,000 for
each Trustees' meeting attended and any expenses incurred in
attending such meetings or carrying out their responsibilities as
Trustees of the Trust. With respect to the period ended December 31,
1999, the Trust paid Trustees' Fees aggregating $144,000. The
following table shows 1999 compensation by Trustee.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Accrued Annual From Registrant
Name of Person, From As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Trustees
J. Michael Earley $ 24,000 N/A N/A $ 24,000
Trustee
R. Barbara Gitenstein $ 24,000 N/A N/A $ 24,000
Trustee
Robert A. Grayson $ 24,000 N/A N/A $ 24,000
Trustee
Stanley B. Seidler $ 24,000 N/A N/A $ 24,000
Trustee
Elizabeth J. Newell $ 24,000 N/A N/A $ 24,000
Trustee
Roger B. Vincent $ 24,000 N/A N/A $ 24,000
Trustee
</TABLE>
---------------
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 Portfolio as of February 1,
2000. The address for each record owner is c/o Golden American
Life Insurance Company, 1475 Dunwoody Drive, West Chester, PA 19380-1478.
57
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NAME PORTFOLIO PERCENTAGE
- ---- --------- ----------
David & Anita Swann Market Manager 14.76%
Charitable Remainder
Trust
Darald Libby Market Manager 9.21%
Charitable Remainder
Unit Trust
George Berman Market Manager 8.21%
Charitable Remainder
Trust
Sanford Lugar Market Manager 6.58%
Ivan DeAnda Growth Opportunities 5.89%
In addition, as of December 31, 1999 the General Account of Golden
American owned 12.11% of the shares of the Emerging Markets Portfolio,
and 9.52% of the Developing World Portfolio.
THE MANAGEMENT AGREEMENT
Directed Services, Inc. ("DSI" or the "Manager") serves as Manager
to the Portfolio pursuant to a Management Agreement (the "Management
Agreement") between the Manager and the Trust. DSI's address is 1475
Dunwoody Drive, West Chester, PA 19380-1478. DSI is a New York
corporation that is a wholly owned subsidiary of Equitable of Iowa
Companies, Inc. ("Equitable of Iowa"), which, in turn, is a
subsidiary of ING Groep, N.V. ("ING"). 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 Portfolios
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 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 Equitable of Iowa.
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 Portfolios other
than the investment advisory services performed by the Portfolio
Managers. These services include, but are not limited to, (i)
coordinating for all Portfolios, at the Manager's expense, all
matters relating to the operation of the Portfolios, including any
necessary coordination among the Portfolio Managers, Custodian,
Dividend Disbursing Agent, Portfolio Accounting Agent (including
pricing and valuation of the Portfolio's portfolios), accountants,
attorneys, and other parties performing services or operational
functions for the Trust; (ii) providing the Trust and the Portfolio,
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 Portfolios 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
Portfolios required by applicable law; (v) preparing and filing and
arranging for the distribution of proxy materials and periodic
reports to shareholders of the Portfolios as required by applicable
law in connection with the Portfolios; (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 Portfolio; (vii) taking such other action with
respect to
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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
Portfolios contemplated in he 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
Portfolio.
Pursuant to the Management Agreement, the Manager is authorized to
exercise full investment discretion and make all determinations with
respect to the day-to-day investment of a Portfolio's assets and the
purchase and sale of portfolio securities for one or more Portfolios
in the event that at any time no Portfolio Manager is engaged to
manage the assets of such Portfolio.
The Management Agreement shall continue in effect until October
24, 1999, and from year to year thereafter, provided such continuance
after August 13, 1998 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 24, 1997,
was approved by shareholders at a meeting held on October 9, 1997,
and was approved 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 November 17, 1998. The Management
Agreement may be terminated without penalty by vote of the Trustees
or the shareholders of the Portfolio or by the Manager, on 60 days'
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 24, 1997, DSI served as the manager to the Trust
pursuant to a Management Agreement dated August 13, 1996, and prior
to August 13, 1996, DSI served as manager to the Trust pursuant to a
Management Agreement dated October 1, 1993.
Gross fees paid to the Manager under the 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, 1999 were as follows: Equity Income Portfolio--
$2,708,647; Strategic Equity Portfolio--$979,956, Fully Managed
Portfolio--$2,566,993; Limited Maturity Bond Portfolio--$1,011,122;
Hard Assets Portfolio--$372,525; Real Estate Portfolio--$612,780;
Capital Appreciation Portfolio--$2,949,797; Rising Dividends
Portfolio--$7,081,897; Emerging Markets Portfolio--$552,994;
Liquid Asset Portfolio--$2,109,806; Value Equity Portfolio--
$1,296,094, Small Cap Portfolio--$2,040,327; Managed Global
Portfolio--$1,688,685, Mid-Cap Growth Portfolio--$3,592,864; Research
Porfolio--$6,958,337; Growth Portfolio--$6,305,623; Total Return
Portfolio--$5,323,533; Capital Growth Portfolio--$4,168,500; Global
Fixed Income Portfolio--$417,531; Developing World Portfolio--$419,418;
and the Market Manager Portfolio--$70,253.
The above amounts represent 0.96% as a percentage of average daily
net assets for the Equity Income, Strategic Equity, Fully Managed,
Hard Assets, Real Estate, Capital Appreciation, Rising
Dividends, Value Equity and the Small Cap Portfolios. The above
amounts represent 0.56% as a percentage of average daily net assets
for the Liquid Assets Portfolio and for the Limited Maturity Bond
Portfolio, 0.91% for the Total Return, Mid-Cap Growth and Research
Portfolios; 1.04% for the Growth and Capital Growth Portfolios;
1.06% for the Global Fixed Income Portfolio; 1.25% for the Managed
Global Portfolio, 1.00% for the Market Manager Portfolio, and
1.75% for the Emerging Markets Portfolio and Developing World
Portfolio.
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Gross fees paid to the Manager under the 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, 1998 were as follows: Equity Income Portfolio--
$2,628,164; Strategic Equity Portfolio--$614,438, Fully Managed
Portfolio--$2,036,662; Limited Maturity Bond Portfolio--$554,541;
Hard Assets Portfolio--$370,049; Real Estate Portfolio--$738,372; All-
Growth Portfolio--$723,616; Capital Appreciation Portfolio--
$2,170,004; Rising Dividends Portfolio--$3,933,978; Emerging Markets
Portfolio--$559,306; Liquid Asset Portfolio--$796,602; Value Equity
Portfolio--$1,033,315, Small Cap Portfolio--$922,032; Managed Global
Portfolio--$1,476,351, and the Market Manager Portfolio--$72,140.
The above amounts represent 0.98% as a percentage of average daily
net assets for the Equity Income, Strategic Equity, Fully Managed,
Hard Assets, Real Estate, All-Growth, Capital Appreciation, Rising
Dividends, Value Equity and the Small Cap Portfolios. The above
amounts represent 0.59% as a percentage of average daily net assets
for the Liquid Assets Portfolio, 0.60% for the Limited Maturity Bond
Portfolio, 1.25% for the Managed Global Portfolio, 0.89 % for the
Market Manager Portfolio, and 1.75% for the Emerging Markets
Portfolio.
For the period from August 17, 1998 (commencement of operations)
to December 31, 1998, the Mid-Cap Growth Portfolio paid Manager fees
of $708,271; the Research Portfolio paid Manager fees of $1,716,605;
the Growth Portfolio paid Manager fees of $725,286; the Total Return
Portfolio paid Manager fees of $1,372,818; the Growth & Income
Portfolio paid Manager fees of $994,126, the Global Fixed Income
Portfolio paid Manager fees of $118,137. For the period of June 1,
1998 (commencement of operations) to December 31, 1998 the Growth
Opportunities Portfolio paid Manager fees of $78,500, and the
Developing World Portfolio paid Manager fees of $94,921
The above Portfolios did not operate for a full year. The Trust
paid the Manager an advisory fee at the following annual rates (as a
percentage of average net assets of a portfolio or combined assets of
the indicated groups of portfolios): 1.60% for the Global Fixed
Income Portfolio; 1.00% of the first $250 million, 0.95% of next $400
million, 0.90% of next $450 million, and 0.85% of amounts in excess
of 1.1 billion (all of combined assets) for the Total Return,
Research and Mid Cap Growth Portfolios; 1.10% of first $250 million
1.05% of next $400
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<PAGE>
million, 1.00% of next $450 million and 0.95% of amounts in excess of
1.1 billion, each for the Growth & Income, Growth and Growth Opportunities
Portfolios; 1.75% for the Developing World Portfolio.
Gross fees paid to the Manager under the 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, 1997 were as follows: Equity Income Portfolio--
$2,635,937; Strategic Equity Portfolio --$349,342; Fully Managed
Portfolio--$1,489,989; Limited Maturity Bond Portfolio--$454,759;
Hard Assets Portfolio--$462,391; Real Estate Portfolio--$610,484; All-
Growth Portfolio--$730,308; Capital Appreciation Portfolio--
$1,664,222; Rising Dividends Portfolio --$1,794,223; Emerging Markets
Portfolio--$845,128; Liquid Asset Portfolio--$289,064; Small Cap
Portfolio--$472,567; Value Equity Portfolio--$591,757; Managed Global
Portfolio--$1,238,851 and Market Manager Portfolio--63,228.
PORTFOLIO MANAGERS
The Trust, DSI, and each Portfolio Manager entered into Portfolio
Management Agreements dated and effective as of October 24, 1997.
The Portfolio Management Agreements were approved by the Trustees of
the Trust at a meeting held on November 17, 1998 and were approved by
shareholders of each Portfolio of the Trust at a meeting held on
April 28, 1998.
Pursuant to the separate 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 Portfolio.
For the fiscal year ended December 31, 1999, the Manager (and not
the Trust) paid the Portfolio Managers the following amounts: Zweig
Advisors Inc.--$215,809 for the Equity Income Portfolio and--
$54,731 for the Strategic Equity Portfolio, T. Rowe Price
Associates, Inc.--$1,317,856 for the Fully Managed Portfolio and
$956,804 for the Equity Income Portfolio; ING Investment Management,
LLC--$394,319 for the Limited Maturity Bond Portfolio, and $424,640
for the Liquid Asset Portfolio and $26,402 for the Market Manager
Portfolio; Van Eck Associates Corp.--$24,137 for the Hard Assets
Portfolio; Chancellor LGT Asset Management, Inc.--$331,066 for the
Capital Appreciation Portfolio; Kayne, Anderson Investment Management,
L.P.--$3,117,093 for the Rising Dividends Portfolio; EII Realty
Securities, Inc.--$318,778 for the Real Estate Portfolio; Eagle Asset
Management, Inc.--$616,000 for the Value Equity Portfolio; Robertson,
Stephens & Company Investment Management, L.P.---++$217,927 for the
Growth Portfolio and --$250,826 for the ++Capital Growth Portfolio;
Putnam Investment Management, Inc.--$315,996 for the Emerging Markets
Portfolio; and --$945,663 for the Managed Global Portfolio;
Massachusetts Financial Services Company--++$1,917,105 for the Total
Return; and --++$2,367,650 for the Research Portfolio; and
- --++$1,440,158 for the Mid-Cap Portfolio. Baring International
Investment Limited--++$117,431 for the Global Fixed Income Portfolio;
Montgomery Asset Management , LLC --+$11,592 for the Developing
World Portfolio; Fred Alger Management, Inc.--$1,061,411 for the
Small Cap Portfolio; AIM Capital Management, Inc. $455,058 for the
Strategic Equity Portfolio and $1,203,466 for the Capital Appreciation;
Alliance Capital Management L.P. $1,018,412 for the Capital Growth
Portfolio; and Janus Capital Corporation $2,791,655 for the Growth
Portfolio; and $136,749 for the Hard Assets Portfolio and $204,478
for the Developing World Portfolio.
For the fiscal year ended December 31, 1998, the Manager (and not
the Trust) paid the Portfolio Managers the following amounts: Zweig
Advisors Inc.--$ 1,349,052 for the Equity Income Portfolio and--
$315,395 for the Strategic Equity Portfolio, T. Rowe Price
Associates, Inc.--$1,045,430 for the Fully Managed Portfolio; ING
Investment Management, LLC--$236,197 for the Limited Maturity Bond
Portfolio, and $186,305 for the Liquid Asset Portfolio; Van Eck
Associates Corp.--$189,949 for the Hard Assets Portfolio; Chancellor
LGT Asset Management, Inc.--$1,113,876 for the Capital Appreciation
Portfolio; Kayne, Anderson Investment Management, L.P.--$2,019,334
for the Rising Dividends Portfolio; EII Realty Securities, Inc.--
$376,011 for the Real Estate Portfolio; Eagle Asset Management, Inc.-
- -$530,407 for the Value Equity Portfolio; and Pilgrim Baxter &
Associates--$408,580 for the All-Growth Portfolio; Robertson,
Stephens & Company Investment Management, L.P.---++$371,191 for the
Growth Portfolio and --$490,723 for the ++Growth & Income Portfolio;
Putnam Investment Management, Inc.--$319,604 for the Emerging Markets
Portfolio; and --$826,757 for the Managed Global Portfolio;
Massachusetts Financial Services Company--++$535,501 for the Total
Return; and --++$626,679 for the Research Portfolio; and --++$300,581
for the Mid-Cap Portfolio. Baring International Investment Limited--
++$33,226 for the Global Fixed Income Portfolio; Montgomery Asset
Management, LLC --+$36,739 for the Growth Opportunities Portfolio and
- --+$47,417 for the Developing World Portfolio; Fred Alger Management,
Inc.--$473,285 for the Small Cap Portfolio; and ING Investment
Management, LLC, .--$36,070 for the Market Manager Portfolio.
++For the period from August 17, 1998 (commencement of operations)
to December 31, 1998.
+For the period February 18, 1998 (commencement of operations) to
December 31, 1998.
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Van Eck Associate Corp.; Zweig Advisor Inc; Chancellor LGT Asset
Management, L. P.; Pilgrim Baxter & Associates; Robertson, Stephens &
Company Investment Management, Putnam Investment Management, Inc.,
and Montgomery Asset Management, LLC. are no longer managers of the
GCG Trust Portfolios. A I M Capital Management, Inc. ("AIM") has been
the Portfolio Manager of the Capital Appreciation Portfolio since
April 1, 1999 and the Strategic Equity Portfolio since March 1, 1999.
The Manager pays AIM the following fees for each Portfolio: 0.50% for
the first $250 million, 0.45% for the next $250 million and 0.40% on
assets over $500 million.
Barings International Investment Limited ("Barings") has been the
Portfolio Manager of the Hard Assets and Developing World Portfolios
since March 1, 1998. The Manager pays Barings 0.90% of assets with
respect to the Developing World Portfolio and 0.40% with respect to
the Hard Assets Portfolio. T. Rowe Price Associates, Inc. ("T. Rowe
Price") has been the Portfolio Manager of the Equity Income Portfolio
since March 1, 1999. The Manager pays T. Rowe Price 0.40% of assets
to serve as the Portfolio's manager. Alliance Capital Management
L.P. ("Alliance") has been the Portfolio Manger of the Growth &
Income Portfolio since April 1, 1999. The Manager pays Alliance
0.75% on the first $10 million, 0.625% on the next $10 million; 0.50%
on the next $20 million, 0.375% on the next $20 million and 0.25% of
net assets on amounts in excess of $60 million. Janus Capital
Corporation ("Janus") has been the Portfolio Manager of the Growth
Portfolio since March 1, 1999. The Manager pays Janus 0.55% on the
first $100 million, 0.50% on the next $400 million, and 0.45% on
amounts in excess of $500 million.
The above amounts represent .14% (of daily net assets) for the
Liquid Assets Portfolio, .25% for the Limited Bond Maturity Bond
Portfolio, .50% for the Equity Income, Fully Managed, Rising
Dividends, Value Equity, Strategic Equity, Capital Appreciation,
Small Cap, Real Estate and the Hard Assets Portfolios. The amounts
represent .55% of net assets for the All-Growth Portfolio, .70% for
the Managed Global Portfolio, 2.05% for the Market Manager Portfolio,
and 1.75% for the Emerging Markets Portfolio. The Preceding
Portfolios were in operation for the full year. For Portfolios that
commenced operation in 1998 and did not operate for a full year, the
Manager pays the following portfolio management fees (based on the
average daily net assets of a portfolio): .45% for the Managed
Global Portfolio, .37% for the Total Return Portfolio, .35% for the
Research Portfolio, .40% for the Mid Cap Growth Portfolio, .54% for
the Growth & Income Portfolio, .90% for the Developing World
Portfolio, and .50% for the Growth Opportunities Portfolio.
For the fiscal year ending December 31, 1997, the Manager (and not
the Trust) paid the Portfolio Managers the following amounts: Zweig
Advisors Inc.--$1,339,369 for the Equity Income Portfolio and
$200,373 for the Strategic Equity Portfolio; T. Rowe Price
Associates, Inc.--$757,091 for the Fully Managed Portfolio; Putnam
Investment Management, Inc.--$462,738 for the Emerging Markets
Portfolio and $664,883 for the Managed Global Portfolio; Van Eck
Associates Corp.--$234,949 for the Hard Assets Portfolio; Chancellor
LGT Asset Management Inc. --$845,622 for the Capital Appreciation
Portfolio; Kayne Anderson Investment Management, L.P.--$911,678 for
the Rising Dividends Portfolio; EII Realty Securities, Inc.--$310,198
for the Real Estate Portfolio; Eagle Asset Management, Inc.--$301,429
for the Value Equity Portfolio; and Pilgrim Baxter & Associated, Ltd.-
- - $396,195 for the All-Growth Portfolio; Equitable Investment
Services, Inc.--$84,766 for Liquid Assets Portfolio, $198,601 for
Limited Maturity Bond Portfolio and $31,614 for Market Manager
Portfolio; and Fred Alger Management, Inc.--$240,119 for Small Cap
Portfolio.
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DISTRIBUTION OF TRUST SHARES
DSI serves as the Portfolio's Distributor. DSI is not obligated to
sell a specific amount of the Portfolio's 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by its Portfolio
Manager of each Portfolio. Each Portfolio Manager has investment
advisory clients other than the Portfolio. A particular security may
be bought or sold by a Portfolio Manager for 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 Portfolio may receive research
services from many broker-dealers with which the Portfolio Manager
places the Portfolio's 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 Portfolio), although not all of these
services are necessarily useful and of value in managing a Portfolio.
BROKERAGE AND RESEARCH SERVICES
The Portfolio Manager for a Portfolio places all orders for the
purchase and sale of portfolio securities, options, and futures
contracts for a Portfolio 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
Portfolio 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 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 Portfolio usually includes an
undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Portfolio includes a disclosed, fixed
commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions
involve
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the payment by the Portfolio 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
Portfolio may receive research services from many broker-dealers with
which the Portfolio Manager places the Portfolio's 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 Portfolio), although not all of these services are necessarily
useful and of value in managing a Portfolio. The advisory fee paid
by the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio in accordance
with the terms of these rules.
Securities and Exchange Commission rules further require that
commissions paid to such an affiliated broker-dealer or Portfolio
Manager by a Portfolio 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, Zweig Securities
Corp., Robertson Stephens Securities Corp., Raymond James &
Associates, Inc., and Fred Alger & Company, Incorporated Montgomery
Securities, Inc. are registered broker-dealers, and each is an
affiliate of a Portfolio Manager. Barings Securities Corporation,
Furman Selz Securities Corp. and ING Securities are also registered
broker-dealers and each is an affiliate of Directed Services, Inc.
the Manager to the CGC Trust. 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
Portfolio in accordance with these rules and procedures.
For the fiscal year ended December 31, 1999, the Equity Income
Portfolio, Strategic Equity Portfolio, Fully Managed Portfolio,
Limited Maturity Bond Portfolio, Emerging Markets Portfolio, Liquid
Asset Portfolio, Market Manager Portfolio, Hard Assets Portfolio,
Real Estate Portfolio, Capital Appreciation Portfolio, Rising
Dividends Portfolio, Value Equity Portfolio, Small Cap Portfolio,
Developing World Portfolio, Mid-Cap Growth Portfolio, Global
Fixed Income Portfolio, Capital Growth Portfolio, Growth Portfolio,
Research Portfolio, Total Return Portfolio and Managed Global
Portfolio paid brokerage commissions of $385,973, $308,351, $193,754, $0,
$328,626, $0, $0, $201,736, $135,831, $662,747, $636,733, $326,135,
$348,126, $109,065, $1,487,342, $665, $2,123,846, $1,176,883, $1,683,542,
$589,063, $649,951, respectively. The Equity Income Portfolio paid
brokerage commissions of $529 (.14% of its total brokerage commissions)
to Barings Securities Corporation. The Strategic Equity Portfolio paid
brokerage commissions of $36 (.01% of its total brokerage commissions)
to Furman Selz Securities Corp. The Fully Managed Portfolio is paid $138
(.07% of its brokerage commissions) to Baring Securities. The Emerging
Markets Portfolio paid $2046 (.62% of its total brokerage commissions)
to Furman Selz Securities Corp. The Real Estate Portfolio paid $84
(.06% of its brokerage commissions) to Barings Securities Corporation.
The Capital Growth Portfolio paid $10,860 (.51% of its total commissions)
to Barings Securities Corporation. The Developing World Portfolio paid
$39 (.04% of its total brokerage commissions) to Baring Securities
Corporation. The Small-Cap Portfolio paid $335,228 (96.30% of its total
brokerage commissions) to Fred Alger & Company. The Research Porfolio
paid $708 (.04% of its total brokerage commissions) to Furman Selz
Securities and $8,238 (.49% of its total brokerage commissions) to BHF
Securities and $3,102 (.18% of its total brokerage commissions) to Barings
Securities Corporation. The Total Return Portfolio paid $4,974 (.84%
of its total brkerage commissions) to Furman Selz Securities and $300
(.05% of its total brokerage commissions) to Barings Securities
Corporation. The Growth Portfolio paid $6,370 (.54% of its total
brokerage commissions) to Barings Securities Corporation.
For the fiscal year ended December 31, 1998, the Equity Income
Portfolio, Strategic Equity Portfolio, Fully Managed Portfolio,
Limited Maturity Bond Portfolio, Emerging Markets Portfolio, Liquid
Asset Portfolio, Market Manager Portfolio, Hard Assets Portfolio,
Real Estate Portfolio, Capital Appreciation Portfolio, Rising
Dividends Portfolio, Value Equity Portfolio, All-Growth Portfolio,
Small Cap Portfolio, Developing World Portfolio, Growth Opportunities
Portfolio, Mid-Cap Growth Portfolio, Global Fixed Income Portfolio,
Growth & Income Portfolio,
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Growth Portfolio, Research Portfolio, Total Return Portfolio and Managed
Global Portfolio paid brokerage commissions of $263,419, $170,714, $202,689,
$0, $190,071, $0, $0, $282,693, $104,920, $365,400, $583,931, $490,592,
$204,680, $266,848, $36,384, $24,964, $200,333, $0, $612,148, $330,923,
$468,656, $189,846, $636,858, respectively. The Equity Income Portfolio
paid brokerage commissions of $568 (.22% of its total brokerage commissions)
to Barings Securities Corporation, $30,928 (11.74% of its total brokerage
commissions) to Zweig Securities Corp., $2484 (0.88% of its total brokerage
commissions) to Raymond James & Associates. The All-Growth Portfolio paid
brokerage commissions of $978 (0.48% of its total brokerage commissions)
to Furman Selz Securities Corp.. The Value Equity Portfolio paid brokerage
commissions of $1,032 (0.21 % of its total brokerage commissions) to
Furman Selz Securities Corp. and $12,768 (2.60% of its total
brokerage commissions) to Raymand James & Associates. The Capital
Appreciation Portfolio is paid $9,000 (2.97% of its brokerage
commissions) to Furman Selz. The Emerging Markets Portfolio paid
$5,638 (2.97% of its total brokerage commissions) to Barings
Securities Corporation and $611 (0.48% of its brokerage commissions)
to ING Securities. The Managed Global Portfolio paid $1,041 (0.16%
of its total commissions) to Barings Securities and $55 (0.01% of its
total commissions) to ING Securities. The Fully Managed Portfolio
paid $225 (0.11% of its total brokerage commissions) to Furman Selz
Securities. The Real Estate Portfolio paid $1,344 (1.28% of its
brokerage commissions) to Furman Selz Securities. The Strategic
Equity Portfolio paid $160 (0.09% of its total brokerage commissions)
to Zweig Securities Corp. The Growth & Income Portfolio paid $4.404
(0.72% of its total commissions) to Furman Selz Securities and
$70,671 (11.54% of its total brokerage commissions) to Robertson
Stephens Securities Corp. The Growth Opportunities Portfolio paid
$78 (0.31% of its total brokerage commissions) to Furman Selz
Securities. The Growth Portfolio paid $6,624 (2.00% of its total
brokerage commissions) to Furman Selz Securities and $4,963 (1.50% of
its total brokerage commissions) to Robertson Stephens Securities
Corp. The Small-Cap Portfolio paid $262,004 (98.18% of its total
brokerage commissions) to Fred Alger & Company.
For the fiscal year ended December 31, 1997, the Equity Income
Portfolio, Strategic Equity Portfolio, Fully Managed Portfolio,
Limited Maturity Bond Portfolio, Emerging Markets Portfolio, Liquid
Asset Portfolio, Market Manager Portfolio, Hard Assets Portfolio,
Real Estate Portfolio, Capital Appreciation Portfolio, Rising
Dividends Portfolio, Value Equity Portfolio, Managed Global
Portfolio, All-Growth Portfolio and Small Cap Portfolio paid
brokerage commissions of $315,130, $82,710, $113,636, $0, $614,405,
$0, $0, $249,483, $112,726, $174,820, $163,515, $219,706, $811,015,
$231,719, and $150,934, respectively. The Equity Income Portfolio
and Strategic Equity Portfolio paid brokerage commissions of $33,263
and $1,788 (10.55% and 2.16% of its total brokerage commissions),
respectively, to Zweig Securities. The Value Equity Portfolio paid
brokerage commissions of $13,239 (6.03% of its total brokerage
commissions) to Raymond James & Associates, Inc. The Hard Assets
Portfolio paid brokerage commissions of $900 (0.36% of its total
brokerage commissions) to Raymond James & Associates, Inc. The Small
Cap Portfolio paid brokerage commissions of $150,041 (99.41% of its
total brokerage commissions) to Fred Alger.
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Barings Securities Corporation is an affiliate of Barings
International Investment Limited, an affiliate of the Manager and
Portfolio Manager of the Hard Assets, Developing World and Global
Fixed Income Portfolios. Zweig Securities Corp. is an affiliate of
Zweig Advisors, Inc., the former Portfolio Manager to the Strategic
Equity and Equity Income (formerly, the Multiple Allocation Series)
Portfolios. Raymond James & Associates is an affiliate of Eagle
asset Management, Inc., Portfolio Manager of the Value Equity
Portfolio. Furman Selz Securities Corp. is an affiliate of the
Manager, as each is owned by ING Groep. Robertson, Stephens
Securities Corp. is an affiliate of Robertson, Stephens & Company
Investment Management, LP, the former Portfolio Manager of the Growth
Portfolio and the Growth & Income Portfolio. Fred Alger & Company is
an affiliate of Fred Alger Management, Inc., Portfolio Manager to the
Small Cap Portfolio.
Jardine Fleming Securities and Robert Fleming Securities are both
affiliates of T. Rowe Price Associates, Inc., Portfolio Manager to
the Fully Managed Portfolio since September, 1999 and to the Equity
Income Portfolio since March, 1999.
The Manager, Directed Services, Inc., is an affiliate of the GCG
Trust.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectuses, the
Portfolio's 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.
The Liquid Asset Portfolio's 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 Portfolio would receive if it sold the instrument. During such
periods the yield to investors in the Portfolio 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 Portfolio 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 Portfolio's 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 Portfolio 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 Portfolio, the yield of the
remaining Portfolios, and the total return of all Portfolios in
advertisements or sales literature. In the case of Variable
Contracts, performance information for the Portfolio will not be
advertised or included in sales literature unless accompanied by
comparable performance information for a separate account to which
the Portfolio offer their shares.
Current yield for Liquid Asset Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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:
YIELD = 2 [((a-b)/cd + 1)^6 - 1]
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 Portfolio will be
expressed in terms of the average annual compounded rate of return of
a hypothetical investment in the Portfolio over certain periods that
will include periods of one, five, and ten years (or, if less, up to
the life of the Portfolio), 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 Portfolio expenses
on an annual basis, and assume that all dividends and distributions
are reinvested when paid.
For the period of January 24, 1989 (inception of the Trust) to
December 31, 1999 and for the ten-, five- and one-year periods ended
December 31, 1999 the average annual total return for each Portfolio
was as follows: , 8.75%, 8.67%, 10.31% and (0.72%) for the Equity
Income Portfolio; 8.83%, 9.27%, 12.90%, and 6.92% for the Fully Managed
Portfolio; 6.27%, 5.90%, 6.08% and 1.13% for the Limited Maturity Bond
Portfolio; 8.35%, 9.29%, 10.03% and (3.81%) for the Real Estate
Portfolio; 6.66%, 5.46%, 6.35% and 23.36% for the Hard Assets
Portfolio; and 5.11%, 4.82%, 5.08% and 4.74% for the
Liquid Asset Portfolio. For the period of May 4, 1992
(inception of the Capital Appreciation Portfolio) to December 31,
1999 and for the five- and one-year period ended December 31, 1997,
the average total return for the Capital Appreciation Portfolio was
17.10%, 23.17% and 24.64%. For the period of October 4, 1993
(inception of the Rising Dividends and Emerging Markets Portfolio) to
December 31, 1999 and for the five-year and one-year periods ended
December 31, 1999, the average total return
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for the Rising Dividends Portfolio was 18.05%, 22.11% and 15.88%
and the average annual total return for the Emerging Markets Portfolio
was 4.26%, 4.22% and 85.30%. For the period of November 14,
1994 (inception of the Market Manager Portfolio) to December 31, 1999
and for the five- and one-year periods ended December 31, 1999, the
average total return for the Market Manager Portfolio was 23.04%, 23.60%
and 16.59%. For the period of January 3, 1995 (inception of the Value
Equity Portfolio) to December 31, 1999 and for the one-year period ended
December 31, 1999, the average total return for the Value Equity
Portfolio was 14.24% and 0.51%. For the period of October 2, 1995
(inception of the Strategic Equity Portfolio) to December 31, 1999
and for the one-year period ended December 31, 1999, the average
total return for the Strategic Equity Portfolio was 21.97% and 56.24%.
For the period ended January 3, 1996 (inception for the Small Cap
Portfolio) to December 31, 1999, and for the one-year period ended
December 31, 1999 the total return for the Small Cap Portfolio was
24.69% and 50.61%.
The Managed Global Portfolio is a successor to the Managed Global
Account of Separate Account D of Golden American. As of September 3,
1996, the investment-related assets of the Managed Global Account of
Separate Account D were transferred to a newly created division of
Separate Account B of Golden American. Simultaneously, Separate
Account B exchanged the investment-related assets for shares of the
Managed Global Portfolio, a newly created Portfolio of the Trust.
The following information regarding average total return is restated
from the Managed Global Account of Separate Account D. The total
return figures reflect the deduction of certain expenses, including
the management fees, and custodian fees, and other expenses. For the
period of October 21, 1992 (commencement of operations) to December 31,
1999 and for the five- and one-year period ended December 31, 1999, the
average total return for the Managed Global Portfolio was 14.50%, 23.36%
and 63.30%, respectively.
For the period of August 17, 1998 (commencement of operations) to
December 31, 1999, the total return was 69.91% and 79.05% for the Mid-Cap
Portfolio; 29.10% and 24.23% for the Research Portfolio; 67.67% and 78.13%
for the Growth Portfolio; 7.51% and 3.38% for the Total Return Portfolio;
26.50% and 25.56% for the Capital Growth Portfolio; (0.96)% and (8.62)% for
Global Fixed Income Portfolio; For the period of February 18, 1998
(commencement of operations) to December 31, 1999 the total return was
9.87% and 61.66% and for the Developing World Portfolio.
Each Portfolio may be categorized as to its market capitalization
make-up ("large cap," mid cap" or "small cap") with regard to the
market capitalization of the issuers whose securities it holds. A
Portfolio average or median market capitalization may also be cited.
Certain other statistical measurements may be used to provide
measures of a Portfolio's characteristics. Some of these statistical
measures include without limitation: median or average P/E ratios,
duration and beta. Median and average P/E ratios are measures
describing the relationship between the price of a Portfolio's
various securities and their earnings per share. Duration is a
weighted-average term-to-maturity of the bond's cash flows, the
weights being present value of each cash flow as a percentage of the
bond's full price.
Beta is a historical measure of a portfolio's market risk; a Beta
of 1.10 indicates that the portfolio's returns tended to be 10%
higher (lower) than the market return during periods in which market
returns were positive (negative).
Performance information for a Portfolio 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 indexes 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 Portfolio. Unmanaged indexes may assume the reinvestment of
dividends but generally do not reflect deductions for administrative
and management costs and expenses.
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Reports and promotional literature may also contain other
information including (i) the ranking of any Portfolio 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 Portfolio's
investment returns, or returns in general, which may by 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
Portfolio (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
Portfolio, 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) 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 Portfolio is intended,
based upon each Portfolio's investment objectives.
In the case of Variable Contracts, quotations of yield or total
return for a Portfolio will not take into account charges and
deductions against any Separate Accounts to which the Portfolio
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 Portfolio
reflects only the performance of a hypothetical investment in the
Portfolio during the particular time period on which the calculations
are based. Performance information should be considered in light of
the Portfolio's 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.
TAXES
Shares of the Portfolios are offered only to the Separate Accounts
that fund Variable Contracts. See the respective prospectuses for
the Variable Contracts for a discussion of the special taxation of
insurance companies with respect to the Separate Accounts and of the
Variable Contracts and the holders thereof.
Each Portfolio has qualified, and expects to continue to qualify,
for treatment as a regulated investment company (?RIC?) under the
Internal Revenue Code of 1986, as amended (the ?Code?). In order to
qualify for that treatment, a Portfolio must distribute to its
shareholders for each taxable year at least 90% of its investment
company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain
foreign currency transactions) (?Distribution Requirement?) and must
meet several additional requirements. These requirements include the
following (1) the Portfolio must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived
with respect to its business of investing in securities or those
currencies (?Income Requirement?); (2) at the close of each quarter
of the Portfolio's taxable year, at least 50% of the value of its
total assets must be represented by cash and cash items, U.S.
Government securities, securities of other RICs, and other securities
that, with respect to any one issuer, do not exceed 5% of the value
of the Portfolio's total assets and that do not represent more than
10% of the outstanding voting securities of the issuer; and (3) at
the close of each quarter of the Portfolio's taxable year, not more
than 25% of the value of its total assets may be invested in
securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer. If each Portfolio qualifies as a
regulated investment company and distributes to its shareholders
substantially all of its net income and net capital gains, then each
Portfolio should have little or no income taxable to it under the
Code.
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Each Portfolio must, and intends to also comply with, the
diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in
addition to the diversification requirements mentioned above, place
certain limitations on the proportion of each Portfolio's assets that
may be represented by any single investment (which includes all
securities of the same issuer). For purposes of section 817(h), all
securities of the same issuer, all interests in the same real
property project, and all interest in the same commodity are treated
as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities
of a particular foreign government and its agencies,
instrumentalities and political subdivisions all will be considered
securities issued by the same issuer.
If a Portfolio fails to qualify as a regulated investment company,
the Portfolio will be subject to federal, and possibly state,
corporate taxes on its taxable income and gains (without any
deduction for its distributions to its shareholders) and
distributions to its shareholders will constitute ordinary income to
the extent of such Portfolio's available earnings and profits.
Owners of Variable Contracts which have invested in such a Portfolio
might be taxed currently on the investment earnings under their
contracts and thereby lose the benefit of tax deferral. In addition,
if a Portfolio failed to comply with the diversification requirements
of section 817(h) of the Code and the regulations thereunder, owners
of Variable Contracts which have invested in the Portfolio could be
taxed on the investment earnings under their contracts and thereby
lose the benefit of tax deferral. For additional information
concerning the consequences of failure to meet the requirements of
section 817(h), see the prospectuses for the Variable Contracts.
Generally, a RIC must distribute substantially all of its ordinary
income and capital gains in accordance with a calendar year
distribution requirement in order to avoid a nondeductible 4% excise
tax. However, the excise tax does not apply to certain Portfolios
whose only shareholders are segregated asset accounts of life
insurance companies held in connection with Variable Contracts. To
avoid the excise tax, each Portfolios that does not qualify for this
exemption intends to make its distributions in accordance with the
calendar year distribution requirement.
The use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts and entering into forward
contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the income
received in connection therewith by the Portfolios. Income from the
disposition of foreign currencies (except certain gains therefrom
that may be excluded by future regulations); and income from
transactions in options, futures, and forward contracts derived by a
Portfolio with respect to its business of investing in securities or
foreign currencies, are expected to qualify as permissible income
under the Income Requirement.
Foreign Investments -- Portfolios investing in foreign securities
or currencies include may be required to pay withholding, income or
other taxes to foreign governments or U.S. possession. Foreign tax
withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any Portfolio that
invests in foreign securities or currencies is reduced by these
foreign taxes. Owners of Variable Contracts investing in such
Portfolios bear the cost of any foreign taxes but will not be able to
claim a foreign tax credit or deduction for these foreign taxes. Tax
conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and foreign
countries generally do not impose taxes on capital gains in respect
of investments by foreign investors.
The Portfolios listed above may invest in securities of "passive
foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests:
(1) at least 75% of its gross income is passive or (2) an average of
at least 50% of its assets produce, or are held for the production
of, passive income. A Portfolio investing in securities of PFICs may
be subject to U.S. Federal income taxes and interest charges, which
would reduce the investment yield of a Portfolio making such
investments. Owners of Variable Contracts investing in such
Portfolios would bear the cost of these taxes and interest charges.
In certain cases, a Portfolio may be eligible to make certain
elections with respect to securities of PFICs which could reduce
taxes and interest charges payable by the Portfolio. However, a
Portfolio's intention to qualify annually as a regulated investment
company may limit a Portfolio's elections with respect to PFIC
securities and no assurance can be given that such elections can or
will be made.
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The foregoing is only a general summary of some of the important
Federal income tax considerations generally affecting the Portfolios
and their shareholders. No attempt is made to present a complete
explanation of the Federal tax treatment of each Portfolio's
activities, and this discussion and the discussion in the
prospectuses and/or statements of additional information for the
Variable Contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult
their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable
to the Variable Contracts and the holders thereof.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated August 3, 1988, an open-end
management investment company and currently consists of twenty-four
Portfolios. The twenty-three Portfolios that are discussed in this
Statement of Additional Information and accompanying prospectuses and
a Portfolio 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 Portfolios (with different
investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional Portfolios 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
Portfolio of the Trust, each shareholder is entitled to receive his
or her pro rata share of the net assets of that Portfolio. All of
the Trust's Portfolios are diversified with the exception of Global
Fixed Income and Mid-Cap Growth.
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 Portfolio are given certain voting rights.
Each share of each Portfolio 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 Portfolio, 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.
PURCHASE OF SHARES
Shares of a Portfolio 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 Portfolios serving as
investment mediums for variable contracts. Shares of the Portfolios
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
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investors arising from offering the Trust's shares to
separate accounts of unaffiliated insurers, separate accounts funding
both life insurance polices and annuity contracts in 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 sometime 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 or 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, in one
or more insurance company separate accounts might withdraw their
investment in the Trust. This might force the Trust to sell
securities at disadvantageous prices.
Shares of each Portfolio 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.
REDEMPTION OF SHARES
Shares of any Portfolio 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 Portfolio. 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 Portfolio to make payment wholly or partly in cash,
the Portfolio may pay the redemption price in whole or part by a
distribution in kind of securities from the portfolio of the
Portfolio, 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 Portfolio may be exchanged for shares of any of the
other Portfolios described in the Prospectus. Exchanges are treated
as a redemption of shares of one Portfolio and a purchase of shares
of one or more of the other Portfolios and are effected at the
respective net asset values per share of each Portfolio 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
Portfolios, and should refer to the Prospectus for the applicable
variable contract for information on allocation of premiums and on
transfers of contract value among divisions of the pertinent
insurance company separate account that invest in the Portfolio.
The Trust reserves the right to discontinue offering shares of one or
more Portfolios at any time. In the event that a Portfolio ceases
offering its shares, any investments allocated by an insurance
company to such Portfolio will be invested in the Liquid Asset
Portfolio or any successor to such Portfolio.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Portfolio is Bankers Trust Company, 280 Park
Avenue, New York, New York 10017. First Data Investors Services
Group of First Data Corporation, One Exchange Place, 4th Floor,
Boston, MA 02109, provides administrative and portfolio accounting
services for all Portfolio.
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INDEPENDENT AUDITORS
Ernst & Young LLP, Two Commerce Square, Suite 4000,
2001 Market Street, Philadelphia, Pennsylvania 19103.
COUNSEL
Sutherland Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW,
Washington, D.C. 20004-2440 serves as 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 Trust's audited financial statements dated December 31, 1999 for
all Portfolios (except the Fund for Life Portfolio), including the
financial highlights and related notes thereto, and the Report of Ernst
& Young LLP, independent auditors, are incorporated by reference in this
Statement of Additional Information from the Trust's Annual Report
dated as of December 31, 1999.
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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.
DESCRIPTION OF MOODY'S RATINGS OF NOTES AND VARIABLE RATE DEMAND
INSTRUMENTS:
Moody's ratings for state and municipal short-term obligations
will be designated Moody's Investment Grade or MIG. Such ratings
recognize the differences between short-term credit and long-term
risk. Short-term ratings on issues with demand features (variable
rate demand obligations) are differentiated by the use of the VMIG
symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payments relying on
external liquidity.
MIB 1/VMIG 1: This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market
for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection
are ample although not as large as in the preceding group.
DESCRIPTION OF MOODY'S TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations which have an
original maturity not exceeding nine months. Moody's makes no
representation that such obligations are exempt from registration
under the Securities Act of 1933, nor does it represent that any
specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following
A-1
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designations, all judged to be investment grade, indicate the relative
repayment ability of rated issuers of securities in which the Trust may
invest:
PRIME-1: Issuers rates Prime-1 (or supporting institutions) have
a superior ability for repayment of senior short-term promissory
obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have
a strong ability for repayment of senior short-term promissory
obligations.
DESCRIPTION OF S&P'S RATINGS FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only in
a small degree.
A: Debt rated "A" has 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: Debt rated "BBB" is 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
to pay interest and repay principal for debt in this category than in
higher rated categories.
SPECULATIVE GRADE
BB, B, CCC, CC: Debt rated in these categories is regarded as
having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. While such debt will
likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI: The "CI" rating is reserved for income bonds on which no
interest is being paid.
D: Debt rated "D" is in default, and repayment of interest
and/or repayment of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
DESCRIPTION OF S&P'S RATINGS FOR INVESTMENT GRADE MUNICIPAL NOTES AND
SHORT-TERM DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or
strong capacity to pay principal and interest. Those issued
determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory
capacity to pay principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR DEMAND OBLIGATIONS AND TAX-EXEMPT
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the
likelihood of timely repayment of debt having an original maturity of
no more than 365 days. The two rating categories for securities in
which the Trust may invest are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics will be denoted with
a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-2
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SAI #2
THE FUND FOR LIFE SERIES
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THE FUND FOR LIFE
1475 DUNWOODY DRIVE
WEST CHESTER, PA 19380
(800) 366-0066
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
This Statement of Additional Information describes The Fund
For Life (the "Fund"), one of the Portfolos of The GCG Trust (the
"Trust"). The Trust is an open-end management investment company
organized as a Massachusetts business trust. The Fund's Manager
is Directed Services, Inc. ("DSI" or the "Manager").
The Fund's investment objective is high total investment
return (capital appreciation and current income) consistent with
prudent investment risk and a balanced investment approach. The
Fund seeks to achieve its investment objective by investing in
shares of other open-end investment companies--commonly called
mutual funds.
As of the date of this Statement of Additional Information,
shares of the Fund are sold only to separate accounts of
insurance companies to serve as the investment medium for
variable annuity contracts issued by the insurance companies.
This Statement of Additional Information is intended to
supplement the information provided to investors in the
Prospectus dated May 1, 2000, of The Fund For Life and has 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
Fund's Prospectus and retained for future reference. The
contents of this Statement of Additional Information are
incorporated by reference in the Prospectus in their entirety. A
copy of the 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
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TABLE OF CONTENTS
Page
INTRODUCTION 1
INVESTMENT POLICIES 1
U.S. Government Securities 2
Banking Industry Obligations 2
Commercial Paper 4
Corporate Debt Securities 4
Repurchase Agreements 5
Illiquid and Restricted Securities 5
Foreign Securities 6
Foreign Currency Transactions 6
Industry Concentration 7
Loans of Portfolio Securities 7
Short Sales 7
Options 7
Futures Contracts and Options
on Futures Contracts 8
Leverage through Borrowing 9
Warrants 9
INVESTMENT RESTRICTIONS 10
MANAGEMENT OF THE TRUST 12
The Management Agreement 16
The Administrative Services Agreement 17
Distribution of Trust Shares 18
Purchases and Redemptions 19
PORTFOLIO TRANSACTIONS 19
NET ASSET VALUE 21
ADVERTISING 21
TAXATION 22
Distributions 25
Other Taxes 25
OTHER INFORMATION 25
Capitalization 25
Voting Rights 26
Purchase of Shares 26
Custodian 26
Independent Auditors 27
Counsel 27
Registration Statement 27
FINANCIAL STATEMENTS 27
Appendix A: Description of Bond Ratings A-1
Appendix B: Securities and Investment Techniques
of Underlying Mutual Funds B-1
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INTRODUCTION
This Statement of Additional Information is designed to
elaborate upon the discussion of certain securities and
investment techniques which are described in the Prospectus. The
more detailed information contained herein is intended solely for
investors who have read the Prospectus and are interested in a
more detailed explanation of certain aspects of some of the
Fund's securities and some investment techniques. Some of the
Fund's investment techniques are described only in the Prospectus
and are not repeated herein. Captions and defined terms in this
Statement of Additional Information generally correspond to like
captions and terms in the Prospectus.
INVESTMENT POLICIES
FUND INVESTMENTS. The Fund intends to maintain its assets
invested in mutual funds in accordance with the investment program
described above. At times, for temporary purposes pending full
investment of its assets or to meet anticipated redemptions, the Fund
may invest in money market mutual funds or invest directly in (or
enter into repurchase agreements with respect to) short-term debt
securities, including U.S. Treasury bills and other short-term U.S.
Government securities, commercial paper, certificates of deposit,
time deposits, and bankers' acceptances. The Fund may not purchase
shares of any investment company that is not registered with the
Securities and Exchange Commission.
The Fund will not employ a defensive strategy in response to
market or financial conditions, but will attempt to remain as fully
invested as practicable in the shares of mutual funds allocated as
described above. However, the mutual funds themselves may adopt
defensive strategies consistent with their own investment policies.
This may result, for example, in the Fund holding underlying funds
that, in turn, have committed significant assets to defensive
investments so they are not primarily invested in equity or
longer-term debt securities in which they would normally be invested.
The Fund's investments other than mutual funds are more fully
described as follows:
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U.S. GOVERNMENT SECURITIES. U.S. Government agency and instrumentality
obligations are debt securities issued by U.S. Government-sponsored
enterprises and Federal agencies. Some obligations of agencies are
supported by the full faith and credit of the United States
or U.S. Treasury guarantees; others, by the right of the issuer to
borrow from the U.S. Treasury; others, by discretionary authority
of the U.S. Government to purchase certain obligations of the
agency or instrumentality; and others, only by the credit of the
agency or instrumentality issuing the obligation. In the case of
obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment.
Agencies and instrumentalities which issue or guarantee debt securities
and which have been established or sponsored by the U.S. Government
include the Bank for Cooperatives, the Export-Import Bank, the
Federal Farm Credit System, the Federal Home Loan Banks, the
Federal Home Loan Mortgage Corporation, the Federal Intermediate
Credit Banks, the Federal Land Banks, the Federal National
Mortgage Association and the Student Loan Marketing Association.
U.S. Treasury bills, which have a maturity of up to one year,
are direct obligations of the United States and are
the most frequently issued marketable U.S. Government security. The
U.S. Treasury also issues securities with longer maturities in the
form of notes and bonds.
BANK OBLIGATIONS. These obligations include negotiable
certificates of deposit, bankers' acceptances, and fixed time
deposits. The Fund limits its investments in United States bank
obligations to obligations of United States banks which 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.
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 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
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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. The Fund will not invest in fixed-time
deposits (i) which are not subject to prepayment; (ii) which
mature in more than seven days that are subject to withdrawal
penalties upon prepayment; or (iii) which mature from two
business days through seven calendar days that provide for
withdrawal penalties upon prepayment (other than overnight
deposits), if, in the aggregate, more than 15% of its assets
would be invested in such deposits, in repurchase agreements
maturing in more than seven days, and in 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.
The Fund may not invest in fixed time deposits maturing in more
than seven calendar days that are subject to withdrawal penalties.
Investments in fixed time deposits maturing from two business days
through seven calendar days that are subject to withdrawal penalties
may not, along with other illiquid securities, exceed 15% of the
value of the total assets of the Fund.
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COMMERCIAL PAPER. Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes, and variable rate
master demand notes issued by domestic and foreign bank holding
companies, corporations, and financial institutions, as well as
similar taxable instruments issued by government agencies and
instrumentalities. All commercial paper purchased by the Fund must
be, at the time of investment, (i) rated "P-1" by Moody's or "A-1" by
S&P, (ii) issued or guaranteed as to principal and interest by
issuers having an existing debt security rating of "Aa" or better by
Moody's or "AA" or better by S&P or (iii) securities which, if not
rated, are in the opinion of the Manager of an investment quality
comparable to rated commercial paper in which the Fund may invest.
Variable amount master demand notes are obligations that permit
the investment of fluctuating amounts at varying rates of interest
pursuant to direct arrangements between the Fund, as lender, and
the borrower. These notes permit daily changes in the amountsborrowed.
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 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 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 S&P; the Fund may invest in
them only if the Manager believes that at the time of investment
the notes are of comparable quality to the other commercial paper
in which the Fund may invest. Master demand notes are considered
by the Fund to have a maturity of one day, unless the Manager has
reason to believe that the borrower could not make immediate
repayment upon demand. See Appendix A for a description of
Moody's and S&P ratings applicable to commercial paper. See more
on "Master Demand Notes" under the same title in Appendix B.
CORPORATE DEBT SECURITIES. Fund investments in these securities
are limited to non-convertible corporate debt securities (corporate
bonds, debentures, notes and other similar corporate debt
instruments) which have one year or less remaining to maturity and
which are rated "AA" or better by S&P or "Aa" or better by Moody's.
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The rating "P-1" is the highest commercial paper rating
assigned by Moody's and the ratings "A-1" and "A-1+" are the
highest commercial paper ratings assigned by S&P. Debt
obligations rated "Aa" or better by Moody's or "AA" or better by
S&P are generally regarded as high-grade obligations and such
ratings indicate that the ability to pay principal and interest
is very strong.
After purchase by the Fund, a security may cease to be rated
or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require a sale of such
security by the Fund. However, the Manager will consider such
event in its determination of whether the Fund should continue to
hold the security. To the extent the ratings given by Moody's or
S&P may change as a result of changes in such organizations or
their rating systems, the Fund will attempt to use comparable
ratings as standards for investments in accordance with the
investment policies contained in the Prospectus and in this
Statement of Additional Information.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase
agreements. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to
repurchase that security from the buyer at a mutually agreed-upon
time and price. These agreements may be considered to be loans by
the purchaser collateralized by the underlying securities. The Fund
may not enter into a repurchase agreement of greater than seven days
maturity if, after such investment, the amount of the Fund's total
assets in such agreements and other illiquid securities is greater
than 15%. In the event of default by the seller under the repurchase
agreement, the Fund may experience problems in exercising its rights
to the underlying securities and may experience time delays and costs
in connection with the disposition of such securities.
The Fund 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 the Fund 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.
ILLIQUID AND RESTRICTED SECURITIES. An underlying fund may invest
not more than 15% of its total assets in securities for which there
is no readily available market ("illiquid securities"), which would
include securities that are illiquid because their disposition is
subject to legal restrictions (so-called "restricted securities") and
repurchase agreements having more than seven days to maturity. A
considerable period of time may elapse between an underlying fund's
decision to dispose of such securities and the time when the
underlying fund is able to dispose of them, during which time the
value of the securities (and therefore the value of the underlying
fund's shares held by the Fund) could decline.
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FOREIGN SECURITIES. An underlying fund may invest up to 100% of
its assets in securities of foreign issuers. There may be less
publicly available information about these issuers than is available
about companies in the U.S., and foreign auditing, accounting, and
financial reporting requirements may not be comparable to those in
the U.S. In addition, the value of the underlying fund's foreign
securities may be adversely affected by fluctuations in the exchange
rates between foreign currencies and the U.S. dollar, as well as
other political and economic developments, including the possibility
of expropriation, confiscatory or other taxation, exchange controls
or other foreign governmental restrictions. Many 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 markets. There is generally less government supervision
and regulation of exchanges, brokers, and issuers than there is in
the U.S. 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. In addition, foreign securities
and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those
securities.
The underlying funds will calculate generally their net asset
values and complete orders to purchase, exchange or redeem shares
only on a Monday-Friday basis (excluding holidays on which the New
York Stock Exchange is closed). Foreign securities in which the
underlying funds may invest may be listed primarily on foreign stock
exchanges which may trade on other days (such as Saturday). As a
result, the net asset value of an underlying fund's portfolio may be
significantly affected by such trading on days when the Manager does
not have access to the underlying funds and shareholders do not have
access to the Fund.
FOREIGN CURRENCY TRANSACTIONS. In connection with its portfolio
transactions in securities traded in a foreign currency, an
underlying fund may enter into forward contracts to purchase or sell
an agreed-upon amount of a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed
upon by the parties at a price set at the time of the contract.
Although such contracts tend to minimize the risk of loss due to a
decline in the value of the subject currency, they tend to limit
commensurately any potential gain which might result should the value
of such currency increase during the contract period. See more on
"Foreign Currency Transactions" under the same title in Appendix B.
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INDUSTRY CONCENTRATION. An underlying fund may concentrate its
investments within one industry. Because the scope of investment
alternatives within an industry is limited, the value of the shares
of such an underlying fund may be subject to greater market
fluctuation than an investment in a fund which invests in a broader
range of securities.
LOANS OF PORTFOLIO SECURITIES. An underlying fund may lend its
portfolio securities provided: (1) that the loan is secured
continuously by collateral consisting of U.S. Government securities
or cash or cash equivalents maintained on a daily marked-to-market
basis in an amount at least equal to the current market value of the
securities loaned; (2) the fund may at any time call the loan and
obtain the return of the securities loaned; (3) the fund will receive
any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of the securities loaned will not at any time
exceed one-third of the total assets of the fund. Loans of
securities involve a risk that the borrower may fail to return the
securities or may fail to provide additional collateral.
SHORT SALES. An underlying fund may sell securities short. The
underlying fund will incur a loss as a result of the short sale if
the price of the security increases between the date of the short
sale and the date on which the fund replaces the borrowed security.
The fund will realize a gain if the security declines in price
between those dates. The amount of any gain will be decreased and
the amount of any loss increased by the amount of any premium,
dividends or interest the fund may be required to pay in connection
with a short sale. See more on "Short Sales" under the same title in
Appendix B.
OPTIONS. Certain underlying mutual funds may purchase and write
call and put options on securities, securities indexes, and on
foreign currencies. 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 a mutual fund is not sold when it has
remaining value, and if the market price of the underlying security,
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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 fund 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 mutual fund seeks to close out an option
position. Furthermore, if trading restrictions or suspensions are
imposed on the options market a fund may be unable to close out a
position. If a mutual fund cannot effect a closing transaction, it
will not be able to sell the underlying security while the previously
written option remains outstanding, even if it might otherwise be
advantageous to do so. See "Options Activities" under the same title
in Appendix B.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. An underlying
mutual fund may invest in financial futures contracts such as
interest rate futures contracts, stock index futures contracts, and
others, and may purchase and write options on such futures contracts.
Generally, transactions in futures contracts and options thereon by a
mutual fund must constitute bona fide hedging or other permissible
transactions under regulations promulgated by the Commodities Futures
Trading Commission (the "CFTC"), under which a fund engaging in such
transactions would not be a "commodity pool."
There are several risks associated with the use of futures
contracts. While a mutual fund's use of futures contracts for
hedging may protect a fund against adverse movements in the general
level of interest rates or securities prices, such transactions could
also preclude the opportunity to benefit from favorable movements in
the level of interest rates or securities prices. There can be no
guarantee that there will be a correlation between price movements in
the hedging vehicle and in the securities being hedged. An incorrect
correlation could result in a loss on both the hedged securities in a
mutual fund and the hedging vehicle so that the fund's return might
have been better had hedging not been attempted.
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There can be no assurance that a liquid market will exist at a
time when a mutual fund seeks to close out a futures contract or
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. Lack of a liquid market for any reason may prevent the
fund from liquidating an unfavorable position and the fund would
remain obligated to meet margin requirements until the position is
closed. See "Futures Contracts" and "Options on Futures Contracts" in
Appendix B.
LEVERAGE THROUGH BORROWING. An underlying fund may borrow a
percentage of the value of its net assets on an unsecured basis from
banks to increase its holdings of portfolio securities. Under the
1940 Act, the fund is required to maintain continuous asset coverage
of 300% with respect to such borrowings and to sell (within three
days) sufficient portfolio holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or
otherwise, even if disadvantageous from an investment standpoint.
In addition, the Fund may, for temporary or emergency purposes,
such as to facilitate redemptions, borrow from a bank in an amount
not in excess of 25% of the Fund's total assets, and the Fund may
pledge a portion of its total assets to secure such borrowings.
Leveraging will exaggerate the effect of any increase or decrease in
the value of portfolio securities on the fund's net asset value, and
money borrowed will be subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average
balances) which may or may not exceed the interest and option
premiums received from the securities purchased with borrowed funds.
WARRANTS. An underlying fund may invest in warrants, which are
options to purchase equity securities at specific prices valid for a
specific period of time. The prices do not necessarily move parallel
to the prices of the underlying securities. Warrants have no voting
rights, receive no dividends and have no rights with respect to the
assets of the issuer. If a warrant is not exercised within the
specified time period, it will become worthless and the fund will
lose the purchase price and the right to purchase the underlying
security.
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INVESTMENT RESTRICTIONS
The investment restrictions set forth below, together with
the Fund's investment objective and policies, are fundamental
policies of the Fund and may not be changed by the Fund without
the approval of a majority of the outstanding voting shares of
the Fund. Under these restrictions, the Fund may not:
(1) 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 or the securities of issuers that
are registered investment companies and that themselves
invest more than 25% of their total assets in one industry,
except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies
or instrumentalities (or repurchase agreements with respect
thereto) or securities or obligations issued by U.S. banks;
(2) Purchase or sell real estate, except that the Fund
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;
(3) Purchase securities on margin (except for use of
short-term credit necessary for clearance of purchases and
sales of portfolio securities), except that to the extent
the Fund engages in transactions in options, futures, and
options on futures, the Fund may make margin deposits in
connection with those transactions and except that effecting
short sales will be deemed not to constitute a margin
purchase for purposes of this restriction, and subject to
the restrictions described in the Prospectus and in the
Statement of Additional Information, purchase securities on
margin;
(4) Lend any funds or other assets, except that the
Fund 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 Board of Trustees;
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(5) Issue senior securities, except insofar as the
Fund may be deemed to have issued a senior security by
reason of borrowing money in accordance with the Fund's
borrowing policies, or in connection with any repurchase
agreement, 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;
(6) Act as an underwriter of securities of other
issuers, except when in connection with the disposition of
portfolio securities, the Fund may be deemed to be an
underwriter under the federal securities laws; and
(7) Borrow money or pledge, mortgage, or hypothecate
its assets, except that the Fund may borrow from banks but
only if immediately after each borrowing and continuing
thereafter, there is asset coverage of 300%.
The Fund is 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 Fund may not:
(1) 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
Manager are illiquid if, as a result of such investment,
more than 15% of the total assets of the Fund (taken at
market value at the time of such investment) would be
invested in such securities;
(2) Purchase or sell commodities or commodities
contracts; and
(3) 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.
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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 Common-
wealth of Massachusetts and the Trust's Agreement and Declaration of Trust.
The Trustees are Barnett Chernow, John R. Barmeyer J. Michael Earley, R.
Barbara Gitenstein, Robert A. Grayson, Stanley B. Seidler, Elizabeth J. Newell,
and Roger B. Vincent. The Executive Officers of the Trust are Barnett
Chernow, Myles R. Tashman, and Mary Bea Wilkinson.
Trustees and Executive Officers of the Trust, their business addresses,
and principal occupations during the past five years are:
NAME AND ADDRESS POSITION BUSINESS AFFILIATIONS AND
WITH THE PRINCIPAL OCCUPATIONS
TRUST
Barnett Chernow President, President and Chairman of the GCG
Golden American Life Trustee and Trust since December 1999; President
Insurance Co. Chairman and Director, Golden American
1475 Dunwoody Drive Life Insurance Company; President,
West Chester, PA 19380 Directed Services, Inc.; Executive Vice
President and then President,
First Golden American Life Insurance
Company of New York; formerly,
Senior Vice President and Chief
Financial Officer, Reliance Insurance
Company, August 1977 to April 1998.
Age 49.
John R. Barmeyer Trustee Senior Vice President, General Counsel
ING's American Region and Secretary of ING America Life
5780 Powers Ferry Road Corporation and its subsidiaries; and
Atlanta, GA 30327-4390 formerly General Counsel, Vice President
and Secretary of Life of Georgia from
1990 to 1992.
Age [ ].
J. Michael Earley Trustee President, and Chief
665 Locust Street Executive Officer, Bankers
Des Moines, IA 50309 Trust Company, Des Moines,
Iowa since July 1992; President and
Chief Executive Officer, Mid-America
Savings Bank, Waterloo, Iowa from
April, 1987 to June, 1992. Age 53.
R. Barbara Gitenstein Trustee President, The College of New Jersey
Office of the President since January, 1999; Trustee Provost,
The College of New Jersey Drake University from July 1992 to
December 1998;
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200 Pennington Road Assistant Provost, State University
Ewing, NJ 08628-0718 of New York from August, 1991 to
July, 1992; Associate Provost,
State University of New York
-Oswego from January, 1989 to
August, 1991. Age 50.
Robert A. Grayson Trustee Co-founder, Grayson
Grayson Associates Associates, Inc.; Adjunct
108 Loma Media Road Professor of Marketing, New
Santa Barbara, CA 93103 York University School of
Business Administration;
former Director, The Golden
Financial Group, Inc.;
former Senior Vice
President, David & Charles
Advertising. Age 71.
Myles R. Tashman Secretary Executive Vice President,
Golden American Life Secretary and General Counsel,
Insurance Co. Golden American Life Insurance
1475 Dunwoody Drive Company; Director, Executive Vice
West Chester, PA 19380 President, Secretary
and General Counsel, Directed
Services, Inc.; Director, Executive
Vice President, Secretary and General
Counsel, First Golden American Life
Insurance Company of New York;
formerly, Senior Vice President
and General Counsel, United Pacific
Life Insurance Company. Age 56.
Stanley B. Seidler Trustee President, Iowa Periodicals,
P.O. Box 1297 Inc. since 1990 and
3301 McKinley Avenue President, Excell Marketing
Des Moines, IA 50321 L.C. since 1994. Age 70.
Mary Bea Wilkinson Treasurer Senior Vice President & Treasurer,
Golden American Life First Golden American Life Insurance
Insurance Co. Company of New York; Senior
1475 Dunwoody Drive Vice President and Treasurer, Golden
West Chester, PA 19803 American Life Insurance Co.;
and President and Treasurer,
Directed Services, Inc.
October 1993 to December
1996; 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.
Age 42.
Roger B. Vincent Trustee President, Springwell
Springwell Corporation; Director
Corporation Petralone, Inc.; formerly,
230 Park Avenue Managing Director Bankers
New York, NY 10169 Trust Company. Age 53.
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Elizabeth J. Newell Trustee President and Chief
KRAGIE/NEWELL, Inc. Executive Officer of
2633 Fleur Drive KRAGIE/NEWELL, Inc. Age 52.
Des Moines, IA 50321
- -----------------------------
As of January 31,2000 none of the Trustees directly owns shares of
the Portfolios. In addition, as of January 31,2000 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 Portfolios in the aggregate.
Each Trustee of the Trust who is not an interested person of the Trust or
Manager or Portfolio Manager receives a fee of $6,000 for each Trustees'
meeting attended and any expenses incurred in attending such meetings or
carrying out their responsibilities as Trustees of the Trust. With respect to
the period ended December 31, 1999, the Trust paid Trustees' Fees
aggregating $148,000. The following table shows 1998 compensation by
Trustee.
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COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Accrued Annual From Registrant
Name of Person, From As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Trustees
J. Michael Earley, $ 24,000 N/A N/A $ 24,000
Trustee
R. Barbara Gitenstein, $ 24,000 N/A N/A $ 24,000
Trustee
Robert A. Grayson $ 24,000 N/A N/A $ 24,000
Trustee
Stanley B. Seidler, $ 24,000 N/A N/A $ 24,000
Trustee
Elizabeth J. Newell $ 24,000 N/A N/A $ 24,000
Trustee
Roger B. Vincent $ 24,000 N/A N/A $ 24,000
Trustee
</TABLE>
---------------
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 Portfolios as of January 31, 2000.
The address for each record owner is c/o Golden American Life Insurance
Company, 1475 Dunwoody Drive, West Chester, PA 19803.
NAME SERIES PERCENTAGE
Helen B. Yungman The Fund For Life 68.92%
Jerome S. Golden The Fund For Life 8.08%
Donald C. Nonell The Fund For Life 12.09%
Additionally, as of January 31, 2000 the General Account of Golden American
owned 8.01% of the shares of the Fund For Life.
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The Management Agreement
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Subject to the supervision of the Trust's Board of Trustees,
the Manager will provide a continuous investment program for the
Fund's portfolio and determine the composition of the assets of
the Fund's portfolio, including determination of the purchase,
retention, or sale of the securities, cash, and other investments
contained in the portfolio. The Manager will provide investment
research and conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Fund's assets by
determining the securities and other investments that shall be
purchased, entered into, sold, closed, or exchanged for the Fund,
when these transactions should be executed, and what portion of
the assets of the Fund should be held in the various securities
and other investments in which it may invest in accordance with
the Fund's investment objective or objectives, policies, and
restrictions.
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 Fund's
assets and the purchase and sale of its portfolio securities.
The Management Agreement will continue in effect until
February 1996, and from year to year thereafter provided such
continuance is approved annually by (i) the holders of a majority
of the outstanding voting securities of the Fund 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 1940 Act) of any such party. The Management
Agreement was approved by the Board of Trustees, including a
majority of the Trustees who are not parties to the Management
Agreement, or interested persons of such party, at a meeting held
on September 27, 1994. The Management Agreement may be
terminated without penalty by vote of the Trustees or the
shareholders of the Fund, or by the Manager, on 60 days' written
notice by either party to the Management Agreement and will
terminate automatically if assigned.
The Trust pays the Manager a monthly fee at an annual rate
of 0.25% of the average daily net assets of the Fund. Gross fees
payable to the Manager for the fiscal years ended December 31, 1999, 1998
and 1997 under the Management Agreement were $595, $211, and $258,
respectively. The 1997, 1998 and 1999 fees were waived by the Manager.
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The Administrative Services Agreement
- -------------------------------------
Directed Services, Inc. ("Administrator") serves as
Administrator to the Fund pursuant to an Administrative Services
Agreement between the Administrator and the Trust. Its address
is 1475 Dunwoody Drive, West Chester, PA 19803. DSI
also serves as Manager to the Fund.
Pursuant to the Administrative Services Agreement, the
Administrator, subject to the direction of the Board of Trustees,
is responsible for providing all supervisory and management
services reasonably necessary for the operation of the Trust and
the Fund other than the services performed by the Manager. These
services shall include, but are not limited to, (i) coordinating
all matters relating to the functions of the Fund's Manager,
Custodian, Dividend Disbursing Agent, and Recordkeeping Agent
(including pricing and valuation of the Fund's portfolio),
accountants, attorneys, and other parties performing services or
operational functions for the Trust, (ii) providing the Trust and
the Fund, at the Administrator'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 as well as other
applicable laws and to provide effective supervision and
administration of the Trust; (iii) maintaining or supervising the
maintenance by the Manager or third parties approved by the Trust
of such books and records of the Trust and the Fund as may be
required by applicable federal or state law; (iv) preparing or
supervising the preparation by third parties approved by the
Trust of all federal, state, and local tax returns and reports of
the Trust required by applicable law; (v) preparing and, after
approval by the Trust, filing and arranging for the distribution
of proxy materials and periodic reports to shareholders of the
Trust as required by applicable law; (vi) preparing and, after
approval by the Trust, 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; (vii) taking
such other action with respect to the Trust, after approval by
the Trust, as may be required by applicable law, including
without limitation the rules and regulations of the Securities
and Exchange Commission and other regulatory agencies; and (viii)
providing the Trust, at the Administrator's expense, with
adequate personnel, office space, communications facilities, and
other facilities necessary for its operations as contemplated in
the Administrative Services Agreement. Other responsibilities of
the Administrator are described in the Prospectus.
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The Administrator 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 Fund. The Trust pays the Administrator a
monthly fee at an annual rate of 0.10% of the Fund's average
daily assets. Gross fees payable to the Administrator under the
Administrative Services Agreement for the fiscal years ended
December 31, 1999, 1998 and 1997 were $238, $992, and $518,
respectively. The 1997,1998 and 1999 fees were waived by the
Administrator.
The Trust bears all of its costs of operation other than
those specifically borne by the Administrator or the Manager.
The Fund's costs include any direct charges relating to the
purchase and sale of portfolio securities, interest charges, fees
and expenses of the Trust's attorneys and auditors, taxes and
governmental fees, cost of share certificates and other expenses
of issue, sale, repurchase or redemption of shares, expenses of
registering and qualifying shares for sale, expenses of printing
and distributing reports, notices and proxy materials to
shareholders, fees and expenses of data processing, recordkeeping
and financial accounting services rendered to the Trust, expenses
of printing and filing reports and other documents with
governmental agencies, expenses of typesetting, printing and
distributing Prospectuses to the existing shareholders, expenses
of annual and special shareholders' meetings, charges of
custodians, fees and expenses of Trustees of the Trust who are
not officers or employees to the Manager or its affiliates,
membership dues in the Investment Company Institute or other
industry associations, insurance premiums and extraordinary
expenses such as litigation expense and the expense of compliance
with any governmental tax withholding requirements.
Certain of the expenses incurred by the Fund in connection
with its organization, its registration with the Securities and
Exchange Commission and any states where registered, and the
public offering of its shares were advanced on behalf of the
Trust by the Manager. These organizational expenses are deferred
and amortized by the Fund over a period not exceeding 60 months
from the date of the Fund's commencement of operations.
Distribution of Trust Shares
- ----------------------------
Directed Services, Inc. (the "Distributor") serves as the
Trust's Distributor pursuant to a Distribution Agreement with the
Trust. The Distributor is not obligated to sell a specific
amount of Trust shares. The Distributor bears all expenses of
providing services pursuant to the Distribution Agreement
including the costs of sales presentations, mailings,
advertising, and any other marketing efforts by the Distributor
in connection with the distribution or sale of the shares.
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Purchases and Redemptions
- -------------------------
For information on purchase and redemption of shares, see
"Purchase of Shares" and "Redemption of Shares" in the Fund's
Prospectus. The Trust may suspend the right of redemption of
shares of the Fund 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 shares. If the Board of Trustees should
determine that it would be detrimental to the best interests of
the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or
in part by a distribution in kind of securities from its
portfolio, 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
As part of its obligations under the Management Agreement,
the Manager places all orders for the purchase and sale of
portfolio investments for the Fund's account with brokers or
dealers selected by it in its discretion. With respect to orders
for the purchase and sale of no-load mutual funds, the Manager
places orders directly with the mutual fund or its agent. With
respect to purchases of certain money market instruments,
purchase orders are placed directly with the issuer or its agent.
Purchases of load fund shares may be effected by the Manager
itself, which is a registered broker-dealer, although other
brokers or dealers may be selected at the discretion of the
Manager.
When appropriate, the Fund may arrange to be included within
a class of investors entitled to a reduced sales charge on load
fund shares and may purchase load fund shares under letters of
intent, rights of accumulation and cumulative purchase
privileges, which permit it to obtain reduced sales charges for
larger purchases of shares. Therefore, in a majority of cases,
the sales charges paid by the Fund on a load fund purchase do not
exceed 1% of the public offering price.
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Under the 1940 Act, a mutual fund must sell its shares at
the price (including sales load, if any) described in its
prospectus, and current rules under the 1940 Act do not permit
negotiations of sales charges. Therefore, the Fund currently is
not able to negotiate the level of the sales charges at which it
purchases shares of load funds, which may be as great as 8.5% of
the public offering price (or 9.29% of the net amount invested).
Nevertheless, certain factors tend to keep the Fund's portfolio
transaction costs as low as possible, including: (1) the Fund,
to the extent feasible, purchases shares of no-load funds which
can be acquired without incurring a sales charge or utilizing a
broker to effect the transaction; (2) the Fund, to the extent
feasible, takes advantage of exchange or conversion privileges
offered by many "families" of mutual funds; and (3) insofar as
the Fund invests in U.S. Government and other money market
securities, the transaction costs should be minimal.
With respect to all non-mutual fund securities, in executing
transactions, the Manager attempts to obtain the best execution
for the Fund 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 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.
The Manager may in the future provide advisory services to
clients other than the Fund. A particular security may be bought
or sold by the Manager for certain clients even though it could
have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more
clients when one or more clients are selling the security. In
some instances, one client may sell a particular security to
another client. Two or more clients of the Manager also may
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 Manager. Although there is no specified
formula for allocating such transactions, the various allocation
methods used by the Manager, and the results of such allocations,
are subject to periodic review by the Trust's 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.
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NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectus, the
Fund's 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.
ADVERTISING
The Trust may, from time to time, include the total return
of the Fund in advertisements or sales literature. Performance
information for the Fund will not be advertised or included in
sales literature unless accompanied by comparable performance
information for a separate account to which the Fund offers its
shares.
Quotations of average annual total return for the Fund will
be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in the Fund over certain
periods that will include periods of one, five, and ten years
(or, if less, up to the life of the Fund), 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 Fund expenses on an annual
basis, and assume that all dividends and distributions are
reinvested when paid. For the fiscal year ended December 31,
1998, the five year period ended December 31, 1998, and the period
from the commencement of operations of the Fund on March 1, 1993 to
December 31, 1998, the total return of the Fund was 13.67%, 10,85%
and 10.75%, respectively.
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Performance information for the Fund may be compared, in
advertisements, sales literature, and reports to shareholders to:
(i) the Standard & Poor's 500 Stock Index, the Dow Jones
Industrial Average, 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 indexes 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 Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Quotations of total return for the Fund will not take into
account charges and deductions against any separate accounts to
which the Fund shares are sold or charges and deductions against
the life insurance policies or annuity contracts issued by Golden
American Life Insurance Company, although comparable performance
information for the separate account will take such charges into
account. Performance information for the Fund reflects only the
performance of a hypothetical investment in the Fund during the
particular time period on which the calculations are based.
Performance information should be considered in light of the
Fund's investment objective 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.
Advertisements may include discussion of the underlying
mutual funds held by the Fund.
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TAXATION
The following discussion summarizes certain U.S. federal tax
considerations incident to an investment in the Fund.
The Fund 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, the Fund
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; (ii)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 Fund's assets is represented by cash, 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
Fund's 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); and (iii) distribute at least 90%
of its net investment income (which includes, among other items,
dividends, interest, and net short-term capital gains in excess
of any net long-term capital losses) each taxable year.
As a regulated investment company, the Fund generally will
not be subject to U.S. federal income tax on its net investment
income and net capital gains (net long-term capital gains in
excess of the net short-term capital losses) that it distributes
to shareholders. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its net
investment income and any net capital gains.
In general, amounts not distributed by a regulated
investment company on a timely basis in accordance with a
calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, a regulated
investment company must distribute during each calendar year, (i)
at least 98% of its ordinary income (not taking into account any
capital gains or losses) of the calendar year, (ii) at least 98%
of its capital gains in excess of its capital losses for the
twelve month period ending on October 31 of the calendar year
(adjusted for certain ordinary losses), and (iii) all ordinary
income and capital gains for previous years that were not
distributed during such years. The Fund will not be subject to
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the excise tax on undistributed amounts for any calendar year if
at all times during the calendar year the shareholders of the
Fund consist only of segregated asset accounts of life insurance
companies established in connection with variable contracts, as
defined in the Code. (For this purpose, any shares of the Fund
attributable to an investment in the Fund not exceeding $250,000
made in connection with the organization of the Fund shall not be
taken into account.) In the event the Fund fails to meet this
exception, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a
calendar year if it is declared by the Fund in October, November,
or December of that year with a record date in such a month and
paid by the Fund during January of the following calendar year.
Such distributions will be taxable to shareholders (the insurance
company separate accounts) for the calendar year in which the
distributions are declared, rather than the calendar year in
which the distributions are received.
If the Fund invests in shares of an investment company
organized abroad, the Fund may be subject to U.S. federal income
tax on a portion of an "excess distribution" from, or on the gain
from the sale of part or all of the shares in, such company. In
addition, an interest charge may be imposed with respect to
deferred taxes arising from such distributions or gains.
To comply with regulations under Section 817(h) of the Code,
the Fund generally will be required to diversify its investments
following the first anniversary of the beginning of its
operations. Generally, pursuant to Section 817(h), the Fund 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.
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
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<PAGE>
account, income and gains produced by those securities would be
included currently in the contract owner's gross income. The
insurance company to which the Fund offers its shares (the
"Company") has advised the Trust that it believes that, for
federal income tax purposes, the Fund will be the owner of the
shares of the mutual funds and any income therefrom, and the
separate accounts of the Company will be the owners of the Shares
of the Fund and any income therefrom. Although it is not known
what standards will be incorporated in future regulations or
other pronouncements, the Treasury staff has indicated informally
that it is concerned that there may be too much contract owner
control where a mutual 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 representing a specific economic risk or to direct
(without restriction) the issuer of a variable contract at any
time to invest in the Fund or other investments may also be
proscribed. The belief of the Company with respect to the
ownership by the Fund of the mutual fund shares and the income
therefrom, and by the separate accounts of the Shares of the Fund
and the income therefrom, is based upon published Internal
Revenue Service rulings and the Company's understanding of the
current Internal Revenue Service policy.
In connection with the issuance of the temporary
diversification regulations in 1986, the Treasury announced that
such regulations did not provide guidance concerning the extent
to which owners may direct their investments to particular
divisions of a separate account without being considered the
owners of the assets of the account. It is possible that
regulations or revenue rulings may be issued in this area at some
time in the future. These future rules and regulations
proscribing investment control may adversely affect the ability
of the Fund to operate as described in the Prospectus. There is,
however, no certainty as to what standards, if any, Treasury will
ultimately adopt. In the event that unfavorable rules or
regulations are adopted, there can be no assurance that the Fund
will be able to operate as currently described in the Prospectus,
or that the Fund will not have to change its investment objective
or objectives, investment policies, or investment restrictions.
While the Fund's investment objective is fundamental and may be
changed only by a vote of a majority of its outstanding shares,
the Trustees have the right to modify the investment policies of
the Fund as necessary to prevent any such prospective rules and
regulations from causing the Variable Contract owners to be
considered the owners of the assets underlying the Separate
Accounts.
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Distributions
- -------------
Distributions of net investment income by the Fund are
taxable to shareholders (the insurance company separate accounts)
as ordinary income. Net capital gains will be treated, to the
extent distributed and designated as capital gains dividends, as
long-term capital gains in the hands of the shareholders.
Other Taxes
- -----------
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 the Fund.
OTHER INFORMATION
Capitalization
- --------------
The Trust is a Massachusetts business trust established
under an Agreement and Declaration of Trust dated August 3, 1988.
The capitalization of the Trust consists of an unlimited number
of shares of beneficial interest with a par value of $0.001 each.
The Trust currently consists of fourteen operational Series, one
of which is discussed in this Statement of Additional
Information. 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 portfolio.
Expenses incurred by the Fund in connection with its
organization and the public offering of its shares aggregated
approximately $51,850.03. These costs have been deferred and are
being amortized over a period not exceeding five years from the
Fund's commencement of operations.
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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, and prior to July 17, 1989, the
name of the Trust was Western Capital Specialty Managers Trust.
Voting Rights
- -------------
Shareholders of the Trust 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 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 of electing or removing Trustees, changing fundamental
policies, or approving a contract for investment advisory
services. It is not anticipated that the Trust will hold
meetings of the shareholders of the Fund unless required by law
or the Agreement and Declaration of Trust. In this regard, 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.
Purchase of Shares
- ------------------
Shares of the Portfolio 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 Portfolio serving as investment
mediums for variable contracts. Shares of the Portfolio 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 polices and annuity contracts in 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 sometime 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 or 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, in one
or more insurance company separate accounts might withdraw their
investment in the Trust. This might force the Trust to sell
securities at disadvantageous prices.
Shares of the Portfolio are sold at its 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.
Redemption of Shares
- --------------------
Shares of the Portfolio 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 Portfolio. 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 the Portfolio to make payment wholly or partly in
cash, the Portfolio may pay the redemption price in whole or part by
a distribution in kind of securities from the portfolio of the
Portfolio, 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 the Portfolio may be exchanged for shares of any of the
other Portfolios of the GCG Trust. Exchanges are treated as a
redemption of shares of one Portfolio and a purchase of shares of one
or more of the other Portfolios and are effected at the respective
net asset values per share of each Portfolio 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 Portfolio, and
should refer to the Prospectus for the applicable variable contract
for information on allocation of premiums and on transfers of
contract value among subaccounts of the pertinent insurance company
separate account that invest in the Portfolio.
The Trust reserves the right to discontinue offering shares of the
Portfolio at any time.
Custodian
- ---------
The Custodian for the Trust is Bankers Trust Company, 280
Park Avenue, New York, NY 10017. DSI provides portfolio
accounting services for the Trust pursuant to a Portfolio
Accounting Agreement.
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Independent Auditors
- --------------------
Ernst & Young LLP, Two Commerce Square, Suite 4000, 2001 Market
Street, Philadelphia, PA 19103, serves as independent auditors for the
Trust.
Counsel
- -------
Sutherland, Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW,
Washington, D.C. 20004-2440 serves as counsel to the Trust.
Registration Statement
- ----------------------
This Statement of Additional Information and the Prospectus
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 Prospectus 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 Fund dated as of
December 31, 1999, including the financial highlights and notes
thereto and the report of Ernst & Young LLP, independent auditors,
are incorporated by reference in this Statement of Additional
Information from the Fund's Annual Report dated as of
December 31, 1999.
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<PAGE>
APPENDIX A: 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 the 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 - predominantly 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>
<PAGE>
APPENDIX B: SECURITIES AND INVESTMENT TECHNIQUES
OF UNDERLYING MUTUAL FUNDS
FOREIGN CURRENCY TRANSACTIONS. An underlying fund may enter
into forward contracts in connection with its portfolio
transactions in securities traded in a foreign currency. Under
such an arrangement, concurrently with the entry into a contract
to acquire a foreign security for a specified amount of currency,
the fund would purchase with U.S. dollars the required amount of
foreign currency for delivery at the settlement date of the
purchase; the fund would enter into similar forward currency
transactions in connection with the sale of foreign securities.
The effect of such transactions would be to fix a U.S. dollar
price for the security to protect against a possible loss
resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date
on which payment is made or received, the normal range of which
is three to fourteen days. These contracts are traded in the
interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement and no commissions
are charged at any stage for trades.
Under the Internal Revenue Code (the "Code"), gains or
losses attributable to fluctuations in exchange rates which occur
between the time an underlying fund accrues interest or other
receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time it 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 an underlying fund's investment company
taxable income to be distributed to the Fund as ordinary income.
This, in turn, will affect the amount of investment company
taxable income of the Fund. See "Dividends, Distributions, and
Taxes" in the Fund's Prospectus.
B-1
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<PAGE>
MASTER DEMAND NOTES. Although the Fund itself will not do
so, underlying funds (particularly money market mutual funds) may
invest up to 100% of their assets in master demand notes. Master
demand notes are unsecured obligations of U.S. corporations
redeemable upon notice that permit investment by a fund of
fluctuating amounts at varying rates of interest pursuant to
direct arrangements between the fund and the issuing corporation.
Because they are direct arrangements between the fund and the
issuing corporation, there is no secondary market for the notes.
However, they are redeemable at face value, plus accrued
interest, at any time.
SHORT SALES. An underlying fund may sell securities short.
In a short sale, the fund sells stock which it does not own,
making delivery with securities "borrowed" from a broker. The
fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement.
This price may or may not be less than the price at which the
security was sold by the fund. Until the security is replaced,
the fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. In order to
borrow the security, the fund also may have to pay a premium
which would increase the cost of the security sold. The proceeds
of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position
is closed out.
The underlying fund also must deposit in a segregated
account an amount of cash or U.S. Government securities equal to
the difference between (a) the market value of the securities
sold short at the time they were sold short and (b) the value of
the collateral deposited with the broker in connection with the
short sale (not including the proceeds from the short sale).
While the short position is open, the fund must maintain daily
the segregated account at such a level that (1) the amount
deposited in it plus the amount deposited with the broker as
collateral equals the current market value of the securities sold
short and (2) the amount deposited in it plus the amount
deposited with the broker as collateral is not less than the
market value of the securities at the time they were sold short.
Depending upon market conditions, up to 80% of the value of a
fund's net assets may be deposited as collateral for the
obligation to replace securities borrowed to effect short sales
and allocated to a segregated account in connection with short
sales.
A short sale is "against the box" if at all times when the
short position is open the fund owns at least an equal amount of
the securities or securities convertible into, or exchangeable
without further consideration for, securities of the same issue
as the securities sold short. Such a transaction serves to defer
a gain or loss for federal income tax purposes.
B-2
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<PAGE>
OPTIONS ACTIVITIES. An underlying fund may write (i.e.,
sell) listed call options ("calls") if the calls are "covered"
throughout the life of the option. A call is "covered" if the
fund owns the optioned securities. When a fund writes a call, it
receives a premium and gives the purchaser the right to buy the
underlying security at any time during the call period (usually
not more than nine months in the case of common stock) at a fixed
exercise price regardless of market price changes during the call
period. If the call is exercised, the fund will forgo any gain
from an increase in the market price of the underlying security
over the exercise price.
An underlying fund may purchase a call on securities only to
effect a "closing purchase transaction," which is the purchase of
a call covering the same underlying security and having the same
exercise price and expiration date as a call previously written
by the fund on which it wishes to terminate its obligation. If
the fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call
previously written by the fund expires (or until the call is
exercised and the fund delivers the underlying security).
An underlying fund also may write and purchase put options
("puts"). When a fund writes a put, it receives a premium and
gives the purchaser of the put the right to sell the underlying
security to the fund at the exercise price at any time during the
option period. When an underlying fund writes a put, it must
"cover" the put by either maintaining cash or fixed income
securities with a value equal to the exercise price in a
segregated account with its custodian or by holding a put on the
same security and in the same principal amount as the put written
when the exercise price of the put held is equal to or greater
than the exercise price of the put written. When a fund
purchases a put, it pays a premium in return for the right to
sell the underlying security at the exercise price at any time
during the option period. An underlying fund also may purchase
stock index puts, which differ from puts on individual securities
in that they are settled in cash based on the values of the
securities in the underlying index rather than by delivery of the
underlying securities. Purchase of a stock index put is designed
to protect against a decline in the value of the portfolio
generally rather than an individual security in the portfolio.
If any put is not exercised or sold, it will become worthless on
its expiration date.
An underlying fund's option positions may be closed out only
on an exchange which provides a secondary market for options of
the same series, but there can be no assurance that a liquid
secondary market will exist at a given time for any particular
option. In this regard, trading in options on certain securities
(such as U.S. Government securities) is relatively new so that it
is impossible to predict to what extent liquid markets will
develop or continue.
B-3
<PAGE>
<PAGE>
The underlying fund's custodian, or a securities depository
acting for it, generally acts as escrow agent as to the
securities on which the fund has written puts or calls, or as to
other securities acceptable for such escrow so that no margin
deposit is required of the fund. Until the underlying securities
are released from escrow, they cannot be sold by the fund.
In the event of a shortage of the underlying securities
deliverable on exercise of an option, the Options Clearing
Corporation has the authority to permit other, generally
comparable securities, to be delivered in fulfillment of option
exercise obligations. If the Options Clearing Corporation
exercises its discretionary authority to allow such other
securities to be delivered, it may also adjust the exercise
prices of the affected options by setting different prices at
which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options
Clearing Corporation may impose special exercise settlement
procedures.
FUTURES CONTRACTS. An underlying fund may enter into
futures contracts for the purchase or sale of debt securities and
stock indexes. A futures contract is an agreement between two
parties to buy and sell a security or an index for a set price on
a future date. Futures contracts are traded on designated
"contract markets" which, through their clearing corporations,
guarantee performance of the contracts.
Generally, if market interest rates increase, the value of
outstanding debt securities declines (and vice versa). Entering
into a futures contract for the sale of securities has an effect
similar to the actual sale of securities, although sale of the
futures contract might be accomplished more easily and quickly.
For example, if an underlying fund holds long-term U.S.
Government securities and it anticipates a rise in long-term
interest rates, it could, in lieu of disposing of its portfolio
securities, enter into futures contracts for the sale of similar
long-term securities. If rates increased and the value of the
fund's portfolio securities declined, the value of the fund's
futures contracts would increase, thereby protecting the fund by
preventing the net asset value from declining as much as it
otherwise would have. Similarly, entering into futures contracts
for the purchase of securities has an effect similar to the
actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying
securities. For example, if the fund expects long-term interest
rates to decline, it might enter into futures contracts for the
purchase of long-term securities so that it could gain rapid
market exposure that may offset anticipated increases in the cost
of securities it intends to purchase while continuing to hold
higher-yield short-term securities or waiting for the long-term
market to stabilize.
B-4
<PAGE>
<PAGE>
A stock index futures contract may be used to hedge an
underlying fund's portfolio with regard to market risk as
distinguished from risk relating to a specific security. A stock
index futures contract does not require the physical delivery of
securities, but merely provides for profits and losses resulting
from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective
accounts of the parties to the contract. On the contract's
expiration date, a final cash settlement occurs. Changes in the
market value of a particular stock index futures contract reflect
changes in the specified index of equity securities on which the
future is based.
There are several risks in connection with the use of
futures contracts. In the event of an imperfect correlation
between the futures contract and the portfolio position which is
intended to be protected, the desired protection may not be
obtained and the fund may be exposed to risk of loss. Further,
unanticipated changes in interest rates or stock price movements
may result in a poorer overall performance for the fund than if
it had not entered into futures contracts on debt securities or
stock indexes. Also, the successful use of futures depends upon
the underlying fund investment advisor's ability to predict
correctly movements in the direction of the market.
In addition, the market prices of futures contracts may be
affected by certain factors. First, all participants in the
futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through
offsetting transactions which could distort the normal
relationship between the securities and futures markets. Second,
from the point of view of speculators, the deposit requirements
in the futures market are less onerous than margin requirements
in the securities market. Therefore, increased participation by
speculators in the futures market also may cause temporary price
distortions, although speculators generally serve an important
function by bringing liquidity to the futures markets. When
purchasing a futures contract, a fund must deposit in a
segregated account cash or high quality debt instruments equal in
value to the current value of the underlying instruments less the
margin deposit.
Finally, positions in futures contracts may be closed out
only on an exchange or board of trade which provides a secondary
market for such futures. There is no assurance that a liquid
secondary market on an exchange or board of trade will exist for
any particular contract or at any particular time.
B-5
<PAGE>
<PAGE>
OPTIONS ON FUTURES CONTRACTS. An underlying fund also may
purchase and sell listed put and call options on futures
contracts. An option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position
in a futures contract (a long position if the option is a call
and a short position if the option is a put), at a specified
exercise price at any time during the option period. When an
option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the
difference between the current market price of the futures
contract and the exercise price of the option. The fund may
purchase put options on futures contracts in lieu of, and for the
same purpose as, a sale of a futures contract. It also may
purchase such put options in order to hedge a long position in
the underlying futures contract in the same manner as it
purchases "protective puts" on securities.
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
Exhibits
(a) (1) Amended and Restated Agreement and Declaration of
Trust 3/19/96 (1)
(2) Amendment to the Restated Agreement and Declaration of
Trust adding the Managed Global Series 6/10/96 (2)
(3) Amendment to the Restated Agreement and Declaration of
Trust changing the name the Natural Resources Series
to the Hard Assets Series and adding the Mid-Cap
Growth Series 1/23/97 (43)
(4) Amendment to the Restated Agreement and Declaration of
Trust redesigning the Global Equity Series as the Managed
Global Series; terminating the Mid-Cap Growth Series-added
January 23, 1997; adding the Mid-Cap Growth Series, Research
Series, Total Return Series, Growth & Income Series, Value +
Growth Series, Global Fixed Income Series, Growth Opportunities
Series & Developing World Series 1/12/98 (3)
(5) Amendment to the Restated Agreement and Declaration of
Trust adding Large Cap Value Series and the International
Equity Series, also to change the names of the Multiple
Allocation Series to the Equity Income Series and Value +
Growth Series to the Growth Series 2/16/99 (43)
(6) Amendment to the Restated Agreement and Declaration of
Trust changing the name of the Growth & Income Series
to the Capital Growth Series 6/30/99 (43)
(7) Amendment to the Restated Agreement and Declaration of
Trust adding the Investors Series, All Cap Series
and the Large Cap Growth Series 8/17/99 (43)
(b) By-laws (17)
(c) Instruments Defining Rights of Security Holders (18)
(d) (1) (A) Management Agreement for all Series except The
Fund For Life (4)
(B) Addendum to the Management Agreement, Mid-Cap Growth
Series, Research Series, Total Return Series, Growth &
Income Series, Value + Growth Series, Global Fixed
Income Series, Growth Opportunities Series & Developing
World Series 1/2/98 (43)
(C) Addendum to the Management Agreement, adding
International Equity Series and the Large Cap
Value Series 2/16/99 (43)
(D) Addendum to the Management Agreement, adding
Investors Series, All Cap Series and the
Large Cap Growth Series 8/17/99 (43)
(E) Management Agreement for The Fund For Life (19)
(2) Portfolio Management Agreements
(A) Portfolio Management Agreement with T. Rowe
Price Associates, Inc. (5)
(B) Portfolio Management Agreement with ING Investment
Management LLC, formerly Equitable Investment
Services, Inc. (6)
(C) Portfolio Management Agreement with Kayne
Anderson Investment Management, LLC. (7)
(D) Addendum to the Kayne Anderson Investment Management, LLC
Agreement (43)
(E) Portfolio Management Agreement with Eagle
Asset Management, Inc. (8)
(F) Portfolio Management Agreement with
Massachusetts Financial Services Company (9)
(G) Portfolio Management Agreement with
Baring International Investment Limited (20)
(H) Portfolio Management Agreement with
A I M Capital Management, Inc. (21)
(I) Portfolio Management Agreement with
Janus Capital Corporation (22)
(J) Portfolio Management Agreement with
Alliance Capital Management L.P. (23)
(K) Schedule Pages for T. Rowe Price Associates, Inc. (24)
(L) Portfolio Management Agreement with Salomon Smith
Barney Asset Management, Inc.
(M) Portfolio Management Agreement with Capital Guardian
Trust Company
(N) Form of Portfolio Management Agreement with The Prudential
Investment Corporation
(O) Addendum to the A I M Capital Management, Inc. Agreement
(P) Addendum to the Baring International Investment Limited
Agreement
(Q) Addendum to the Capital Guardian Trust Company
Agreement
(3) Administrative Services Agreement for The Fund For Life (25)
(4) Administration and Fund Accounting Agreement among the Trust,
Directed Services, Inc., and PFPC, Inc. (formerly, First Data
Corporation) (26)
(e) Distribution Agreement (10)
(f) Not Applicable
(g) Custodial Agreement with Bank of New York
(h) (1) (A) Transfer Agency and Service Agreement (27)
(B) Addendum to the Transfer Agency and Service
Agreement for The Fund For Life, Zero Target 2002
Series, and Capital Appreciation Series (12)
(2) (A) Organizational Agreement for Golden American
Life Insurance Company (28)
(B) Assignment Agreement for Organizational Agreement (29)
(C) Organizational Agreement for The Mutual
Benefit Life Insurance Company (30)
(D) Assignment Agreement for Organizational Agreement (31)
(E) Addendum to Organizational Agreement adding
Market Manager Series and Value Equity Series (13)
(F) Addendum to the Organizational Agreement adding
the Strategic Equity Series (32)
(G) Addendum to the Organizational Agreement adding
the Small Cap Series (14)
(H) Addendum to the Organizational Agreement adding
Managed Global Series (15)
(I) Addendum to the Organizational Agreement adding
Mid-Cap Growth Series, Research Series, Total Return
Series, Growth & Income Series, Value & Growth, Global
Fixed Income Series, Growth Opportunities Series, and
Developing World Series (11)
(J) Addendum to the Organizational Agreement adding
International Equity Series and the Large Cap
Value Series 2/16/99
(K) Addendum to the Organizational Agreement adding
Investors Series, All Cap Series and the
Large Cap Growth Series 6/15/99
(3) (A) Settlement Agreement for Golden American Life
Insurance Company (33)
(B) Assignment Agreement for Settlement Agreement (16)
(C) Settlement Agreement for The Mutual Benefit Life
Insurance Company (34)
(D) Assignment Agreement for Settlement Agreement (35)
(4) Indemnification Agreement (36)
(5) (A) Expense Reimbursement Agreement (37)
(B) Amendment No. 1 to the Expense Reimbursement Agreement (38)
(C) Amendment No. 2 to the Expense Reimbursement Agreement (39)
(D) Amendment No. 3 to the Expense Reimbursement Agreement (40)
(E) Amendment No. 4 to the Expense Reimbursement Agreement (41)
(i) Consent of Sutherland Asbill & Brennan LLP
(j) Consent of Ernst & Young LLP
(k) Not Applicable
(l) Initial Capital Agreement (42)
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p) Other Exhibits
(1) Powers of Attorney
(1) Incorporated by reference to Exhibit 1(a) of Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 2, 1996, File No. 33-23512.
(2) Incorporated by reference to Exhibit 1(b) of Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A of
The GCG Trust as filed on June 14, 1996, File No. 33-23512.
(3) Incorporated by reference to Exhibit (b)1(c) of Post-Effective
Amendment No. 33 to the Registration Statement on Form N-1A of
The GCG Trust as filed on September 2, 1997, File No. 33-23512.
(4) Incorporated by reference to Exhibit 5(a)(i) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(5) Incorporated by reference to Exhibit 5(b)(iv) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(6) Incorporated by reference to Exhibit 5(b)(vi) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(7) Incorporated by reference to Exhibit 5(b)(ix) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(8) Incorporated by reference to Exhibit 5(b)(xi) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(9) Incorporated by reference to Exhibit 5(b)(xii) of Post-Effective
Amendment No. 33 to the Registration Statement on Form N-1A of
The GCG Trust as filed on September 2, 1997, File No. 33-23512.
(10) Incorporated by reference to Exhibit 6 of Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A of
The GCG Trust as filed on June 14, 1996, File No. 33-23512.
(11) Incorporated by reference to Exhibit 9(b)(ix) of Post-Effective
Amendment No. 33 to the Registration Statement on Form N-1A of
The GCG Trust as filed on September 2, 1997, File No. 33-23512.
(12) Incorporated by reference to Exhibit 9(a)(ii) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(13) Incorporated by reference to Exhibit 9(b)(v) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(14) Incorporated by reference to Exhibit 9(b)(vii) of 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.
(15) Incorporated by reference to Exhibit 9(b)(viii) of Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A of
The GCG Trust as filed on June 14, 1996, File No. 33-23512.
(16) Incorporated by reference to Exhibit 9(c)(ii) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(17) Incorporated by reference to Exhibit (b) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(18) Incorporated by reference to Exhibit (c) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(19) Incorporated by reference to Exhibit (d)(1)(B) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(20) Incorporated by reference to Exhibit (d)(2)(K) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(21) Incorporated by reference to Exhibit (d)(2)(L) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(22) Incorporated by reference to Exhibit (d)(2)(M) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(23) Incorporated by reference to Exhibit (d)(2)(N) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(24) Incorporated by reference to Exhibit (d)(2)(O) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(25) Incorporated by reference to Exhibit (d)(3) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(26) Incorporated by reference to Exhibit (d)(4) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(27) Incorporated by reference to Exhibit (h)(1)(A) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(28) Incorporated by reference to Exhibit (h)(2)(A) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(29) Incorporated by reference to Exhibit (h)(2)(B) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(30) Incorporated by reference to Exhibit 9(b)(iii) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997 File No. 33-23512.
(31) Incorporated by reference to Exhibit (h)(2)(D) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(32) Incorporated by reference to Exhibit (h)(2)(F) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(33) Incorporated by reference to Exhibit (h)(3)(A) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(34) Incorporated by reference to Exhibit (h)(3)(C) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(35) Incorporated by reference to Exhibit (h)(3)(D) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(36) Incorporated by reference to Exhibit (h)(4) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(37) Incorporated by reference to Exhibit (h)(5)(A) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(38) Incorporated by reference to Exhibit (h)(5)(B) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(39) Incorporated by reference to Exhibit (h)(5)(C) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(40) Incorporated by reference to Exhibit (h)(5)(D) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(41) Incorporated by reference to Exhibit (h)(5)(E) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(42) Incorporated by reference to Exhibit (l)(1) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(43) Incorporated by reference to Post-Effective Amendment No. 41 to
the Registration Statement on Form N-1A of The GCG Trust as filed
on November 8, 1999 File No. 33-23512.
Item 24. Persons Controlled by or Under Control with Registrant.
As of the date of this Post-Effective Amendment, a separate
account of Security Equity Life Insurance Company; a separate
account of Equitable Life Insurance Company of Iowa; Golden
American Life Insurance Company and its separate account;
and First Golden American Life Insurance Company of New York
own all of the outstanding shares of the Registrant.
Security Equity Life Insurance Company, a separate account of
Equitable Life Insurance Company of Iowa, Golden American Life
Insurance Company and First Golden American Life Insurance Company
of New York is required to vote fund shares in accordance with
instructions received from owners of variable life insurance
and annuity contracts funded by separate accounts of the relevant
company.
The subsidiaries of ING Groep N.V. are Incorporated by reference
to Post-Effective Amendment No. 40 to the Registration Statement
on Form N-1A of The GCG Trust as filed on May 3, 1999
File No. 33-23512.
Item 25. 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.
The Trust has a management agreement with Directed Services Inc.
("DSI"), and The Trust and DSI have various portfolio management
agreements with the portfolio managers (the "Agreements").
Generally, the Trust will indemnify DSI and the portfolio managers
under the Agreements for acts and omissions by DSI and/or the
portfolio managers. Also, DSI will indemnify the portfolio managers
under the Agreements for acts and omissions by the portfolio
managers. Neither DSI nor the portfolio managers are indemnified
for acts or omissions where DSI and/or the portfolio managers commit
willful misfeasance, bad faith, gross negligence and/or by reason
of reckless disregard.
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 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 26. Business and Other Connections of Investment Adviser.
Directed Services, Inc.
The Manager of all Series of the Trust is DSI. The directors
and officers of the Manager have, during the past year, had substantial
affiliations with Golden American Life Insurance Company ("Golden American")
and Equitable of Iowa Companies ("EIC") and its affiliates. Unless
otherwise stated all officers of DSI have a principal business address of
1475 Dunwoody Drive, West Chester, Pennsylvania 19380. Most directors of
DSI are employees of either EIC or one of its affiliates or each serves as
directors of some or all of EIC's subsidiaries. In addition to DSI and
Golden American, EIC's subsidiaries are Equitable Life Insurance Company
of Iowa ("Equitable Life"), Equitable American Insurance Company ("Equitable
American") USG Annuity & Life Company ("USG") and Locust Street Securities.
EIC's principal business address 909 Locust Street, Des Moines, Iowa 50306.
<TABLE>
<S> <C> <C>
Name Position With Adviser Other Affiliations
Myles R. Tashman Director, Executive Vice Director, Executive Vice President, General
President, Secretary and Counsel, and Secretary of Golden American
General Counsel Life Insurance Company, Inc. and First
Golden American Insurance Company of New
York, and Secretary, The GCG Trust.
R. Lawrence Roth Director President of VESTAX Capital Corporation
VESTAX Capital Corporation
1931 Georgetown Road
Hudson, OH 44236
James R. McInnis President Executive Vice President of Golden
American Life Insurance Company and
First Golden American Life Insurance
Company of New York.
Barnett Chernow Director and President of Golden American
Executive Vice President Life Insurance Company and First Golden
American Life Insurance Company of New
York; Vice President of Equitable Life
Insurance Company of Iowa and USG
Annuity & Life Company; and President,
Chairmand and Trustee of The GCG Trust.
Stephen J. Preston Executive Vice President Executive Vice President and Chief Actuary
Golden American Life Insurance Company,
Inc. and First Golden American Life
Insurance Company of New York
Jodie Schult Treasurer Treasurer of Locust Street Securities, Inc.
Equitable of Iowa Companies
909 Locust Street
Des Moines, IA 50309
David L. Jacobson Senior Vice President Senior Vice President and Assistant
Secretary of Golden American Life Insurance
Company, Inc. and First Golden American
Life Insurance Company of New York
</TABLE>
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.
Kayne Anderson Investment Management, LLC
For information regarding Kayne Anderson Investment Management, LLC,
reference is made to Form ADV of Kayne Anderson Investment Management,
LLC, SEC File No. 801-24241, which is incorporated by reference.
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.
EII Realty Securities, Inc.
For information regarding EII Realty Securities, Inc., reference is made to
Form ADV of EII Realty Securities, Inc., SEC File No. 801-44099, which is
incorporated herein by reference.
A I M Capital Management, Inc.
For information regarding A I M Capital Management, Inc., reference is made
to Form ADV of A I M Capital Management, Inc., SEC File No. 801-15211, which
is incorporated by refereence.
ING Investment Management, LLC
For information regarding ING Investment Management, LLC, reference is made
to Form ADV of ING Investment Management, LLC, SEC File No. 801-15160, which
is incorporated by reference.
Baring International Investment Limited
For information regarding Baring International Investment Limited, reference
is made to Form ADV of Baring International Investment Limited, SEC File No.
801-15160, which is incorporated by reference.
Massachusetts Financial Services Company
For information regarding Massachusetts Financial Services Company,
reference is made to Form ADV of Massachusetts Financial Services Company,
SEC File No. 801-15160, which is incorporated by reference.
Janus Capital Corporation
For information regarding Janus Capital Corporation reference is made to
Form ADV of Janus Capital Corporation, SEC File No. 801-13991, which is
incorporated by reference.
Alliance Capital Management L.P.
For information regarding Alliance Capital Management L.P. reference is
made to Form ADV of Alliance Capital Management L.P., SEC File No. 801-32361,
which is incorporated by reference.
Salomon Smith Barney Asset Management, Inc.
For information regarding Salomon Smith Barney Asset Management, Inc.,
reference is made to Form ADV of Salomon Smith Barney Asset Management, Inc.,
SEC File No. 801-32046, which is incorporated by reference.
The Prudential Investment Corporation
For information regarding The Prudential Investment Corporation reference
is made to Form ADV of The Prudential Investment Corporation SEC File
No. 801-22808, which is incorporated by reference.
Capital Guardian Trust Company
The information as to the directors and officers of capital guardian trust
company is set forth below. to the knowledge of the trust, none of the
directors or officers of Capital Guardian is or has been at anytime during the
past two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except as set forth below.
These persons may be contacted c/o Capital Guardian Trust Company, 333 South
Hope Street, Los Angeles, California 90071.
Donnalisa Barnum, Senior Vice President of Capital Guardian Trust Company. Vice
President, Capital International Limited.
Andrew F. Barth, Director of Capital Guardian Trust Company. Executive Vice
President and Research Manager, Capital Guardian Research Company.
Michael D. Beckman, Senior Vice President, Treasurer and Director of Capital
Guardian Trust Company. Director, Capital Guardian Trust Company of Nevada; and
Treasurer, Capital Guardian Research Company.
Elizabeth A. Burns, Senior Vice President of Capital Guardian Trust Company.
Larry P. Clemmensen, Director of Capital Guardian Trust Company and American
Funds Distributors, Inc. Chairman of the Board, American Funds Service Company;
Director and President, The Capital Group Companies, Inc.; Senior Vice
President and Director, Capital Research and Management Company; President and
Director, Capital Management Services, Inc.; Treasurer, Capital Strategy
Research, Inc.; and Senior Vice President, Capital Income Builder, Inc. and
Capital World Growth & Income Fund, Inc.
Roberta A. Conroy, Senior Vice President, Director and Counsel of Capital
Guardian Trust Company. Senior Vice President and Secretary, Capital
International, Inc. and Emerging Markets Growth Fund, Inc.; Assistant General
Counsel, The Capital Group Companies, Inc.; and Secretary. Capital Management
Services, Inc.
John B. Emerson, Senior Vice President of Capital Guardian Trust Company.
Deputy Assistant to the President for Intergovernmental Affairs and Deputy
Director of Presidential Personnel, The White House.
Michael E. Ericksen, Senior Vice President of Capital Guardian Trust Company.
Senior Vice President, Capital International, Limited.
David I. Fisher, Chairman and Director of The Capital Group Companies, Inc. and
Capital Guardian Trust Company. Vice Chairman and Director, Capital
International, Inc., Capital International K.K., Capital International Limited
and Emerging Markets Growth Fund, Inc.; President and Director, Capital Group
International, Inc. and Capital International Limited (Bermuda); Presidente du
Conseil, Capital International S.A.; and Director, Capital Group Research,
Inc., Capital Research International, EuroPacific Growth Fund and New
Perspective Fund.
William Flumenbaum, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Vice President, Capital Guardian Trust
Company, a Nevada Corporation; Director, Principal Gifts - UCLA Development;
Executive Director, UCLA Jonsson Cancer Center Foundation; and Deputy Director,
UCLA Health Science Development.
Richard N. Havas, Senior Vice President of Capital Guardian Trust Company,
Capital International Limited, Capital Research International and Capital
Guardian Canada, Inc.
Frederick M. Hughes, Jr., Senior Vice President of Capital Guardian Trust
Company.
William H. Hurt, Senior Vice President and Director of Capital Guardian Trust
Company. Chairman, Capital Guardian Trust Company of Nevada and Capital
Strategy Research, Inc.
Robert G. Kirby, Chairman Emeritus of Capital Guardian Trust Company. Senior
Partner, The Capital Group Partners L.P.
Nancy J. Kyle, Senior Vice President and Director of Capital Guardian Trust
Company. President, Capital Guardian Canada, Inc. and Vice President, Emerging
Markets Growth Fund, Inc.
Karin L. Larson, Director of Capital Guardian Trust Company and The Capital
Group Companies, Inc. President, Director and Director of Research, Capital
Guardian Research Company; Chairperson, President and Director, Capital Group
Research, Inc.; and President, Director and Director of International Research,
Capital Research International.
D. James Martin, Director of Capital Guardian Trust Company. Senior Vice
President and Director, Capital Guardian Research Company.
John R. McIlwraith, Senior Vice President and Director of Capital Guardian
Trust Company. Senior Vice President and Director, Capital International
Limited.
James R. Mulally, Senior Vice President and Director of Capital Guardian Trust
Company. Senior Vice President, Capital International Limited; Director,
Capital Guardian Research Company; and Vice President, Capital Research
Company.
Shelby Notkin, Senior Vice President of Capital Guardian Trust Company.
Director, Capital Guardian Trust Company of Nevada.
Mary M. O'Hern, Senior Vice President of Capital Guardian Trust Company and
Capital International Limited; Vice President, Capital International, Inc.
Jeffrey C. Paster, Senior Vice President of Capital Guardian Trust Company.
Robert V. Pennington, Senior Vice President of Capital Guardian Trust Company;
President, Capital Guardian Trust Company of Nevada.
Jason M. Pilalas, Director of Capital Guardian Trust Company. Senior Vice
President and Director, Capital Guardian Research Company.
Robert Ronus, President and Director of Capital Guardian Trust Company.
Chairman and Director, Capital Guardian Canada, Inc., Capital Guardian Research
Company and Capital Research International; Director, The Capital Group
Companies, Inc., Capital Group International, Inc. and Capital International
Fund S.A.; Directeur, Capital International S.A.; and Senior Vice President,
Capital International Limited.
Theodore R. Samuels, Senior Vice President and Director of Capital Guardian
Trust Company. Director, Capital Guardian Research Company.
Lionel A. Sauvage, Senior Vice President of Capital Guardian Trust Company.
Director, Capital Guardian Research Company; and Vice President, Capital
International Research, Inc.
John H. Seiter, Executive Vice President of Client Relations & Marketing and
Director of Capital Guardian Trust Company. Senior Vice President, Capital
Group International, Inc.; and Vice President, The Capital Group Companies,
Inc.
Robert L. Spare, Senior Vice President of Capital Guardian Trust Company.
Eugene P. Stein, Executive Vice President and Director of Capital Guardian
Trust Company. Director, Capital Guardian Research Company.
Bente L. Strong, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Publisher, Capital Publishing's The
American Benefactor Magazine.
Philip A. Swan, Senior Vice President of Capital Guardian Trust Company.
Shaw B. Wagener, Director of Capital Guardian Trust Company, Capital
International Asia Pacific Management Company, S.A., Capital International
Management Company, Capital International Emerging Countries Fund and Capital
International Latin American Fund. President and Director, Capital
International, Inc.; and Senior Vice President, Capital Group International,
Inc. and Emerging Markets Growth Fund, Inc.
Eugene M. Waldron, Senior Vice President of Capital Guardian Trust Company.
Vice President, Loomis, Sayles & Company.
N. Dexter Williams, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Senior Vice President, American Funds
Distributors, Inc.
Item 27. Principal Underwriters.
(a) Directed Services, Inc. serves as Distributor of Shares of The GCG
Trust.
(b) The following officers of Directed Services, Inc. hold positions
with the registrant: Barnett Chernow, Vice President, and Myles
R. Tashman, Secretary.
<TABLE>
<S> <C> <C>
NAME and PRINCIPAL POSITIONS and OFFICES POSITIONS and OFFICES
BUSINESS ADDRESS with UNDERWRITER with FUND
Barnett Chernow Director and Executive President, Chairman and
Golden American Life Vice President Trustee
Insurance Co.
1475 Dunwoody Drive
West Chester, PA 19380
Myles R. Tashman Director, Executive Vice Secretary
Golden American Life President, Secretary and
Insurance Co. General Counsel
1475 Dunwoody Drive
West Chester, PA 19380
</TABLE>
(c) Not Applicable (Underwriter Receives No Compensation)
Item 28. 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 1475 Dunwoody Drive, West Chester, Pennsylvania
19380-1478. The Trust's books of account are also kept at the offices
of First Data Corp. 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
Pennsylvania 19406-0903.
Item 29. Management Services.
There are no management-related service contracts not discussed
in Part A or Part B.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 42 to the Registration Statement on Form N-1A (File No. 33-23512)
to be signed on its behalf by the undersigned, thereto duly authorized, in
the City of West Chester, and the Commonwealth of Pennsylvania, on February
29, 2000.
THE GCG TRUST
(Registrant)
--------------------------
Barnett Chernow*
President
*By: /s/Marilyn Talman
---------------------
Marilyn Talman
as Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 42 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 February 29, 2000.
Signature Title
Chairman, President and
Trustee
- ----------------------
Barnett Chernow*
Trustee
- ----------------------
John R. Barmeyer*
Trustee
- ----------------------
J. Michael Earley
Trustee
- ----------------------
R. Barbara Gitenstein*
Trustee
- ----------------------
Robert A. Grayson*
Trustee
- ----------------------
Elizabeth J. Newell*
Trustee
- ----------------------
Stanley B. Seidler*
Trustee
- ----------------------
Roger B. Vincent*
*By: /s/ Marilyn Talman
-----------------------
Marilyn Talman
as Attorney-in-Fact
<PAGE>
<PAGE>
EXHIBIT INDEX
Number Exhibit Name Exhibit
- ------ ------------ -------
(d)(2)(L) Portfolio Management Agreement with Salomon Smith EX99.d2l
Barney Asset Management, Inc.
(d)(2)(M) Portfolio Management Agreement with Capital Guardian EX99.d2m
Trust Company
(d)(2)(N) Portfolio Management Agreement with The Prudential EX99.d2n
Investment Corporation
(d)(2)(O) Addendum to the A I M Capital Management, Inc. Agreement EX99.d2o
(d)(2)(P) Addendum to the Baring International Investment Limited EX99.d2p
Agreement
(d)(2)(Q) Addendum to the Capital Guardian Trust Company EX99.d2q
Agreement
(g) Custodial Agreement with Bank of New York EX99.g
(h)(2)(J) Addendum to the Organizational Agreement adding EX99.h2j
International Equity Series and the Large Cap
Value Series 2/16/99
(h)(2)(K) Addendum to the Organizational Agreement adding EX99.h2k
Investors Series, All Cap Series and the
Large Cap Growth Series 6/15/99
(i) Consent of Sutherland Asbill & Brennan LLP EX99.i
(j) Consent of Ernst & Young LLP EX99.j
(p)(1) Powers of Attorney EX99.p1
<PAGE>
EXHIBIT (d)(2)(L)
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT made this 1st day of January, 2000, among The GCG Trust
(the "Trust"), a Massachusetts business trust, Directed Services, Inc.
(the "Manager"), a New York corporation, and Salomon Brothers Asset
Management Inc. ("Portfolio Manager"), a Delaware corporation.
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end, management investment
company;
WHEREAS, the Trust is authorized to issue separate series, each of
which will offer a separate class of shares of beneficial interest, each
series having its own investment objective or objectives, policies, and
limitations;
WHEREAS, the Trust currently offers shares in multiple series, may
offer shares of additional series in the future, and intends to offer
shares of additional series in the future;
WHEREAS, pursuant to a Management Agreement, effective as of October
24, 1997, a copy of which has been provided to the Portfolio Manager, the
Trust has retained the Manager to render advisory, management, and
administrative services to many of the Trust's series;
WHEREAS, the Trust and the Manager wish to retain the Portfolio
Manager to furnish investment advisory services to one or more of the
series of the Trust, and the Portfolio Manager is willing to furnish such
services to the Trust and the Manager;
NOW THEREFORE, in consideration of the premises and the promises and
mutual covenants herein contained, it is agreed between the Trust, the
Manager, and the Portfolio Manager as follows:
1. APPOINTMENT. The Trust and the Manager hereby appoint Salomon
Brothers Asset management Inc. to act as Portfolio Manager to the Series
designated on Schedule A of this Agreement (each a "Series") for the
periods and on the terms set forth in this Agreement. The Portfolio
Manager accepts such appointment and agrees to furnish the services
herein set forth for the compensation herein provided.
In the event the Trust designates one or more series other than the
Series with respect to which the Trust and the Manager wish to retain the
Portfolio Manager to render investment advisory services hereunder, they
shall promptly notify the Portfolio Manager in writing. If the Portfolio
Manager is willing to render such services, it shall so notify the Trust
and Manager in writing, whereupon such series shall become a Series
hereunder, and be subject to this Agreement.
2. PORTFOLIO MANAGEMENT DUTIES. Subject to the supervision of the
Trust's Board of Trustees and the Manager, the Portfolio Manager will
provide a continuous investment
<PAGE>
<PAGE>
program for each Series' portfolio and determine the
composition of the assets of each Series' portfolio, including
determination of the purchase, retention, or sale of the securities,
cash, and other investments contained in the portfolio. The
Portfolio Manager will provide investment research and conduct a
continuous program of evaluation, investment, sales, and reinvestment of
each Series' assets by determining the securities and other investments
that shall be purchased, entered into, sold, closed, or exchanged for the
Series, when these transactions should be executed, and what portion of
the assets of each Series should be held in the various securities and
other investments in which it may invest, and the Portfolio Manager is
hereby authorized to execute and perform such services on behalf of each
Series. To the extent permitted by the investment policies of the
Series, the Portfolio Manager shall make decisions for the Series as to
foreign currency matters and make determinations as to and execute and
perform foreign currency exchange contracts on behalf of the Series. The
Portfolio Manager will provide the services under this Agreement in
accordance with the Series' investment objective or objectives, policies,
and restrictions as stated in the Trust's Registration Statement filed
with the Securities and Exchange Commission (the "SEC"), as from time to
time amended, copies of which shall be sent to the Portfolio Manager by
the Manager upon filing with the SEC. The Portfolio Manager further
agrees as follows:
(a) The Portfolio Manager will (1) manage each Series so that no
action or omission on the part of the Portfolio Manager will cause a
Series to fail to meet the requirements to qualify as a regulated
investment company specified in Section 851 of the Internal Revenue Code
(other than the requirements for the Trust to register under the 1940 Act
and to file with its tax return an election to be a regulated investment
company, both of which shall not be the responsibility of the Portfolio
Manager), (2) manage each Series so that no action or omission on the
part of the Portfolio Manager shall cause a Series to fail to comply with
the diversification requirements of Section 817(h) of the Internal
Revenue Code and regulations issued thereunder, and (3) use reasonable
efforts to manage the Series so that no action or omission on the part of
the Portfolio Manager shall cause a Series to fail to comply with any
other rules and regulations pertaining to investment vehicles underlying
variable annuity or variable life insurance policies. The Manager will
notify the Portfolio Manager promptly if the Manager believes that a
Series is in violation of any requirement specified in the first sentence
of this paragraph. The Manager or the Trust will notify the Portfolio
Manager of any pertinent changes, modifications to, or interpretations of
Section 817(h) of the Internal Revenue Code and regulations issued
thereunder and of rules or regulations pertaining to investment vehicles
underlying variable annuity or variable life insurance policies.
(b) The Portfolio Manager will perform its duties hereunder
pursuant to the 1940 Act and all rules and regulations thereunder, all
other applicable federal and state laws and regulations, with any
applicable procedures adopted by the Trust's Board of Trustees of which
the Portfolio Manager has been notified in writing, and the provisions of
the Registration Statement of the Trust under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as supplemented or amended, of which
the Portfolio Manager has received a copy ("Registration Statement").
The Manager or the Trust will notify the Portfolio Manager of pertinent
provisions of applicable state insurance law with which the Portfolio
Manager must comply under this Paragraph 2(b).
2
<PAGE>
<PAGE>
(c) On occasions when the Portfolio Manager deems the purchase or
sale of a security to be in the best interest of a Series as well as of
other investment advisory clients of the Portfolio Manager or any of its
affiliates, the Portfolio Manager may, to the extent permitted by
applicable laws and regulations, but shall not be obligated to, aggregate
the securities to be so sold or purchased with those of its other clients
where such aggregation is not inconsistent with the policies set forth in
the Registration Statement. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Portfolio Manager in a manner that is
fair and equitable in the judgment of the Portfolio Manager in the
exercise of its fiduciary obligations to the Trust and to such other
clients, subject to review by the Manager and the Board of Trustees.
(d) In connection with the purchase and sale of securities for a
Series, the Portfolio Manager will arrange for the transmission to the
custodian and portfolio accounting agent for the Series on a daily basis,
such confirmation, trade tickets, and other documents and information,
including, but not limited to, Cusip, Sedol, or other numbers that
identify securities to be purchased or sold on behalf of the Series, as
may be reasonably necessary to enable the custodian and portfolio
accounting agent to perform its administrative and recordkeeping
responsibilities with respect to the Series. With respect to portfolio
securities to be purchased or sold through the Depository Trust Company,
the Portfolio Manager will arrange for the automatic transmission of the
confirmation of such trades to the Trust's custodian and portfolio
accounting agent.
(e) The Portfolio Manager will assist the portfolio accounting
agent for the Trust in determining or confirming, consistent with the
procedures and policies stated in the Registration Statement for the
Trust, the value of any portfolio securities or other assets of the
Series for which the portfolio accounting agent seeks assistance from or
identifies for review by the Portfolio Manager, and the parties agree
that the Portfolio Manager shall not bear responsibility or liability for
the determination or accuracy of the valuation of any portfolio
securities and other assets of the Series except to the extent that the
Portfolio Manager exercises judgment with respect to any such valuation.
(f) The Portfolio Manager will make available to the Trust and the
Manager, promptly upon request, all of the Series' investment records and
ledgers maintained by the Portfolio Manager (which shall not include the
records and ledgers maintained by the custodian and portfolio accounting
agent for the Trust) as are necessary to assist the Trust and the Manager
to comply with requirements of the 1940 Act and the Investment Advisers
Act of 1940 (the "Advisers Act"), as well as other applicable laws. The
Portfolio Manager will furnish to regulatory authorities having the
requisite authority any information or reports in connection with such
services which may be requested in order to ascertain whether the
operations of the Trust are being conducted in a manner consistent with
applicable laws and regulations.
3
<PAGE>
<PAGE>
(g) The Portfolio Manager will provide reports to the Trust's Board
of Trustees for consideration at meetings of the Board on the investment
program for the Series and the issuers and securities represented in the
Series' portfolio, and will furnish the Trust's Board of Trustees with
respect to the Series such periodic and special reports as the Trustees
and the Manager may reasonably request.
(h) In rendering the services required under this Agreement, the
Portfolio Manager may, from time to time, employ or associate with itself
such person or persons as it believes necessary to assist it in carrying
out its obligations under this Agreement. However, the Portfolio Manager
may not retain as subadviser any company that would be an "investment
adviser," as that term is defined in the 1940 Act, to the Series unless
the contract with such company is approved by a majority of the Trust's
Board of Trustees and a majority of Trustees who are not parties to any
agreement or contract with such company and who are not "interested
persons," as defined in the 1940 Act, of the Trust, the Manager, or the
Portfolio Manager, or any such company that is retained as subadviser,
and is approved by the vote of a majority of the outstanding voting
securities of the applicable Series of the Trust to the extent required
by the 1940 Act. The Portfolio Manager shall be responsible for making
reasonable inquiries and for reasonably ensuring that any employee of the
Portfolio Manager, any subadviser that the Portfolio Manager has employed
or with which it has associated with respect to the Series, or any
employee thereof has not, to the best of the Portfolio Manager's
knowledge, in any material connection with the handling of Trust assets:
(i) been convicted, in the last ten (10) years, of any felony or
misdemeanor arising out of conduct involving embezzlement,
fraudulent conversion, or misappropriation of funds or securities,
involving violations of Sections 1341, 1342, or 1343 of Title 18,
United States Code, or involving the purchase or sale of any
security; or
(ii) been found by any state regulatory authority, within the last
ten (10) years, to have violated or to have acknowledged violation
of any provision of any state insurance law involving fraud, deceit,
or knowing misrepresentation; or
(iii) been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have
acknowledged violation of any provision of federal or state
securities laws involving fraud, deceit, or knowing
misrepresentation.
3. BROKER-DEALER SELECTION. The Portfolio Manager is responsible
for decisions to buy and sell securities and other investments for each
Series' portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. The Portfolio Manager's primary consideration in
effecting a security transaction will be to obtain the best execution for
the Series, taking into account the factors specified in the prospectus
and/or statement of additional information for the Trust, which include
price (including the applicable brokerage commission or dollar spread),
the size of the 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, and the execution capabilities and operational
facilities of the firms involved, and the firm's risk in positioning a
block of securities.
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Accordingly, the price to the Series in any transaction may
be less favorable than that available from another broker-dealer
if the difference is reasonably justified, in the judgment of the
Portfolio Manager in the exercise of its fiduciary obligations to the
Trust, by other aspects of the portfolio execution services offered.
Subject to such policies as the Board of Trustees may determine and
consistent with Section 28(e) of the Securities Exchange Act of 1934, the
Portfolio Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason
of its having caused the Series to pay a broker-dealer for effecting a
portfolio investment transaction in excess of the amount of commission
another broker-dealer would have charged for effecting that transaction,
if the Portfolio Manager or its affiliate determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in
terms of either that particular transaction or the Portfolio Manager's or
its affiliate's overall responsibilities with respect to the Series and
to their other clients as to which they exercise investment discretion.
To the extent consistent with these standards, the Portfolio Manager is
further authorized to allocate the orders placed by it on behalf of the
Series to the Portfolio Manager if it is registered as a broker-dealer
with the SEC, to its affiliated broker-dealer, or to such brokers and
dealers who also provide research or statistical material, or other
services to the Series, the Portfolio Manager, or an affiliate of the
Portfolio Manager. Such allocation shall be in such amounts and
proportions as the Portfolio Manager shall determine consistent with the
above standards, and the Portfolio Manager will report on said allocation
regularly to the Board of Trustees of the Trust indicating the broker-
dealers to which such allocations have been made and the basis therefor.
4. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager has
reviewed the post-effective amendment to the Registration Statement for
the Trust filed with the SEC that contains disclosure about the Portfolio
Manager, and represents and warrants that, with respect to the disclosure
about or information relating, directly or indirectly, to the Portfolio
Manager, to the Portfolio Manager's knowledge, such Registration
Statement contains, as of the date hereof, no untrue statement of any
material fact and does not omit any statement of a material fact which
was required to be stated therein or necessary to make the statements
contained therein not misleading. The Portfolio Manager further
represents and warrants that it is a duly registered investment adviser
under the Advisers Act, or alternatively that it is not required to be a
registered investment adviser under the Advisers Act to perform the
duties described in this Agreement, and that it is a duly registered
investment adviser in all states in which the Portfolio Manager is
required to be registered.
5. EXPENSES. During the term of this Agreement, the Portfolio
Manager will pay all expenses incurred by it and its staff and for their
activities in connection with its portfolio management duties under this
Agreement. The Manager or the Trust shall be responsible for all the
expenses of the Trust's operations including, but not limited to:
(a) Expenses of all audits by the Trust's independent public
accountants;
(b) Expenses of the Series' transfer agent, registrar, dividend
disbursing agent, and shareholder recordkeeping services;
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(c) Expenses of the Series' custodial services including
recordkeeping services provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of
each Series' net assets;
(e) Expenses of obtaining Portfolio Activity Reports and Analyses
of International Management Reports (as appropriate) for each Series;
(f) Expenses of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors,
stockholders, or employees of the Portfolio Manager or an affiliate of
the Portfolio Manager;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Series;
(j) Costs, including the interest expense, of borrowing money;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses and reports of
the Trust to its shareholders, the filing of reports with regulatory
bodies, the maintenance of the Trust's existence, and the regulation of
shares with federal and state securities or insurance authorities;
(l) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing stock certificates representing shares of the
Trust;
(n) Trustees' fees and expenses to trustees who are not officers,
employees, or stockholders of the Portfolio Manager or any affiliate
thereof;
(o) The Trust's pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or other insurance premiums;
(p) Association membership dues;
(q) Extraordinary expenses of the Trust as may arise including
expenses incurred in connection with litigation, proceedings, and other
claims (unless the Portfolio Manager is responsible for such expenses
under Section 14 of this Agreement), and the legal obligations of
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the Trust to indemnify its Trustees, officers, employees, shareholders,
distributors, and agents with respect thereto; and
(r) Organizational and offering expenses.
6. COMPENSATION. For the services provided, the Manager will pay
the Portfolio Manager a fee, payable as described in Schedule B.
7. SEED MONEY. The Manager agrees that the Portfolio Manager shall
not be responsible for providing money for the initial capitalization of
the Series.
8. COMPLIANCE.
(a) The Portfolio Manager agrees that it shall promptly notify the
Manager and the Trust (1) in the event that the SEC or other governmental
authority has censured the Portfolio Manager; placed limitations upon its
activities, functions or operations; suspended or revoked its
registration, if any, as an investment adviser; or has commenced
proceedings or an investigation that may result in any of these actions,
(2) upon having a reasonable basis for believing that the Series has
ceased to qualify or might not qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code, or (3) upon having a
reasonable basis for believing that the Series has ceased to comply with
the diversification provisions of Section 817(h) of the Internal Revenue
Code or the regulations thereunder. The Portfolio Manager further agrees
to notify the Manager and the Trust promptly of any material fact known
to the Portfolio Manager respecting or relating to the Portfolio Manager
that is not contained in the Registration Statement or prospectus for the
Trust, or any amendment or supplement thereto, and is required to be
stated therein or necessary to make the statements therein not
misleading, or of any statement contained therein that becomes untrue in
any material respect.
(b) The Manager agrees that it shall immediately notify the
Portfolio Manager (1) in the event that the SEC has censured the Manager
or the Trust; placed limitations upon either of their activities,
functions, or operations; suspended or revoked the Manager's registration
as an investment adviser; or has commenced proceedings or an
investigation that may result in any of these actions, (2) upon having a
reasonable basis for believing that the Series has ceased to qualify or
might not qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code, or (3) upon having a reasonable basis for
believing that the Series has ceased to comply with the diversification
provisions of Section 817(h) of the Internal Revenue Code or the
Regulations thereunder.
9. BOOKS AND RECORDS. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Portfolio Manager hereby agrees that all
records which it maintains for the Series are the property of the Trust
and further agrees to surrender promptly to the Trust any of such records
upon the Trust's or the Manager's request, although the Portfolio Manager
may, at its own expense, make and retain a copy of such records. The
Portfolio Manager further agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act the records required to
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be maintained by Rule 31a-l under the 1940 Act and to preserve the records
required by Rule 204-2 under the Advisers Act for the period specified
in the Rule.
10. COOPERATION. Each party to this Agreement agrees to cooperate
with each other party and with all appropriate governmental authorities
having the requisite jurisdiction (including, but not limited to, the SEC
and state insurance regulators) in connection with any investigation or
inquiry relating to this Agreement or the Trust.
11. REPRESENTATIONS RESPECTING PORTFOLIO MANAGER.
(a) During the term of this Agreement, the Trust and the Manager
agree to furnish to the Portfolio Manager at its principal offices prior
to use thereof copies of all Registration Statements and amendments
thereto, prospectuses, proxy statements, reports to shareholders, sales
literature or other material prepared for distribution to shareholders of
the Trust or any Series or to the public that refer or relate in any way
to the Portfolio Manager or any of its affiliates (other than the
Manager), or that use any derivative of the name of the Portfolio Manager
any of its affiliates or any logo associated therewith. The Trust and
the Manager agree that they will not use any such material without the
prior consent of the Portfolio Manager, which consent shall not be
unreasonably withheld. In the event of the termination of this
Agreement, the Trust and the Manager will furnish to the Portfolio
Manager copies of any of the above-mentioned materials that refer or
relate in any way to the Portfolio Manager;
(b) the Trust and the Manager will furnish to the Portfolio Manager
such information relating to either of them or the business affairs of
the Trust as the Portfolio Manager shall from time to time reasonably
request in order to discharge its obligations hereunder;
(c) the Manager and the Trust agree that neither the Trust, the
Manager, nor affiliated persons of the Trust or the Manager shall give
any information or make any representations or statements in connection
with the sale of shares of the Series concerning the Portfolio Manager or
the Series other than the information or representations contained in the
Registration Statement, prospectus, or statement of additional
information for the Trust, as they may be amended or supplemented from
time to time, or in reports or proxy statements for the Trust, or in
sales literature or other promotional material approved in advance by the
Portfolio Manager, except with the prior permission of the Portfolio
Manager.
12. CONTROL. Notwithstanding any other provision of the Agreement,
it is understood and agreed that the Trust shall at all times retain the
ultimate responsibility for and control of all functions performed
pursuant to this Agreement and reserve the right to direct, approve, or
disapprove any action hereunder taken on its behalf by the Portfolio
Manager.
13. SERVICES NOT EXCLUSIVE. It is understood that the services of
the Portfolio Manager are not exclusive, and nothing in this Agreement
shall prevent the Portfolio Manager (or its affiliates) from providing
similar services to other clients, including investment companies
(whether or not their investment objectives and policies are similar to
those of the Series) or from engaging in other activities.
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14. LIABILITY. Except as may otherwise be required by the 1940 Act
or the rules thereunder or other applicable law, the Trust and the
Manager agree that the Portfolio Manager, any affiliated person of the
Portfolio Manager, and each person, if any, who, within the meaning of
Section 15 of the 1933 Act, controls the Portfolio Manager shall not be
liable for, or subject to any damages, expenses, or losses in connection
with, any act or omission connected with or arising out of any services
rendered under this Agreement, except by reason of willful misfeasance,
bad faith, or gross negligence in the performance of the Portfolio
Manager's duties, or by reason of reckless disregard of the Portfolio
Manager's obligations and duties under this Agreement.
15. INDEMNIFICATION.
(a) Notwithstanding Section 14 of this Agreement, the Manager
agrees to indemnify and hold harmless the Portfolio Manager, any
affiliated person of the Portfolio Manager (other than the Manager), and
each person, if any, who, within the meaning of Section 15 of the 1933
Act controls ("controlling person") the Portfolio Manager (all of such
persons being referred to as "Portfolio Manager Indemnified Persons")
against any and all losses, claims, damages, liabilities, or litigation
(including legal and other expenses) to which a Portfolio Manager
Indemnified Person may become subject under the 1933 Act, the 1940 Act,
the Advisers Act, the Internal Revenue Code, under any other statute, at
common law or otherwise, arising out of the Manager's responsibilities to
the Trust which (1) may be based upon any misfeasance, malfeasance, or
nonfeasance by the Manager, any of its employees or representatives or
any affiliate of or any person acting on behalf of the Manager or (2) may
be based upon any untrue statement or alleged untrue statement of a
material fact supplied by, or which is the responsibility of, the Manager
and contained in the Registration Statement or prospectus covering shares
of the Trust or a Series, or any amendment thereof or any supplement
thereto, or the omission or alleged omission to state therein a material
fact known or which should have been known to the Manager and was
required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance
upon information furnished to the Manager or the Trust or to any
affiliated person of the Manager by a Portfolio Manager Indemnified
Person; provided however, that in no case shall the indemnity in favor of
the Portfolio Manager Indemnified Person be deemed to protect such person
against any liability to which any such person would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of
obligations and duties under this Agreement.
(b) Notwithstanding Section 14 of this Agreement, the Portfolio
Manager agrees to indemnify and hold harmless the Manager, any affiliated
person of the Manager (other than the Portfolio Manager), and each
person, if any, who, within the meaning of Section 15 of the 1933 Act,
controls ("controlling person") the Manager (all of such persons being
referred to as "Manager Indemnified Persons") against any and all losses,
claims, damages, liabilities, or litigation (including legal and other
expenses) to which a Manager Indemnified Person may become subject under
the 1933 Act, 1940 Act, the Advisers Act, the Internal Revenue Code,
under any other statute, at common law or otherwise, arising out of the
Portfolio Manager's
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responsibilities as Portfolio Manager of the Series which
(1) may be based upon any misfeasance, malfeasance, or nonfeasance
by the Portfolio Manager, any of its employees or representatives, or any
affiliate of or any person acting on behalf of the Portfolio Manager, (2)
may be based upon a failure to comply with Section 2, Paragraph (a) of
this Agreement, or (3) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or prospectus covering the shares of the Trust or a Series, or
any amendment or supplement thereto, or the omission or alleged omission
to state therein a material fact known or which should have been known to
the Portfolio Manager and was required to be stated therein or necessary
to make the statements therein not misleading, if such a statement or
omission was made in reliance upon information furnished to the Manager,
the Trust, or any affiliated person of the Manager or Trust by the
Portfolio Manager or any affiliated person of the Portfolio Manager;
provided, however, that in no case shall the indemnity in favor of a
Manager Indemnified Person be deemed to protect such person against any
liability to which any such person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence in the performance of
its duties, or by reason of its reckless disregard of its obligations and
duties under this Agreement.
(c) The Manager shall not be liable under Paragraph (a) of this
Section 15 with respect to any claim made against a Portfolio Manager
Indemnified Person unless such Portfolio Manager Indemnified Person shall
have notified the Manager in writing within a reasonable time after the
summons, notice, or other first legal process or notice giving
information of the nature of the claim shall have been served upon such
Portfolio Manager Indemnified Person (or after such Portfolio Manager
Indemnified Person shall have received notice of such service on any
designated agent), but failure to notify the Manager of any such claim
shall not relieve the Manager from any liability which it may have to the
Portfolio Manager Indemnified Person against whom such action is brought
otherwise than on account of this Section 15. In case any such action is
brought against the Portfolio Manager Indemnified Person, the Manager
will be entitled to participate, at its own expense, in the defense
thereof or, after notice to the Portfolio Manager Indemnified Person, to
assume the defense thereof, with counsel satisfactory to the Portfolio
Manager Indemnified Person. If the Manager assumes the defense of any
such action and the selection of counsel by the Manager to represent both
the Manager and the Portfolio Manager Indemnified Person would result in
a conflict of interests and therefore, would not, in the reasonable
judgment of the Portfolio Manager Indemnified Person, adequately
represent the interests of the Portfolio Manager Indemnified Person, the
Manager will, at its own expense, assume the defense with counsel to the
Manager and, also at its own expense, with separate counsel to the
Portfolio Manager Indemnified Person, which counsel shall be satisfactory
to the Manager and to the Portfolio Manager Indemnified Person. The
Portfolio Manager Indemnified Person shall bear the fees and expenses of
any additional counsel retained by it, and the Manager shall not be
liable to the Portfolio Manager Indemnified Person under this Agreement
for any legal or other expenses subsequently incurred by the Portfolio
Manager Indemnified Person independently in connection with the defense
thereof other than reasonable costs of investigation. The Manager shall
not have the right to compromise on or settle the litigation without the
prior written consent of the Portfolio Manager Indemnified Person if the
compromise or settlement results, or may result in a finding of
wrongdoing on the part of the Portfolio Manager Indemnified Person.
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(d) The Portfolio Manager shall not be liable under Paragraph (b)
of this Section 15 with respect to any claim made against a Manager
Indemnified Person unless such Manager Indemnified Person shall have
notified the Portfolio Manager in writing within a reasonable time after
the summons, notice, or other first legal process or notice giving
information of the nature of the claim shall have been served upon such
Manager Indemnified Person (or after such Manager Indemnified Person
shall have received notice of such service on any designated agent), but
failure to notify the Portfolio Manager of any such claim shall not
relieve the Portfolio Manager from any liability which it may have to the
Manager Indemnified Person against whom such action is brought otherwise
than on account of this Section 15. In case any such action is brought
against the Manager Indemnified Person, the Portfolio Manager will be
entitled to participate, at its own expense, in the defense thereof or,
after notice to the Manager Indemnified Person, to assume the defense
thereof, with counsel satisfactory to the Manager Indemnified Person. If
the Portfolio Manager assumes the defense of any such action and the
selection of counsel by the Portfolio Manager to represent both the
Portfolio Manager and the Manager Indemnified Person would result in a
conflict of interests and therefore, would not, in the reasonable
judgment of the Manager Indemnified Person, adequately represent the
interests of the Manager Indemnified Person, the Portfolio Manager will,
at its own expense, assume the defense with counsel to the Portfolio
Manager and, also at its own expense, with separate counsel to the
Manager Indemnified Person which counsel shall be satisfactory to the
Portfolio Manager and to the Manager Indemnified Person. The Manager
Indemnified Person shall bear the fees and expenses of any additional
counsel retained by it, and the Portfolio Manager shall not be liable to
the Manager Indemnified Person under this Agreement for any legal or
other expenses subsequently incurred by the Manager Indemnified Person
independently in connection with the defense thereof other than
reasonable costs of investigation. The Portfolio Manager shall not have
the right to compromise on or settle the litigation without the prior
written consent of the Manager Indemnified Person if the compromise or
settlement results, or may result in a finding of wrongdoing on the part
of the Manager Indemnified Person.
(e) The Manager shall not be liable under this Section 15 to
indemnify and hold harmless the Portfolio Manager and the Portfolio
Manager shall not be liable under this Section 15 to indemnify and hold
harmless the Manager with respect to any losses, claims, damages,
liabilities, or litigation that first become known to the party seeking
indemnification during any period that the Portfolio Manager is, within
the meaning of Section 15 of the 1933 Act, a controlling person of the
Manager.
16. DURATION AND TERMINATION. This Agreement shall become
effective on the date first indicated above. Unless terminated as
provided herein, the Agreement shall remain in full force and effect for
two (2) years from such date and continue on an annual basis thereafter
with respect to each Series; provided that such annual continuance is
specifically approved each year by (a) the vote of a majority of the
entire Board of Trustees of the Trust, or by the vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of each
Series, and (b) the vote of a majority of those Trustees who are not
parties to this Agreement or interested persons (as such term is defined
in the 1940 Act) of any such party to this Agreement cast in person at a
meeting called for the purpose of voting on such approval.
The Portfolio Manager
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shall not provide any services for such Series or receive any
fees on account of such Series with respect to which this Agreement is
not approved as described in the preceding sentence. However, any
approval of this Agreement by the holders of a majority of the
outstanding shares (as defined in the 1940 Act) of a Series shall be
effective to continue this Agreement with respect to such Series
notwithstanding (i) that this Agreement has not been approved by the
holders of a majority of the outstanding shares of any other Series or
(ii) that this agreement has not been approved by the vote of a majority
of the outstanding shares of the Trust, unless such approval shall be
required by any other applicable law or otherwise. Notwithstanding the
foregoing, this Agreement may be terminated for each or any Series
hereunder: (a) by the Manager at any time without penalty, upon sixty
(60) days' written notice to the Portfolio Manager and the Trust, (b) at
any time without payment of any penalty by the Trust, upon the vote of a
majority of the Trust's Board of Trustees or a majority of the
outstanding voting securities of each Series, upon sixty (60) day's
written notice to the Manager and the Portfolio Manager, or (c) by the
Portfolio Manager at any time without penalty, upon sixty (60) days
written notice to the Manager and the Trust. In addition, this Agreement
shall terminate with respect to a Series in the event that it is not
initially approved by the vote of a majority of the outstanding voting
securities of that Series at a meeting of shareholders at which approval
of the Agreement shall be considered by shareholders of the Series. In
the event of termination for any reason, all records of each Series for
which the Agreement is terminated shall promptly be returned to the
Manager or the Trust, free from any claim or retention of rights in such
records by the Portfolio Manager, although the Portfolio Manager may, at
its own expense, make and retain a copy of such records. The Agreement
shall automatically terminate in the event of its assignment (as such
term is described in the 1940 Act). In the event this Agreement is
terminated or is not approved in the manner described above, the Sections
or Paragraphs numbered 2(f), 9, 10, 11, 14, 15, and 18 of this Agreement
shall remain in effect, as well as any applicable provision of this
Paragraph numbered 16.
17. AMENDMENTS. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change,
waiver, discharge or termination is sought, and no amendment of this
Agreement shall be effective until approved by an affirmative vote of (i)
the holders of a majority of the outstanding voting securities of the
Series, and (ii) the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting
on such approval, if such approval is required by applicable law.
18. USE OF NAME.
(a) It is understood that the name "Directed Services, Inc." or any
derivative thereof or logo associated with that name is the valuable
property of the Manager and/or its affiliates, and that the Portfolio
Manager has the right to use such name (or derivative or logo) only with
the approval of the Manager and only so long as the Manager is Manager to
the Trust and/or the Series. Upon termination of the Management
Agreement between the Trust and the Manager, the Portfolio Manager shall
as soon as is reasonably possible cease to use such name (or derivative
or logo).
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(b) It is understood that the name "Salomon Brothers Asset
Management Inc." or any derivative thereof or logo associated with that
name is the valuable property of the Portfolio Manager and its affiliates
and that the Trust and/or the Series have the right to use such name (or
derivative or logo) in offering materials of the Trust with the approval
of the Portfolio Manager and for so long as the Portfolio Manager is a
portfolio manager to the Trust and/or the Series. Upon termination of
this Agreement between the Trust, the Manager, and the Portfolio Manager,
the Trust shall as soon as is reasonably possible cease to use such name
(or derivative or logo).
19. AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST. A
copy of the Amended and Restated Agreement and Declaration of Trust for
the Trust is on file with the Secretary of the Commonwealth of
Massachusetts. The Amended and Restated Agreement and Declaration of
Trust has been executed on behalf of the Trust by Trustees of the Trust
in their capacity as Trustees of the Trust and not individually. The
obligations of this Agreement shall be binding upon the assets and
property of the Trust and shall not be binding upon any Trustee, officer,
or shareholder of the Trust individually.
20. MISCELLANEOUS.
(a) This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania, provided that nothing herein shall be
construed in a manner inconsistent with the 1940 Act, the Advisers Act or
rules or orders of the SEC thereunder. The term "affiliate" or
"affiliated person" as used in this Agreement shall mean "affiliated
person" as defined in Section 2(a)(3) of the 1940 Act.
(b) The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
(c) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby, and to this extent, the
provisions of this Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Portfolio
Manager as an agent of the Manager, or constituting the Manager as an
agent of the Portfolio Manager.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed as of the day and year first above written.
THE GCG TRUST
Attest /s/James Lamb By: /s/ Barnett Chernow
--------------------- ---------------------------
Title: AVP Title: President
--------------------- ------------------------
DIRECTED SERVICES, INC.
Attest /s/James Lamb By: /s/ David L. Jacobson
--------------------- ---------------------------
Title: AVP Title: SVP
--------------------- ------------------------
SALOMON BROTHERS ASSET
MANAGEMENT INC.
Attest /s/Robert Vegliante By: /s/ Ross Margolies
--------------------- ---------------------------
Title: Asst. Secretary Title: Managing Director
--------------------- ------------------------
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SCHEDULE A
The Series of The GCG Trust, as described in Section 1 of the
attached Portfolio Management Agreement, to which Salomon Brothers Asset
Management Inc. shall act as Portfolio Manager are as follows:
Investors Series
All Cap Series
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SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by Salomon Brothers Asset Management Inc.
("Portfolio Manager") to the following Series of The GCG Trust, pursuant
to the attached Portfolio Management Agreement, the Manager will pay the
Portfolio Manager a fee, computed daily and payable monthly, based on the
average daily net assets of the Series at the following annual rates of
the average daily net assets of the Series:
SERIES RATE
- ------ ----
Investors Series: 0.45% on first $100 million;
0.40% on first $100 million;
0.35% on next $200 million;
0.30% on next $350 million; and
0.25% on assets in excess of $750 million.
All Cap Series: 0.50% on first $100 million;
0.45% on first $100 million;
0.40% on next $200 million; and
0.35% on assets in excess of $400 million.
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EXHIBIT (d)(2)(M)
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT made this 28th day of January, 2000, among The GCG
Trust (the "Trust"), a Massachusetts business trust, Directed
Services, Inc. (the "Manager"), a New York corporation, and Capital
Guardian Trust Company ("Portfolio Manager"), a California
corporation.
WHEREAS, the Trust is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end, management
investment company;
WHEREAS, the Trust is authorized to issue separate series, each
of which will offer a separate class of shares of beneficial
interest, each series having its own investment objective or
objectives, policies, and limitations;
WHEREAS, the Trust currently offers shares in multiple series,
may offer shares of additional series in the future, and intends to
offer shares of additional series in the future;
WHEREAS, pursuant to a Management Agreement, effective as of
October 24, 1997, a copy of which has been provided to the Portfolio
Manager, the Trust has retained the Manager to render advisory,
management, and administrative services to many of the Trust's
series;
WHEREAS, the Trust and the Manager wish to retain the Portfolio
Manager to furnish investment advisory services to one or more of the
series of the Trust, and the Portfolio Manager is willing to furnish
such services to the Trust and the Manager;
NOW THEREFORE, in consideration of the premises and the promises
and mutual covenants herein contained, it is agreed between the
Trust, the Manager, and the Portfolio Manager as follows:
1. APPOINTMENT. The Trust and the Manager hereby appoint
Capital Guardian Trust Company to act as Portfolio Manager to the
Series designated on Schedule A of this Agreement (each a "Series")
for the periods and on the terms set forth in this Agreement. The
Portfolio Manager accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
In the event the Trust designates one or more series other than
the Series with respect to which the Trust and the Manager wish to
retain the Portfolio Manager to render investment advisory services
hereunder, they shall promptly notify the Portfolio Manager in
writing. If the Portfolio Manager is willing to render such
services, it shall so notify the Trust and Manager in writing,
whereupon such series shall become a Series hereunder, and be subject
to this Agreement.
2. PORTFOLIO MANAGEMENT DUTIES. Subject to the supervision of
the Trust's Board of Trustees and the Manager, the Portfolio Manager
will provide a continuous investment program for each Series'
portfolio and determine the composition of the assets of each Series'
portfolio, including determination of the purchase, retention, or
sale of the securities, cash, and other investments contained in the
portfolio. The Portfolio Manager will provide investment research
and conduct a continuous program of evaluation, investment, sales,
and reinvestment of each Series' assets by determining the securities
and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Series, when these transactions should
be executed, and what portion of the assets of each Series should be
held in the various securities and other investments in which it may
invest, and the Portfolio Manager is hereby authorized to execute and
perform such services on behalf of each Series. To the extent
permitted by the investment policies of the Series, the Portfolio
Manager shall make decisions for the Series as to foreign currency
matters and make determinations as to and execute and perform foreign
currency exchange contracts on behalf of the Series. The Portfolio
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Manager will provide the services under this Agreement in accordance
with the Series' investment objective or objectives, policies, and
restrictions as stated in the Trust's Registration Statement filed
with the Securities and Exchange Commission (the "SEC"), as from time
to time amended, copies of which shall be sent to the Portfolio
Manager by the Manager upon filing with the SEC. The Portfolio
Manager further agrees as follows:
(a) The Portfolio Manager shall (1) perform in accordance with
the requirements of Subchapter M (to the extent reasonably related to
the scope of its duties as Portfolio Manager as contemplated under
this Agreement); and (2) comply with the diversification requirements
of Section 817(h) of the Internal Revenue Code and regulations issued
thereunder in managing each Series. The Manager will notify the
Portfolio Manager promptly if the Manager believes that a Series is
in violation of any requirement specified in the first sentence of
this paragraph. The Manager or the Trust will notify the Portfolio
Manager of any pertinent changes, modifications to, or
interpretations of Section 817(h) of the Internal Revenue Code and
regulations issued thereunder and of rules or regulations pertaining
to investment vehicles underlying variable annuity or variable life
insurance policies.
(b) The Portfolio Manager will perform the following duties:
(i) manage the Series assets in accordance with the Series investment
objective(s) and policies as stated in the Prospectus and Statement
of Additional Information; (ii) make day-to-day investment decisions
for the Series; and (iii) place purchase and sale orders for
portfolio transactions on behalf of the Series, pursuant to the 1940
Act and all rules and regulations thereunder, all other applicable
federal and state laws and regulations, with any applicable
procedures adopted by the Trust's Board of Trustees of which the
Portfolio Manager has been notified in writing, and the provisions of
the Registration Statement of the Trust under the Securities Act of
1933 (the "1933 Act") and the 1940 Act, as supplemented or amended,
of which the Portfolio Manager has received a copy ("Registration
Statement"). The Manager or the Trust will notify the Portfolio
Manager of pertinent provisions of applicable state insurance law
with which the Portfolio Manager must comply under this Paragraph
2(b).
(c) On occasions when the Portfolio Manager deems the purchase
or sale of a security to be in the best interest of a Series as well
as of other investment advisory clients of the Portfolio Manager or
any of its affiliates, the Portfolio Manager may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be so sold or purchased
with those of its other clients where such aggregation is not
inconsistent with the policies set forth in the Registration
Statement. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be
made by the Portfolio Manager in a manner that is fair and equitable
in the judgment of the Portfolio Manager in the exercise of its
fiduciary obligations to the Trust and to such other clients, subject
to review by the Manager and the Board of Trustees.
(d) In connection with the purchase and sale of securities for
a Series, the Portfolio Manager will arrange for the transmission to
the custodian and portfolio accounting agent for the Series on a
daily basis, such confirmation, trade tickets, and other documents
and information, including, but not limited to, Cusip, Sedol, or
other numbers that identify securities to be purchased or sold on
behalf of the Series, as may be reasonably necessary to enable the
custodian and portfolio accounting agent to perform its
administrative and recordkeeping responsibilities with respect to the
Series. With respect to portfolio securities to be purchased or sold
through the Depository Trust Company, the Portfolio Manager will
arrange for the automatic transmission of the confirmation of such
trades to the Trust's custodian and portfolio accounting agent.
(e) The Portfolio Manager will assist the portfolio accounting
agent for the Trust in determining or confirming, consistent with the
procedures and policies stated in the Registration Statement for the
Trust, the value of any portfolio securities or other assets of the
Series for which the portfolio accounting agent seeks assistance from
or identifies for review by the Portfolio Manager, and the parties
agree that the Portfolio Manager shall not bear responsibility or
liability for the determination or accuracy of the valuation of any
portfolio securities and other assets of the Series except to the
extent that the Portfolio Manager exercises judgment with respect to
any such valuation.
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(f) The Portfolio Manager will make available to the Trust and
the Manager, promptly upon request, all of the Series' investment
records and ledgers maintained by the Portfolio Manager (which shall
not include the records and ledgers maintained by the custodian and
portfolio accounting agent for the Trust) as are necessary to assist
the Trust and the Manager to comply with requirements of the 1940 Act
and the Investment Advisers Act of 1940 (the "Advisers Act"), as well
as other applicable laws. The Portfolio Manager will furnish to
regulatory authorities having the requisite authority any information
or reports in connection with such services which may be requested in
order to ascertain whether the operations of the Trust are being
conducted in a manner consistent with applicable laws and
regulations.
(g) The Portfolio Manager will provide reports to the Trust's
Board of Trustees for consideration at meetings of the Board on the
investment program for the Series and the issuers and securities
represented in the Series' portfolio, and will furnish the Trust's
Board of Trustees with respect to the Series such periodic and
special reports as the Trustees and the Manager may reasonably
request.
(h) In rendering the services required under this Agreement,
the Portfolio Manager may, from time to time, employ or associate
with itself such person or persons as it believes necessary to assist
it in carrying out its obligations under this Agreement. However,
the Portfolio Manager may not retain as subadviser any company that
would be an "investment adviser," as that term is defined in the 1940
Act, to the Series unless the contract with such company is approved
by a majority of the Trust's Board of Trustees and a majority of
Trustees who are not parties to any agreement or contract with such
company and who are not "interested persons," as defined in the 1940
Act, of the Trust, the Manager, or the Portfolio Manager, or any such
company that is retained as subadviser, and is approved by the vote
of a majority of the outstanding voting securities of the applicable
Series of the Trust to the extent required by the 1940 Act. The
Portfolio Manager shall be responsible for making reasonable
inquiries and for reasonably ensuring that any employee of the
Portfolio Manager, any subadviser that the Portfolio Manager has
employed or with which it has associated with respect to the Series,
or any employee thereof has not, to the best of the Portfolio
Manager's knowledge, in any material connection with the handling of
Trust assets:
(i) been convicted, in the last ten (10) years, of any felony
or misdemeanor arising out of conduct involving embezzlement,
fraudulent conversion, or misappropriation of funds or
securities, involving violations of Sections 1341, 1342, or 1343
of Title 18, United States Code, or involving the purchase or
sale of any security; or
(ii) been found by any state regulatory authority, within the
last ten (10) years, to have violated or to have acknowledged
violation of any provision of any state insurance law involving
fraud, deceit, or knowing misrepresentation; or
(iii) been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have
acknowledged violation of any provision of federal or state
securities laws involving fraud, deceit, or knowing
misrepresentation.
3. BROKER-DEALER SELECTION. The Portfolio Manager is
responsible for decisions to buy and sell securities and other
investments for each Series' portfolio, broker-dealer selection, and
negotiation of brokerage commission rates. The Portfolio Manager's
primary consideration in effecting a security transaction will be to
obtain the best execution for the Series, taking into account the
factors specified in the prospectus and/or statement of additional
information for the Trust, which include price (including the
applicable brokerage commission or dollar spread), the size of the
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, and the execution capabilities and
operational facilities of the firms involved, and the firm's risk in
positioning a block of securities. Accordingly, the price to the
Series in any transaction may be less favorable than that available
from another broker-dealer if the difference is reasonably justified,
in the judgment of the Portfolio Manager in the exercise of its
fiduciary obligations to the Trust, by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of
Trustees may determine and consistent with Section 28(e) of the
Securities
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Exchange Act of 1934, the Portfolio Manager shall not be
deemed to have acted unlawfully or to have breached any duty created
by this Agreement or otherwise solely by reason of its having caused
the Series to pay a broker-dealer for effecting a portfolio
investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if
the Portfolio Manager or its affiliate determines in good faith that
such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker-dealer,
viewed in terms of either that particular transaction or the
Portfolio Manager's or its affiliate's overall responsibilities with
respect to the Series and to their other clients as to which they
exercise investment discretion. To the extent consistent with these
standards, the Portfolio Manager is further authorized to allocate
the orders placed by it on behalf of the Series to the Portfolio
Manager if it is registered as a broker-dealer with the SEC, to its
affiliated broker-dealer, or to such brokers and dealers who also
provide research or statistical material, or other services to the
Series, the Portfolio Manager, or an affiliate of the Portfolio
Manager. Such allocation shall be in such amounts and proportions as
the Portfolio Manager shall determine consistent with the above
standards, and the Portfolio Manager will report on said allocation
regularly to the Board of Trustees of the Trust indicating the broker-
dealers to which such allocations have been made and the basis
therefor.
4. DISCLOSURE ABOUT PORTFOLIO MANAGER. In order to assist the
Manager in reviewing and updating the Trust's Registration Statement
filed with the SEC, the Portfolio Manager shall upon request provide
the Manager with a description of its organization, the portfolio
managers assigned to manage the Series, the method, style and
techniques by which it intends to manage each Series, and any other
relevant information about the Portfolio Manager that the Manager may
reasonably request. The Portfolio Manager represents and warrants
that such written information provided shall be accurate and
complete, but not necessarily tailored for specific Registration
Statement disclosure. Notwithstanding anything to the contrary
herein, it is understood that it is the responsibility of the Manager
and/or counsel to the Trust to meet all disclosure and other
requirements applicable to the Trust's Registration Statement. The
Portfolio Manager further represents and warrants that it is a duly
registered investment adviser under the Advisers Act, or
alternatively that it is not required to be a registered investment
adviser under the Advisers Act to perform the duties described in
this Agreement, and that it is a duly registered investment adviser
in all states in which the Portfolio Manager is required to be
registered.
5. EXPENSES. During the term of this Agreement, the Portfolio
Manager will pay all expenses incurred by it and its staff and for
their activities in connection with its portfolio management duties
under this Agreement. The Manager or the Trust shall be responsible
for all the expenses of the Trust's operations including, but not
limited to:
(a) Expenses of all audits by the Trust's independent public
accountants;
(b) Expenses of the Series' transfer agent, registrar, dividend
disbursing agent, and shareholder recordkeeping services;
(c) Expenses of the Series' custodial services including
recordkeeping services provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value
of each Series' net assets;
(e) Expenses of obtaining Portfolio Activity Reports and
Analyses of International Management Reports (as appropriate) for
each Series;
(f) Expenses of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's
executive officers and employees, if any, who are not officers,
directors, stockholders, or employees of the Portfolio Manager or an
affiliate of the Portfolio Manager;
(h) Taxes levied against the Trust;
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(i) Brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for the Series;
(j) Costs, including the interest expense, of borrowing money;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses and
reports of the Trust to its shareholders, the filing of reports with
regulatory bodies, the maintenance of the Trust's existence, and the
regulation of shares with federal and state securities or insurance
authorities;
(l) The Trust's legal fees, including the legal fees related to
the registration and continued qualification of the Trust's shares
for sale;
(m) Costs of printing stock certificates representing shares of
the Trust;
(n) Trustees' fees and expenses to trustees who are not
officers, employees, or stockholders of the Portfolio Manager or any
affiliate thereof;
(o) The Trust's pro rata portion of the fidelity bond required
by Section 17(g) of the 1940 Act, or other insurance premiums;
(p) Association membership dues;
(q) Extraordinary expenses of the Trust as may arise including
expenses incurred in connection with litigation, proceedings, and
other claims (unless the Portfolio Manager is responsible for such
expenses under Section 14 of this Agreement), and the legal
obligations of the Trust to indemnify its Trustees, officers,
employees, shareholders, distributors, and agents with respect
thereto; and
(r) Organizational and offering expenses.
6. COMPENSATION. For the services provided, the Manager will
pay the Portfolio Manager a fee, payable as described in Schedule B.
7. SEED MONEY. The Manager agrees that the Portfolio Manager
shall not be responsible for providing money for the initial
capitalization of the Series.
8. COMPLIANCE.
(a) The Portfolio Manager agrees that it shall promptly notify
the Manager and the Trust (1) in the event that the SEC or other
governmental authority has censured the Portfolio Manager; placed
limitations upon its activities, functions or operations; suspended
or revoked its registration, if any, as an investment adviser; or has
commenced proceedings or an investigation that may result in any of
these actions, (2) upon having a reasonable basis for believing that
the Series has ceased to qualify or might not qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code,
or (3) upon having a reasonable basis for believing that the Series
has ceased to comply with the diversification provisions of Section
817(h) of the Internal Revenue Code or the regulations thereunder.
The Portfolio Manager further agrees to notify the Manager and the
Trust promptly of any material fact known to the Portfolio Manager
respecting or relating to the Portfolio Manager that is not contained
in the Registration Statement or prospectus for the Trust, or any
amendment or supplement thereto, and is required to be stated therein
or necessary to make the statements therein not misleading, or of any
statement contained therein that becomes untrue in any material
respect.
(b) The Manager agrees that it shall immediately notify the
Portfolio Manager (1) in the event that the SEC has censured the
Manager or the Trust; placed limitations upon either of their
activities, functions, or operations; suspended or revoked the
Manager's registration as an investment adviser; or has commenced
proceedings or an investigation that may result in any of these
actions, (2) upon having
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a reasonable basis for believing that the Series has ceased to qualify
or might not qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code,or (3) upon having a reasonable basis for
believing that the Series has ceased to comply with the diversification
provisions of Section 817(h) of the Internal Revenue Code or the Regulations
thereunder.
9. BOOKS AND RECORDS. In compliance with the requirements of
Rule 31a-3 under the 1940 Act, the Portfolio Manager hereby agrees
that all records which it maintains for the Series are the property
of the Trust and further agrees to surrender promptly to the Trust
any of such records upon the Trust's or the Manager's request,
although the Portfolio Manager may, at its own expense, make and
retain a copy of such records. The Portfolio Manager further agrees
to preserve for the periods prescribed by Rule 31a-2 under the 1940
Act the records required to be maintained by Rule 31a-l under the
1940 Act and to preserve the records required by Rule 204-2 under the
Advisers Act for the period specified in the Rule.
10. COOPERATION. Each party to this Agreement agrees to
cooperate with each other party and with all appropriate governmental
authorities having the requisite jurisdiction (including, but not
limited to, the SEC and state insurance regulators) in connection
with any investigation or inquiry relating to this Agreement or the
Trust.
11. REPRESENTATIONS RESPECTING PORTFOLIO MANAGER.
(a) During the term of this Agreement, the Trust and the Manager
agree to furnish to the Portfolio Manager at its principal offices
prior to use thereof copies of all Registration Statements and
amendments thereto, prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for
distribution to shareholders of the Trust or any Series or to the
public that refer or relate in any way to the Portfolio Manager,
Capital Guardian Trust Company, or any of its affiliates (other than
the Manager), or the use any of derivative of the name "Capital
Guardian Trust Company" or any affiliate listed on Schedule C or any
logo associated therewith. The Trust and the Manager agree that they
will not use any such material without the prior consent of the
Portfolio Manager, which consent shall not be unreasonably withheld.
In the event of the termination of this Agreement, the Trust and the
Manager will furnish to the Portfolio Manager copies of any of the
above-mentioned materials that refer or relate in any way to the
Portfolio Manager;
(b) the Trust and the Manager will furnish to the Portfolio
Manager such information relating to either of them or the business
affairs of the Trust as the Portfolio Manager shall from time to time
reasonably request in order to discharge its obligations hereunder;
(c) the Manager and the Trust agree that neither the Trust, the
Manager, nor affiliated persons of the Trust or the Manager shall
give any information or make any representations or statements in
connection with the sale of shares of the Series concerning the
Portfolio Manager or the Series other than the information or
representations contained in the Registration Statement, prospectus,
or statement of additional information for the Trust, as they may be
amended or supplemented from time to time, or in reports or proxy
statements for the Trust, or in sales literature or other promotional
material approved in advance by the Portfolio Manager, except with
the prior permission of the Portfolio Manager.
(d) The Manager hereby warrants and represents to the Portfolio
Manager that (a) it has obtained all applicable licenses, permits,
registrations and approvals that may be required in order to serve in
its designated capacities with respect to the Series, and shall
continue to keep current such licenses, permits, registrations and
approvals for so long as this Agreement is in effect; (b) it is not
prohibited by the 1940 Act or other applicable laws and regulations
from performing the services contemplated by this Agreement; (c) it
will immediately notify the Portfolio Manager of the occurrence of
any event that would disqualify it from serving in its designated
capacities with respect to the Series; and (d) this Agreement has
been duly and validly authorized, executed and delivered on behalf
of the Manager and is valid and binding Agreement of the Manager
enforceable in accordance with its terms.
(e) The Portfolio Manager hereby warrants and represents to the
Manager that (a) it has obtained all applicable licenses, permits,
registrations and approvals that may be required in order to serve in
its
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designated capacities with respect to the Series, and shall
continue to keep current such licenses, permits, registrations and
approvals for so long as this Agreement is in effect; (b) it is not
prohibited by the 1940 Act or other applicable laws and regulations
from performing the services contemplated by this Agreement; (c) it
will immediately notify the Manager of the occurrence of any event
that would disqualify it from serving in its designated capacities
with respect to the Series; and (d) this Agreement has been duly and
validly authorized, executed and delivered on behalf of the Portfolio
Manager and is valid and binding Agreement of the Portfolio Manager
enforceable in accordance with its terms.
12. CONTROL. Notwithstanding any other provision of the
Agreement, it is understood and agreed that the Trust shall at all
times retain the ultimate responsibility for and control of all
functions performed pursuant to this Agreement and reserve the right
to direct, approve, or disapprove any action hereunder taken on its
behalf by the Portfolio Manager.
13. SERVICES NOT EXCLUSIVE. It is understood that the services
of the Portfolio Manager are not exclusive, and nothing in this
Agreement shall prevent the Portfolio Manager (or its affiliates)
from providing similar services to other clients, including
investment companies (whether or not their investment objectives and
policies are similar to those of the Series) or from engaging in
other activities.
14. LIABILITY. Except as may otherwise be required by the 1940
Act or the rules thereunder or other applicable law, the Trust and
the Manager agree that the Portfolio Manager, any affiliated person
of the Portfolio Manager, and each person, if any, who, within the
meaning of Section 15 of the 1933 Act, controls the Portfolio Manager
shall not be liable for, or subject to any damages, expenses, or
losses in connection with, any act or omission connected with or
arising out of any services rendered under this Agreement, except by
reason of willful misfeasance, bad faith, or gross negligence in the
performance of the Portfolio Manager's duties, or by reason of
reckless disregard of the Portfolio Manager's obligations and duties
under this Agreement.
15. INDEMNIFICATION.
(a) The Portfolio Manager shall indemnify and hold harmless the
Trust and the Manager (and its affiliated companies and their
respective officers, directors and employees) from any and all
claims, losses, liabilities or damages (including reasonable
attorney's fees and other related expenses) arising out of or in
connection with the willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder of the
Portfolio Manager.
(b) The Manager shall indemnify and hold harmless the Portfolio
Manager (and its affiliated companies and their respective officers,
directors and employees) from and against any and all claims, losses,
liabilities or damages (including reasonable attorney's fees and
other related expenses) arising out of any matter which does not
require the Portfolio Manager to provide an indemnity under the
preceding paragraph, including, any claim that is based upon any
untrue and alleged untrue statement contained in the Series'
Prospectus or Statement of Additional Information, any registration
statement of the Trust or Manager, any sales literature or materials
for the sale or distribution of the Series' shares, or any omission
or alleged omission to state any required statement or disclosure
necessary to make the statements in any such document not misleading,
except if such statement made in reliance on information furnished by
Portfolio Manager in writing to the Manager or the Trust for the
express purpose of inclusion therin.
(c) The Manager shall not be liable under this Section 15 with
respect to any claim made against the Portfolio Manager unless
Portfolio Manager shall have notified the Manager in writing within a
reasonable time after the summons, notice, or other first legal
process or notice giving information of the nature of the claim shall
have been served upon Portfolio Manager (or after such Portfolio
Manager shall have received notice of such service on any designated
agent), but failure to notify the Manager of any such claim shall not
relieve the Manager from any liability which it may have to the
Portfolio Manager against whom such action is brought otherwise than
on account of this Section 15. In case any such action is brought
against the Portfolio Manager, the Manager will be entitled to
participate, at its own expense, in the defense thereof or, after
notice to the Portfolio Manager, to assume the defense
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thereof, with counsel satisfactory to the Portfolio Manager. If the
Manager assumes the defense of any such action and the selection of
counsel by the Manager to represent both the Manager and the Portfolio
Manager would result in a conflict of interests and therefore, would not,
in the reasonable judgment of the Portfolio Manager, adequately represent
the interests of the Portfolio Manager, the Manager will, at its own expense,
assume the defense with counsel to the Manager and, also at its own expense,
with separate counsel to the Portfolio Manager, which counsel shall be
satisfactory to the Manager and to the Portfolio Manager. The Portfolio
Manager shall bear the fees and expenses of any additional counsel retained
by it, and the Manager shall not be liable to the Portfolio Manager under
this Agreement for any legal or other expenses subsequently incurred by
the Portfolio Manager independently in connection with the defense thereof
other than reasonable costs of investigation. The Manager shall not have
the right to compromise on or settle the litigation without the prior
written consent of the Portfolio Manager if the compromise or
settlement results, or may result in a finding of wrongdoing on the
part of the Portfolio Manager.
(d) The Portfolio Manager shall not be liable under this
Section 15 with respect to any claim made against the Manager unless
Manager shall have notified the Portfolio Manager in writing within a
reasonable time after the summons, notice, or other first legal
process or notice giving information of the nature of the claim shall
have been served upon Manager (or after Manager shall have received
notice of such service on any designated agent), but failure to
notify the Portfolio Manager of any such claim shall not relieve the
Portfolio Manager from any liability which it may have to the Manager
against whom such action is brought otherwise than on account of this
Section 15. In case any such action is brought against the Manager,
the Portfolio Manager will be entitled to participate, at its own
expense, in the defense thereof or, after notice to the Manager, to
assume the defense thereof, with counsel satisfactory to the Manager.
If the Portfolio Manager assumes the defense of any such action and
the selection of counsel by the Portfolio Manager to represent both
the Portfolio Manager and the Manager would result in a conflict of
interests and therefore, would not, in the reasonable judgment of
the Manager, adequately represent the interests of the Manager, the
Portfolio Manager will, at its own expense, assume the defense with
counsel to the Portfolio Manager and, also at its own expense, with
separate counsel to the Manager which counsel shall be satisfactory
to the Portfolio Manager and to the Manager. The Manager shall bear
the fees and expenses of any additional counsel retained by it, and
the Portfolio Manager shall not be liable to the Manager under this
Agreement for any legal or other expenses subsequently incurred by
the Manager independently in connection with the defense thereof
other than reasonable costs of investigation. The Portfolio Manager
shall not have the right to compromise on or settle the litigation
without the prior written consent of the Manager if the compromise or
settlement results, or may result in a finding of wrongdoing on the
part of the Manager.
(e) The Manager shall not be liable under this Section 15 to
indemnify and hold harmless the Portfolio Manager and the Portfolio
Manager shall not be liable under this Section 15 to indemnify and
hold harmless the Manager with respect to any losses, claims,
damages, liabilities, or litigation that first become known to the
party seeking indemnification during any period that the Portfolio
Manager is, within the meaning of Section 15 of the 1933 Act, a
controlling person of the Manager.
16. DURATION AND TERMINATION. This Agreement shall become
effective on the date first indicated above. Unless terminated as
provided herein, the Agreement shall remain in full force and effect
for two (2) years from such date and continue on an annual basis
thereafter with respect to each Series; provided that such annual
continuance is specifically approved each year by (a) the vote of a
majority of the entire Board of Trustees of the Trust, or by the vote
of a majority of the outstanding voting securities (as defined in the
1940 Act) of each Series, and (b) the vote of a majority of those
Trustees who are not parties to this Agreement or interested persons
(as such term is defined in the 1940 Act) of any such party to this
Agreement cast in person at a meeting called for the purpose of
voting on such approval. The Portfolio Manager shall not provide any
services for such Series or receive any fees on account of such
Series with respect to which this Agreement is not approved as
described in the preceding sentence. However, any approval of this
Agreement by the holders of a majority of the outstanding shares (as
defined in the 1940 Act) of a Series shall be effective to continue
this Agreement with respect to such Series notwithstanding (i) that
this Agreement has not been approved by the holders of a majority of
the outstanding shares of any other Series or (ii) that this
agreement has not been approved by the vote of a majority of the
outstanding shares of the Trust, unless such approval shall be
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required by any other applicable law or otherwise. Notwithstanding
the foregoing, this Agreement may benterminated for each or any Series
hereunder: (a) by the Manager at any time without penalty, upon sixty
(60) days' written notice to the Portfolio Manager and the Trust, (b)
at any time without payment of any penalty by the Trust, upon the vote
of a majority of the Trust's Board of Trustees or a majority of the
outstanding voting securities of each Series, upon sixty (60) days'
written notice to the Manager and the Portfolio Manager, or (c) by the
Portfolio Manager at any time without penalty, upon sixty (60) days'
written notice to the Manager and the Trust. In addition, this Agreement
shall terminate with respect to a Series in the event that it is not
initially approved by the vote of a majority of the outstanding voting
securities of that Series at a meeting of shareholders at which approval
of the Agreement shall be considered by shareholders of the Series.
In the event of termination for any reason, all records of each Series
for which the Agreement is terminated shall promptly be returned to the
Manager or the Trust, free from any claim or retention of rights in such
records by the Portfolio Manager, although the Portfolio Manager may, at
its own expense, make and retain a copy of such records. The Agreement
shall automatically terminate in the event of its assignment (as such
term is described in the 1940 Act). In the event this Agreement is
terminated or is not approved in the manner described above, the
Sections or Paragraphs numbered 2(f), 9, 10, 11, 14, 15, and 18 of
this Agreement shall remain in effect, as well as any applicable
provision of this Section 16.
17. AMENDMENTS. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change,
waiver, discharge or termination is sought, and no amendment of this
Agreement shall be effective until approved by an affirmative vote of
(i) the holders of a majority of the outstanding voting securities of
the Series, and (ii) the Trustees of the Trust, including a majority
of the Trustees of the Trust who are not interested persons of any
party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, if such approval is required by
applicable law.
18. USE OF NAME.
(a) It is understood that the name "Directed Services, Inc." or
any derivative thereof or logo associated with that name is the
valuable property of the Manager and/or its affiliates, and that the
Portfolio Manager has the right to use such name (or derivative or
logo) only with the approval of the Manager and only so long as the
Manager is Manager to the Trust and/or the Series. Upon termination
of the Management Agreement between the Trust and the Manager, the
Portfolio Manager shall as soon as is reasonably possible cease to
use such name (or derivative or logo).
(b) It is understood that the name "Capital Guardian Trust
Company" or any affiliate listed on Schedule C or any derivative
thereof or logo associated with that name is the valuable property of
the Portfolio Manager and its affiliates and that the Trust and/or
the Series have the right to use such name (or derivative or logo) in
offering materials of the Trust with the approval of the Portfolio
Manager and for so long as the Portfolio Manager is a portfolio
manager to the Trust and/or the Series. Upon termination of this
Agreement between the Trust, the Manager, and the Portfolio Manager,
the Trust shall as soon as is reasonably possible cease to use such
name (or derivative or logo).
19. AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST. A
copy of the Amended and Restated Agreement and Declaration of Trust
for the Trust is on file with the Secretary of the Commonwealth of
Massachusetts. The Amended and Restated Agreement and Declaration of
Trust has been executed on behalf of the Trust by Trustees of the
Trust in their capacity as Trustees of the Trust and not
individually. The obligations of this Agreement shall be binding
upon the assets and property of the Trust and shall not be binding
upon any Trustee, officer, or shareholder of the Trust individually.
20. NOTICES. All notices and other communications hereunder shall
be in writing (including telex or similar writing) and shall be deemed
given if delivered in person or by messenger, certified mail, cable,
telegram or telex or facsimile transmission or by a reputable
overnight delivery service which provides evidence of receipt to the
parties at the following addresses or telex or facsimile transmission
numbers (or at such other address or number for a party as shall be
specified by like notice):
9
<PAGE>
<PAGE>
(a) if to the Portfolio Manager, to:
Capital Guardian Trust Company
333 South Hope Street, 55th Floor
Los Angeles, California 90071
Facsimile transmission number: (213) 486-9218
Attention: Treasurer
(b) if to the Manager, to:
Myles R. Tashman
Directed Services, Inc.
1475 Dunwoody Drive
West Chester, PA 19380
Facsimile transmission number: (610) 425-3520
if to the Trust, to
Myles R. Tashman
The GCG Trust
1475 Dunwoody Drive
West Chester, PA 19380
Facsimile transmission number: (610) 425-3520
Each such notice or other communication shall be effective (i) if
given by telex or facsimile transmission, when such telex or
facsimile is transmitted to the number specified in this section and
the appropriate answer back or confirmation is received, and (ii) if
given by any other means, when delivered at the address specified in
this section.
21. MISCELLANEOUS.
(a) This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania, provided that nothing herein shall be
construed in a manner inconsistent with the 1940 Act, the Advisers
Act or rules or orders of the SEC thereunder. The term "affiliate"
or "affiliated person" as used in this Agreement shall mean
"affiliated person" as defined in Section 2(a)(3) of the 1940 Act.
(b) The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
(c) To the extent permitted under Section 16 of this Agreement,
this Agreement may only be assigned by any party with the prior
written consent of the other parties.
(d) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby, and to
this extent, the provisions of this Agreement shall be deemed to be
severable.
(e) Nothing herein shall be construed as constituting the
Portfolio Manager as an agent of the Manager, or constituting the
Manager as an agent of the Portfolio Manager.
10
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed as of the day and year first above written.
THE GCG TRUST
Attest /s/James Lamb By: /s/ Barnett Chernow
--------------------- ---------------------------
Title: AVP Title: President
--------------------- ------------------------
DIRECTED SERVICES, INC.
Attest /s/James Lamb By: /s/ David L. Jacobson
--------------------- ---------------------------
Title: AVP Title: Senior Vice President
--------------------- ------------------------
CAPITAL GUARDIAN TRUST COMPANY
Attest By:
--------------------- --------------------------
Title:Senior Vice President Title: Senior Vice President
--------------------- ------------------------
11
<PAGE>
<PAGE>
SCHEDULE A
The Series of The GCG Trust, as described in Section 1 of the
attached Portfolio Management Agreement, to which Capital Guardian
Trust Company shall act as Portfolio Manager are as follows:
Managed Global Series
Large Cap Value Series
Small Cap Series
12
<PAGE>
<PAGE>
SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by Capital Guardian Trust Company
("Portfolio Manager") to the following Series of The GCG Trust,
pursuant to the attached Portfolio Management Agreement, the Manager
will pay the Portfolio Manager a fee, computed daily and payable
monthly, based on the average daily net assets of the Series at the
following annual rates of the average daily net assets of the Series:
SERIES: FEES:
Large Cap Value 0.50 on first $150 million;
0.45 on next $150 million;
0.35% on next $200 million; and
0.30% thereafter.
Managed Global 0.65% on first $150 million;
0.55% on next $150 million;
0.45% on next $200 million; and
0.40% thereafter.
Small Cap 0.55% on first $500 million; and
0.35% thereafter.
13
<PAGE>
<PAGE>
SCHEDULE C
CAPITAL GUARDIAN TRUST COMPANY'S AFFILIATES
1. American Funds Distributors, Inc.
2. American Funds Service Company
3. Capital Group Companies, Inc.
4. Capital Group International, Inc.
5. Capital Group Research, Inc.
6. Capital Guardian (Canada), Inc.
7. Capital Guardian Research Company
8. Capital Guardian Trust Company
9. Capital Guardian Trust Company, a Nevada Corporation
10. Capital International Advisory Company S.A.
11. Capital International All Countries Fund Management Company S.A.
12. Capital International Asia Pacific Management Company
13. Capital International Europe Fund Management Company
14. Capital International Global Small Cap Fund Management Company S.A.
15. Capital International, Inc.
16. Capital International K.K.
17. Capital International Kokusai Fund Management Company S.A.
18. Capital International Limited
19. Capital International Limited (Bermuda)
20. Capital International Management Company S.A.
21. Capital International Perspective S.A.
22. Capital International Research, Inc.
23. Capital International S.A.
24. Capital Management Services, Inc.
25. Capital Research Company
26. Capital Research and Management Company
27. Capital Strategy Research, Inc.
28. CIHAC Fund Management Company S.A
29. American Funds Group
14
<PAGE>
EXHIBIT (d)(2)(N)
DRAFT
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT made this ____ day of _________, 2000, among The GCG
Trust (the "Trust"), a Massachusetts business trust, Directed
Services, Inc. (the "Manager"), a New York corporation, and
[_______________________________]. ("Portfolio Manager"), a
[__________] corporation.
WHEREAS, the Trust is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end, management
investment company;
WHEREAS, the Trust is authorized to issue separate series, each
of which will offer a separate class of shares of beneficial
interest, each series having its own investment objective or
objectives, policies, and limitations;
WHEREAS, the Trust currently offers shares in multiple series,
may offer shares of additional series in the future, and intends to
offer shares of additional series in the future;
WHEREAS, pursuant to a Management Agreement, effective as of
October 24, 1997, a copy of which has been provided to the Portfolio
Manager, the Trust has retained the Manager to render advisory,
management, and administrative services to many of the Trust's
series;
WHEREAS, the Trust and the Manager wish to retain the Portfolio
Manager to furnish investment advisory services to one or more of the
series of the Trust, and the Portfolio Manager is willing to furnish
such services to the Trust and the Manager;
NOW THEREFORE, in consideration of the premises and the promises
and mutual covenants herein contained, it is agreed between the
Trust, the Manager, and the Portfolio Manager as follows:
1. APPOINTMENT. The Trust and the Manager hereby appoint
Solomon Brothers Asset management Inc. to act as Portfolio Manager to
the Series designated on Schedule A of this Agreement (each a
"Series") for the periods and on the terms set forth in this
Agreement. The Portfolio Manager accepts such appointment and agrees
to furnish the services herein set forth for the compensation herein
provided.
In the event the Trust designates one or more series other than
the Series with respect to which the Trust and the Manager wish to
retain the Portfolio Manager to render investment advisory services
hereunder, they shall promptly notify the Portfolio Manager in
writing. If the Portfolio Manager is willing to render such
services, it shall so notify the Trust and Manager in writing,
whereupon such series shall become a Series hereunder, and be subject
to this Agreement.
2. PORTFOLIO MANAGEMENT DUTIES. Subject to the supervision of
the Trust's Board of Trustees and the Manager, the Portfolio Manager
will provide a continuous investment program for each Series'
portfolio and determine the composition of the assets of each Series'
portfolio, including determination of the purchase, retention, or
sale of the securities, cash, and other investments contained in the
portfolio. The Portfolio Manager will provide investment research
and conduct a continuous program of evaluation, investment, sales,
and reinvestment of each Series' assets by determining the securities
and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Series, when these transactions should
be executed, and what portion of the assets of each Series should be
held in the various securities and other investments in which it may
invest, and the Portfolio Manager is hereby authorized to execute and
perform such services on behalf of each Series. To the extent
permitted by the investment policies of the Series, the Portfolio
Manager shall make decisions for the Series as to foreign currency
matters and make determinations as to and execute and perform foreign
currency exchange contracts on behalf of the Series. The Portfolio
Manager will provide the services under this Agreement in accordance
with the Series' investment objective or objectives, policies, and
restrictions as stated in the Trust's Registration Statement filed
with the Securities and Exchange Commission (the "SEC"), as from time
to time amended, copies of which shall be sent to the Portfolio
Manager by the Manager upon filing with the SEC. The Portfolio
Manager further agrees as follows:
(a) The Portfolio Manager will (1) manage each Series so that
no action or omission on the part of the Portfolio Manager will cause
a Series to fail to meet the requirements to qualify as a regulated
investment company specified in Section 851 of the Internal Revenue
Code (other than the requirements for the Trust to register under the
1940 Act and to file with its tax return an election to be a
regulated investment company, both of which shall not be the
responsibility of the Portfolio Manager), (2) manage each Series so
that no action or omission on the part of the Portfolio Manager shall
cause a Series to fail to comply with the diversification
requirements of Section 817(h) of the Internal Revenue Code and
regulations issued thereunder, and (3) use reasonable efforts to
manage the Series so that no action or omission on the part of the
Portfolio Manager shall cause a Series to fail to comply with any
other rules and regulations pertaining to investment vehicles
underlying variable annuity or variable life insurance policies. The
Manager will notify the Portfolio Manager promptly if the Manager
believes that a Series is in violation of any requirement specified
in the first sentence of this paragraph. The Manager or the Trust
will notify the Portfolio Manager of any pertinent changes,
modifications to, or interpretations of Section 817(h) of the
Internal Revenue Code and regulations issued thereunder and of rules
or regulations pertaining to investment vehicles underlying variable
annuity or variable life insurance policies.
(b) The Portfolio Manager will perform its duties hereunder
pursuant to the 1940 Act and all rules and regulations thereunder,
all other applicable federal and state laws and regulations, with any
applicable procedures adopted by the Trust's Board of Trustees of
which the Portfolio Manager has been notified in writing, and the
provisions of the Registration Statement of the Trust under the
Securities Act of 1933 (the "1933 Act") and the 1940 Act, as
supplemented or amended, of which the Portfolio Manager has received
a copy ("Registration
2
Statement"). The Manager or the Trust will
notify the Portfolio Manager of pertinent provisions of applicable
state law with which the Portfolio Manager must comply under this
Paragraph 2(b).
(c) On occasions when the Portfolio Manager deems the purchase
or sale of a security to be in the best interest of a Series as well
as of other investment advisory clients of the Portfolio Manager or
any of its affiliates, the Portfolio Manager may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be so sold or purchased
with those of its other clients where such aggregation is not
inconsistent with the policies set forth in the Registration
Statement. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be
made by the Portfolio Manager in a manner that is fair and equitable
in the judgment of the Portfolio Manager in the exercise of its
fiduciary obligations to the Trust and to such other clients, subject
to review by the Manager and the Board of Trustees.
(d) In connection with the purchase and sale of securities for
a Series, the Portfolio Manager will arrange for the transmission to
the custodian and portfolio accounting agent for the Series on a
daily basis, such confirmation, trade tickets, and other documents
and information, including, but not limited to, Cusip, Sedol, or
other numbers that identify securities to be purchased or sold on
behalf of the Series, as may be reasonably necessary to enable the
custodian and portfolio accounting agent to perform its
administrative and recordkeeping responsibilities with respect to the
Series. With respect to portfolio securities to be purchased or sold
through the Depository Trust Company, the Portfolio Manager will
arrange for the automatic transmission of the confirmation of such
trades to the Trust's custodian and portfolio accounting agent.
(e) The Portfolio Manager will assist the portfolio accounting
agent for the Trust in determining or confirming, consistent with the
procedures and policies stated in the Registration Statement for the
Trust, the value of any portfolio securities or other assets of the
Series for which the portfolio accounting agent seeks assistance from
or identifies for review by the Portfolio Manager, and the parties
agree that the Portfolio Manager shall not bear responsibility or
liability for the determination or accuracy of the valuation of any
portfolio securities and other assets of the Series except to the
extent that the Portfolio Manager exercises judgment with respect to
any such valuation.
(f) The Portfolio Manager will make available to the Trust and
the Manager, promptly upon request, all of the Series' investment
records and ledgers maintained by the Portfolio Manager (which shall
not include the records and ledgers maintained by the custodian and
portfolio accounting agent for the Trust) as are necessary to assist
the Trust and the Manager to comply with requirements of the 1940 Act
and the Investment Advisers Act of 1940 (the "Advisers Act"), as well
as other applicable laws. The Portfolio Manager will furnish to
regulatory authorities having the requisite authority any information
or reports in connection with such services which may be requested in
order to ascertain whether the operations of the Trust are being
conducted in a manner consistent with applicable laws and
regulations.
3
(g) The Portfolio Manager will provide reports to the Trust's
Board of Trustees for consideration at meetings of the Board on the
investment program for the Series and the issuers and securities
represented in the Series' portfolio, and will furnish the Trust's
Board of Trustees with respect to the Series such periodic and
special reports as the Trustees and the Manager may reasonably
request.
(h) In rendering the services required under this Agreement,
the Portfolio Manager may, from time to time, employ or associate
with itself such person or persons as it believes necessary to assist
it in carrying out its obligations under this Agreement. However,
the Portfolio Manager may not retain as subadviser any company that
would be an "investment adviser," as that term is defined in the 1940
Act, to the Series unless the contract with such company is approved
by a majority of the Trust's Board of Trustees and a majority of
Trustees who are not parties to any agreement or contract with such
company and who are not "interested persons," as defined in the 1940
Act, of the Trust, the Manager, or the Portfolio Manager, or any such
company that is retained as subadviser, and is approved by the vote
of a majority of the outstanding voting securities of the applicable
Series of the Trust to the extent required by the 1940 Act. The
Portfolio Manager shall be responsible for making reasonable
inquiries and for reasonably ensuring that any employee of the
Portfolio Manager, any subadviser that the Portfolio Manager has
employed or with which it has associated with respect to the Series,
or any employee thereof has not, to the best of the Portfolio
Manager's knowledge, in any material connection with the handling of
Trust assets:
(i) been convicted, in the last ten (10) years, of any felony
or misdemeanor arising out of conduct involving embezzlement,
fraudulent conversion, or misappropriation of funds or
securities, involving violations of Sections 1341, 1342, or 1343
of Title 18, United States Code, or involving the purchase or
sale of any security; or
(ii) been found by any state regulatory authority, within the
last ten (10) years, to have violated or to have acknowledged
violation of any provision of any state insurance law involving
fraud, deceit, or knowing misrepresentation; or
(iii) been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have
acknowledged violation of any provision of federal or state
securities laws involving fraud, deceit, or knowing
misrepresentation.
3. BROKER-DEALER SELECTION. The Portfolio Manager is
responsible for decisions to buy and sell securities and other
investments for each Series' portfolio, broker-dealer selection, and
negotiation of brokerage commission rates. The Portfolio Manager's
primary consideration in effecting a security transaction will be to
obtain the best execution for the Series, taking into account the
factors specified in the prospectus and/or statement of additional
information for the Trust, which include price (including the
applicable brokerage commission or dollar spread), the size of the
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, and the execution capabilities and\
4
operational facilities of the firms involved, and the firm's risk in
positioning a block of securities. Accordingly, the price to the
Series in any transaction may be less favorable than that available
from another broker-dealer if the difference is reasonably justified,
in the judgment of the Portfolio Manager in the exercise of its
fiduciary obligations to the Trust, by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of
Trustees may determine and consistent with Section 28(e) of the
Securities Exchange Act of 1934, the Portfolio Manager shall not be
deemed to have acted unlawfully or to have breached any duty created
by this Agreement or otherwise solely by reason of its having caused
the Series to pay a broker-dealer for effecting a portfolio
investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if
the Portfolio Manager or its affiliate determines in good faith that
such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker-dealer,
viewed in terms of either that particular transaction or the
Portfolio Manager's or its affiliate's overall responsibilities with
respect to the Series and to their other clients as to which they
exercise investment discretion. To the extent consistent with these
standards, the Portfolio Manager is further authorized to allocate
the orders placed by it on behalf of the Series to the Portfolio
Manager if it is registered as a broker-dealer with the SEC, to its
affiliated broker-dealer, or to such brokers and dealers who also
provide research or statistical material, or other services to the
Series, the Portfolio Manager, or an affiliate of the Portfolio
Manager. Such allocation shall be in such amounts and proportions as
the Portfolio Manager shall determine consistent with the above
standards, and the Portfolio Manager will report on said allocation
regularly to the Board of Trustees of the Trust indicating the broker-
dealers to which such allocations have been made and the basis
therefor.
4. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager
has reviewed the post-effective amendment to the Registration
Statement for the Trust filed with the SEC that contains disclosure
about the Portfolio Manager, and represents and warrants that, with
respect to the disclosure about or information relating, directly or
indirectly, to the Portfolio Manager, to the Portfolio Manager's
knowledge, such Registration Statement contains, as of the date
hereof, no untrue statement of any material fact and does not omit
any statement of a material fact which was required to be stated
therein or necessary to make the statements contained therein not
misleading. The Portfolio Manager further represents and warrants
that it is a duly registered investment adviser under the Advisers
Act, or alternatively that it is not required to be a registered
investment adviser under the Advisers Act to perform the duties
described in this Agreement, and that it is a duly registered
investment adviser in all states in which the Portfolio Manager is
required to be registered.
5. EXPENSES. During the term of this Agreement, the Portfolio
Manager will pay all expenses incurred by it and its staff and for
their activities in connection with its portfolio management duties
under this Agreement. The Manager or the Trust shall be responsible
for all the expenses of the Trust's operations including, but not
limited to:
(a) Expenses of all audits by the Trust's independent public
accountants;
5
(b) Expenses of the Series' transfer agent, registrar, dividend
disbursing agent, and shareholder recordkeeping services;
(c) Expenses of the Series' custodial services including
recordkeeping services provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value
of each Series' net assets;
(e) Expenses of obtaining Portfolio Activity Reports and
Analyses of International Management Reports (as appropriate) for
each Series;
(f) Expenses of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's
executive officers and employees, if any, who are not officers,
directors, stockholders, or employees of the Portfolio Manager or an
affiliate of the Portfolio Manager;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for the Series;
(j) Costs, including the interest expense, of borrowing money;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses and
reports of the Trust to its shareholders, the filing of reports with
regulatory bodies, the maintenance of the Trust's existence, and the
regulation of shares with federal and state securities or insurance
authorities;
(l) The Trust's legal fees, including the legal fees related to
the registration and continued qualification of the Trust's shares
for sale;
(m) Costs of printing stock certificates representing shares of
the Trust;
(n) Trustees' fees and expenses to trustees who are not
officers, employees, or stockholders of the Portfolio Manager or any
affiliate thereof;
(o) The Trust's pro rata portion of the fidelity bond required
by Section 17(g) of the 1940 Act, or other insurance premiums;
(p) Association membership dues;
6
(q) Extraordinary expenses of the Trust as may arise including
expenses incurred in connection with litigation, proceedings, and
other claims (unless the Portfolio Manager is responsible for such
expenses under Section 14 of this Agreement), and the legal
obligations of the Trust to indemnify its Trustees, officers,
employees, shareholders, distributors, and agents with respect
thereto; and
(r) Organizational and offering expenses.
6. COMPENSATION. For the services provided, the Manager will
pay the Portfolio Manager a fee, payable as described in Schedule B.
7. SEED MONEY. The Manager agrees that the Portfolio Manager
shall not be responsible for providing money for the initial
capitalization of the Series.
8. COMPLIANCE.
(a) The Portfolio Manager agrees that it shall promptly notify
the Manager and the Trust (1) in the event that the SEC or other
governmental authority has censured the Portfolio Manager; placed
limitations upon its activities, functions or operations; suspended
or revoked its registration, if any, as an investment adviser; or has
commenced proceedings or an investigation that may result in any of
these actions, (2) upon having a reasonable basis for believing that
the Series has ceased to qualify or might not qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code,
or (3) upon having a reasonable basis for believing that the Series
has ceased to comply with the diversification provisions of Section
817(h) of the Internal Revenue Code or the regulations thereunder.
The Portfolio Manager further agrees to notify the Manager and the
Trust promptly of any material fact known to the Portfolio Manager
respecting or relating to the Portfolio Manager that is not contained
in the Registration Statement or prospectus for the Trust, or any
amendment or supplement thereto, and is required to be stated therein
or necessary to make the statements therein not misleading, or of any
statement contained therein that becomes untrue in any material
respect.
(b) The Manager agrees that it shall immediately notify the
Portfolio Manager (1) in the event that the SEC has censured the
Manager or the Trust; placed limitations upon either of their
activities, functions, or operations; suspended or revoked the
Manager's registration as an investment adviser; or has commenced
proceedings or an investigation that may result in any of these
actions, (2) upon having a reasonable basis for believing that the
Series has ceased to qualify or might not qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code,
or (3) upon having a reasonable basis for believing that the Series
has ceased to comply with the diversification provisions of Section
817(h) of the Internal Revenue Code or the Regulations thereunder.
9. BOOKS AND RECORDS. In compliance with the requirements of
Rule 31a-3 under the 1940 Act, the Portfolio Manager hereby agrees
that all records which it maintains for the Series are the property
of the Trust and further agrees to surrender promptly to the Trust
any of
7
such records upon the Trust's or the Manager's request,
although the Portfolio Manager may, at its own expense, make and
retain a copy of such records. The Portfolio Manager further agrees
to preserve for the periods prescribed by Rule 31a-2 under the 1940
Act the records required to be maintained by Rule 31a-l under the
1940 Act and to preserve the records required by Rule 204-2 under the
Advisers Act for the period specified in the Rule.
10. COOPERATION. Each party to this Agreement agrees to
cooperate with each other party and with all appropriate governmental
authorities having the requisite jurisdiction (including, but not
limited to, the SEC and state insurance regulators) in connection
with any investigation or inquiry relating to this Agreement or the
Trust.
11. REPRESENTATIONS RESPECTING PORTFOLIO MANAGER.
(a) During the term of this Agreement, the Trust and the Manager
agree to furnish to the Portfolio Manager at its principal offices
prior to use thereof copies of all Registration Statements and
amendments thereto, prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for
distribution to shareholders of the Trust or any Series or to the
public that refer or relate in any way to the Portfolio Manager or
any of its affiliates (other than the Manager), or that use any
derivative of the name of the Portfolio Manager or any of its
affiliates or any logo associated therewith. The Trust and the
Manager agree that they will not use any such material without the
prior consent of the Portfolio Manager, which consent shall not be
unreasonably withheld. In the event of the termination of this
Agreement, the Trust and the Manager will furnish to the Portfolio
Manager copies of any of the above-mentioned materials that refer or
relate in any way to the Portfolio Manager;
(b) the Trust and the Manager will furnish to the Portfolio
Manager such information relating to either of them or the business
affairs of the Trust as the Portfolio Manager shall from time to time
reasonably request in order to discharge its obligations hereunder;
(c) the Manager and the Trust agree that neither the Trust, the
Manager, nor affiliated persons of the Trust or the Manager shall
give any information or make any representations or statements in
connection with the sale of shares of the Series concerning the
Portfolio Manager or the Series other than the information or
representations contained in the Registration Statement, prospectus,
or statement of additional information for the Trust, as they may be
amended or supplemented from time to time, or in reports or proxy
statements for the Trust, or in sales literature or other promotional
material approved in advance by the Portfolio Manager, except with
the prior permission of the Portfolio Manager.
12. CONTROL. Notwithstanding any other provision of the
Agreement, it is understood and agreed that the Trust shall at all
times retain the ultimate responsibility for and control of all
functions performed pursuant to this Agreement and reserve the right
to direct, approve, or disapprove any action hereunder taken on its
behalf by the Portfolio Manager.
8
13. SERVICES NOT EXCLUSIVE. It is understood that the services
of the Portfolio Manager are not exclusive, and nothing in this
Agreement shall prevent the Portfolio Manager (or its affiliates)
from providing similar services to other clients, including
investment companies (whether or not their investment objectives and
policies are similar to those of the Series) or from engaging in
other activities.
14. LIABILITY. Except as may otherwise be required by the 1940
Act or the rules thereunder or other applicable law, the Trust and
the Manager agree that the Portfolio Manager, any affiliated person
of the Portfolio Manager, and each person, if any, who, within the
meaning of Section 15 of the 1933 Act, controls the Portfolio Manager
shall not be liable for, or subject to any damages, expenses, or
losses in connection with, any act or omission connected with or
arising out of any services rendered under this Agreement, except by
reason of willful misfeasance, bad faith, or gross negligence in the
performance of the Portfolio Manager's duties, or by reason of
reckless disregard of the Portfolio Manager's obligations and duties
under this Agreement.
15. INDEMNIFICATION.
(a) Notwithstanding Section 14 of this Agreement, the Manager
agrees to indemnify and hold harmless the Portfolio Manager, any
affiliated person of the Portfolio Manager (other than the Manager),
and each person, if any, who, within the meaning of Section 15 of the
1933 Act controls ("controlling person") the Portfolio Manager (all
of such persons being referred to as "Portfolio Manager Indemnified
Persons") against any and all losses, claims, damages, liabilities,
or litigation (including legal and other expenses) to which a
Portfolio Manager Indemnified Person may become subject under the
1933 Act, the 1940 Act, the Advisers Act, the Internal Revenue Code,
under any other statute, at common law or otherwise, arising out of
the Manager's responsibilities to the Trust which (1) may be based
upon any misfeasance, malfeasance, or nonfeasance by the Manager, any
of its employees or representatives or any affiliate of or any person
acting on behalf of the Manager or (2) may be based upon any untrue
statement or alleged untrue statement of a material fact supplied by,
or which is the responsibility of, the Manager and contained in the
Registration Statement or prospectus covering shares of the Trust or
a Series, or any amendment thereof or any supplement thereto, or the
omission or alleged omission to state therein a material fact known
or which should have been known to the Manager and was required to be
stated therein or necessary to make the statements therein not
misleading, unless such statement or omission was made in reliance
upon information furnished to the Manager or the Trust or to any
affiliated person of the Manager by a Portfolio Manager Indemnified
Person; provided however, that in no case shall the indemnity in
favor of the Portfolio Manager Indemnified Person be deemed to
protect such person against any liability to which any such person
would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties, or by
reason of its reckless disregard of obligations and duties under this
Agreement.
(b) Notwithstanding Section 14 of this Agreement, the Portfolio
Manager agrees to indemnify and hold harmless the Manager, any
affiliated person of the Manager (other than the
9
Portfolio Manager),
and each person, if any, who, within the meaning of Section 15 of the
1933 Act, controls ("controlling person") the Manager (all of such
persons being referred to as "Manager Indemnified Persons") against
any and all losses, claims, damages, liabilities, or litigation
(including legal and other expenses) to which a Manager Indemnified
Person may become subject under the 1933 Act, 1940 Act, the Advisers
Act, the Internal Revenue Code, under any other statute, at common
law or otherwise, arising out of the Portfolio Manager's responsibili
ties as Portfolio Manager of the Series which (1) may be based upon
any misfeasance, malfeasance, or nonfeasance by the Portfolio
Manager, any of its employees or representatives, or any affiliate of
or any person acting on behalf of the Portfolio Manager, (2) may be
based upon a failure to comply with Section 2, Paragraph (a) of this
Agreement, or (3) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or prospectus covering the shares of the Trust or a Series,
or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact known or which should have
been known to the Portfolio Manager and was required to be stated
therein or necessary to make the statements therein not misleading,
if such a statement or omission was made in reliance upon information
furnished to the Manager, the Trust, or any affiliated person of the
Manager or Trust by the Portfolio Manager or any affiliated person of
the Portfolio Manager; provided, however, that in no case shall the
indemnity in favor of a Manager Indemnified Person be deemed to
protect such person against any liability to which any such person
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence in the performance of its duties, or by
reason of its reckless disregard of its obligations and duties under
this Agreement.
(c) The Manager shall not be liable under Paragraph (a) of this
Section 15 with respect to any claim made against a Portfolio Manager
Indemnified Person unless such Portfolio Manager Indemnified Person
shall have notified the Manager in writing within a reasonable time
after the summons, notice, or other first legal process or notice
giving information of the nature of the claim shall have been served
upon such Portfolio Manager Indemnified Person (or after such
Portfolio Manager Indemnified Person shall have received notice of
such service on any designated agent), but failure to notify the
Manager of any such claim shall not relieve the Manager from any
liability which it may have to the Portfolio Manager Indemnified
Person against whom such action is brought otherwise than on account
of this Section 15. In case any such action is brought against the
Portfolio Manager Indemnified Person, the Manager will be entitled to
participate, at its own expense, in the defense thereof or, after
notice to the Portfolio Manager Indemnified Person, to assume the
defense thereof, with counsel satisfactory to the Portfolio Manager
Indemnified Person. If the Manager assumes the defense of any such
action and the selection of counsel by the Manager to represent both
the Manager and the Portfolio Manager Indemnified Person would result
in a conflict of interests and therefore, would not, in the
reasonable judgment of the Portfolio Manager Indemnified Person,
adequately represent the interests of the Portfolio Manager
Indemnified Person, the Manager will, at its own expense, assume the
defense with counsel to the Manager and, also at its own expense,
with separate counsel to the Portfolio Manager Indemnified Person,
which counsel shall be satisfactory to the Manager and to the
Portfolio Manager Indemnified Person. The Portfolio Manager
Indemnified Person shall bear the fees and expenses of any additional
counsel retained by it, and the Manager
10
shall not be liable to the
Portfolio Manager Indemnified Person under this Agreement for any
legal or other expenses subsequently incurred by the Portfolio
Manager Indemnified Person independently in connection with the
defense thereof other than reasonable costs of investigation. The
Manager shall not have the right to compromise on or settle the
litigation without the prior written consent of the Portfolio Manager
Indemnified Person if the compromise or settlement results, or may
result in a finding of wrongdoing on the part of the Portfolio
Manager Indemnified Person.
(d) The Portfolio Manager shall not be liable under Paragraph
(b) of this Section 15 with respect to any claim made against a
Manager Indemnified Person unless such Manager Indemnified Person
shall have notified the Portfolio Manager in writing within a
reasonable time after the summons, notice, or other first legal
process or notice giving information of the nature of the claim shall
have been served upon such Manager Indemnified Person (or after such
Manager Indemnified Person shall have received notice of such service
on any designated agent), but failure to notify the Portfolio Manager
of any such claim shall not relieve the Portfolio Manager from any
liability which it may have to the Manager Indemnified Person against
whom such action is brought otherwise than on account of this Section
15. In case any such action is brought against the Manager
Indemnified Person, the Portfolio Manager will be entitled to
participate, at its own expense, in the defense thereof or, after
notice to the Manager Indemnified Person, to assume the defense
thereof, with counsel satisfactory to the Manager Indemnified Person.
If the Portfolio Manager assumes the defense of any such action and
the selection of counsel by the Portfolio Manager to represent both
the Portfolio Manager and the Manager Indemnified Person would result
in a conflict of interests and therefore, would not, in the
reasonable judgment of the Manager Indemnified Person, adequately
represent the interests of the Manager Indemnified Person, the
Portfolio Manager will, at its own expense, assume the defense with
counsel to the Portfolio Manager and, also at its own expense, with
separate counsel to the Manager Indemnified Person which counsel
shall be satisfactory to the Portfolio Manager and to the Manager
Indemnified Person. The Manager Indemnified Person shall bear the
fees and expenses of any additional counsel retained by it, and the
Portfolio Manager shall not be liable to the Manager Indemnified
Person under this Agreement for any legal or other expenses
subsequently incurred by the Manager Indemnified Person independently
in connection with the defense thereof other than reasonable costs of
investigation. The Portfolio Manager shall not have the right to
compromise on or settle the litigation without the prior written
consent of the Manager Indemnified Person if the compromise or
settlement results, or may result in a finding of wrongdoing on the
part of the Manager Indemnified Person.
(e) The Manager shall not be liable under this Section 15 to
indemnify and hold harmless the Portfolio Manager and the Portfolio
Manager shall not be liable under this Section 15 to indemnify and
hold harmless the Manager with respect to any losses, claims,
damages, liabilities, or litigation that first become known to the
party seeking indemnification during any period that the Portfolio
Manager is, within the meaning of Section 15 of the 1933 Act, a
controlling person of the Manager.
11
16. DURATION AND TERMINATION. This Agreement shall become
effective on the date first indicated above. Unless terminated as
provided herein, the Agreement shall remain in full force and effect
for two (2) years from such date and continue on an annual basis
thereafter with respect to each Series; provided that such annual
continuance is specifically approved each year by (a) the vote of a
majority of the entire Board of Trustees of the Trust, or by the vote
of a majority of the outstanding voting securities (as defined in the
1940 Act) of each Series, and (b) the vote of a majority of those
Trustees who are not parties to this Agreement or interested persons
(as such term is defined in the 1940 Act) of any such party to this
Agreement cast in person at a meeting called for the purpose of
voting on such approval. The Portfolio Manager shall not provide any
services for such Series or receive any fees on account of such
Series with respect to which this Agreement is not approved as
described in the preceding sentence. However, any approval of this
Agreement by the holders of a majority of the outstanding shares (as
defined in the 1940 Act) of a Series shall be effective to continue
this Agreement with respect to such Series notwithstanding (i) that
this Agreement has not been approved by the holders of a majority of
the outstanding shares of any other Series or (ii) that this
agreement has not been approved by the vote of a majority of the
outstanding shares of the Trust, unless such approval shall be
required by any other applicable law or otherwise. Notwithstanding
the foregoing, this Agreement may be terminated for each or any
Series hereunder: (a) by the Manager at any time without penalty,
upon sixty (60) days' written notice to the Portfolio Manager and the
Trust, (b) at any time without payment of any penalty by the Trust,
upon the vote of a majority of the Trust's Board of Trustees or a
majority of the outstanding voting securities of each Series, upon
sixty (60) day's written notice to the Manager and the Portfolio
Manager, or (c) by the Portfolio Manager at any time without penalty,
upon sixty (60) days written notice to the Manager and the Trust. In
addition, this Agreement shall terminate with respect to a Series in
the event that it is not initially approved by the vote of a majority
of the outstanding voting securities of that Series at a meeting of
shareholders at which approval of the Agreement shall be considered
by shareholders of the Series. In the event of termination for any
reason, all records of each Series for which the Agreement is
terminated shall promptly be returned to the Manager or the Trust,
free from any claim or retention of rights in such records by the
Portfolio Manager, although the Portfolio Manager may, at its own
expense, make and retain a copy of such records. The Agreement shall
automatically terminate in the event of its assignment (as such term
is described in the 1940 Act). In the event this Agreement is
terminated or is not approved in the manner described above, the
Sections or Paragraphs numbered 2(f), 9, 10, 11, 14, 15, and 18 of
this Agreement shall remain in effect, as well as any applicable
provision of this Paragraph numbered 16.
17. AMENDMENTS. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change,
waiver, discharge or termination is sought, and no amendment of this
Agreement shall be effective until approved by an affirmative vote of
(i) the holders of a majority of the outstanding voting securities of
the Series, and (ii) the Trustees of the Trust, including a majority
of the Trustees of the Trust who are not interested persons of any
party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, if such approval is required by
applicable law.
12
18. USE OF NAME.
(a) It is understood that the name "Directed Services, Inc." or
any derivative thereof or logo associated with that name is the
valuable property of the Manager and/or its affiliates, and that the
Portfolio Manager has the right to use such name (or derivative or
logo) only with the approval of the Manager and only so long as the
Manager is Manager to the Trust and/or the Series. Upon termination
of the Management Agreement between the Trust and the Manager, the
Portfolio Manager shall as soon as is reasonably possible cease to
use such name (or derivative or logo).
(b) It is understood that the name "Prudential Investment
Corporation" or any derivative thereof or logo associated with
that name is the valuable property of the Portfolio Manager and its
affiliates and that the Trust and/or the Series have the right to use
such name (or derivative or logo) in offering materials of the Trust
with the approval of the Portfolio Manager and for so long as the
Portfolio Manager is a portfolio manager to the Trust and/or the
Series. Upon termination of this Agreement between the Trust, the
Manager, and the Portfolio Manager, the Trust shall as soon as is
reasonably possible cease to use such name (or derivative or logo).
19. AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST. A
copy of the Amended and Restated Agreement and Declaration of Trust
for the Trust is on file with the Secretary of the Commonwealth of
Massachusetts. The Amended and Restated Agreement and Declaration of
Trust has been executed on behalf of the Trust by Trustees of the
Trust in their capacity as Trustees of the Trust and not
individually. The obligations of this Agreement shall be binding
upon the assets and property of the Trust and shall not be binding
upon any Trustee, officer, or shareholder of the Trust individually.
20. MISCELLANEOUS.
(a) This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania, provided that nothing herein shall be
construed in a manner inconsistent with the 1940 Act, the Advisers
Act or rules or orders of the SEC thereunder. The term "affiliate"
or "affiliated person" as used in this Agreement shall mean
"affiliated person" as defined in Section 2(a)(3) of the 1940 Act.
(b) The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
(c) To the extent permitted under Section 16 of this Agreement,
this Agreement may only be assigned by any party with the prior
written consent of the other parties.
(d) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby, and to
this extent, the provisions of this Agreement shall be deemed to be
severable.
13
(e) Nothing herein shall be construed as constituting the
Portfolio Manager as an agent of the Manager, or constituting the
Manager as an agent of the Portfolio Manager.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed as of the day and year first above written.
THE GCG TRUST
Attest By:
Title: Title:
DIRECTED SERVICES, INC.
Attest By:
Title: Title:
[_____________________________________]
Attest By:
Title: Title:
14
SCHEDULE A
The Series of The GCG Trust, as described in Section 1 of the
attached Portfolio Management Agreement, to which [ADVISER]. shall act
as Portfolio Manager are as follows:
[_________] Series
[_________] Series
15
<PAGE>
<PAGE>
SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by [ADVISER] ("Portfolio Manager") to
the following Series of The GCG Trust, pursuant to the attached
Portfolio Management Agreement, the Manager will pay the Portfolio
Manager a fee, computed daily and payable monthly, based on the
average daily net assets of the Series at the following annual rates
of the average daily net assets of the Series:
16
<PAGE>
<PAGE>
EXHIBIT (d)(2)(O)
AMENDMENT NO. 1
TO
SUBADVISORY AGREEMENT
This Amendment No.1, effective as of January 3, 2000, amends the Subadvisory
Agreement (the "Agreement"), dated February 26, 1999, among GCG Trust (the
"Trust"), a Massachusetts business trust, Directed Services, Inc. (the
"Manager"), a New York Corporation and A I M Capital Management, Inc. (the
"Sub-Adviser"), a Texas corporation.
W I T N E S S E T H
WHEREAS, the parties desire to amend the Agreement and agree that the
amendments will not become effective until January 3, 2000.
NOW, THEREFORE, the parties agree as follows:
1. Reference to the Sub-Adviser as a Delaware corporation in the initial
paragraph of the Agreement is hereby changed to refer to the Sub-Adviser
as a Texas corporation.
2. Schedule B to the Agreement is hereby deleted in its entirety and
replaced with the following:
SCHEDULE B
TO
SUBADVISORY AGREEMENT
Fee Schedule
- ------------
Pursuant to Section 5 of the Sub-Advisory Agreement among GCG Trust, Directed
Services, Inc. and A I M Capital Management, Inc., (the "Sub-Adviser"), the fees
payable to the Sub-Adviser shall be calculated by applying the following rates
to the average daily net assets of the Portfolios as indicated below:
Portfolio Annual Rate
--------- -----------
Capital Appreciation Portfolio
First $50 million.......................................0.50%
Over $50 million and up to $200 million.................0.475%
Over $200 million and up to $500 million................0.45%
Over $500 million.......................................0.40%
Strategic Equity Portfolio
First $50 million.......................................0.50%
Over $50 million and up to $200 million.................0.475%
Over $200 million and up to $500 million................0.45%
Over $500 million.......................................0.40%
<PAGE>
<PAGE>
3. In all other respects, the Agreement is hereby confirmed and remains in
full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
by their respective officers on the date indicated below.
Date: ______________, 1999
GCG TRUST
Attest: ________________________ By: Barnett Chernow
--------------------
Name:/s/ Barnett Chernow
-------------------
Title: President
------------------
DIRECTED SERVICES, INC.
Attest: ________________________ By: David L. Jacobson
--------------------
Name:/s/ David L. Jacobson
-------------------
Title: Senior Vice President
------------------
A I M CAPITAL MANAGEMENT, INC.
Attest: /s/ Nancy L. Martin By: Gary T. Crum
------------------------ --------------------
Name:/s/ Gary T. Crum
-------------------
Title: President
------------------
<PAGE>
EXHIBIT (d)(2)(P)
AMENDED SCHEDULE A
The Series of The GCG Trust, as described in Section 1 of
the attached Portfolio Management Agreement, to which Baring
International Investment Limited shall act as Portfolio Manager
are as follows:
Global Fixed Income Series
Developing World Series
Hard Asset Series
Emerging Markets Series
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed as of the ____ day ________, 2000.
THE GCG TRUST
Attest _________________ By: ___________________
Title: _________________ Title:_________________
DIRECTED SERVICES, INC.
Attest _________________ By: ___________________
Title: _________________ Title:_________________
BARING INTERNATIONAL
INVESTMENT LIMITED
Attest _________________ By: ___________________
Title: _________________ Title:_________________
<PAGE>
AMENDED SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by Baring International Investment Limited
("Portfolio Manager") to the following Series of The GCG Trust, pursuant to
the attached Portfolio Management Agreement, the Manager will pay the
Portfolio Manager a fee, computed daily and payable monthly, based on the
average daily net assets of the Series at the following annual rates of the
average daily net assets of the Series:
SERIES RATE
Global Fixed Income Series 0.45% of first $200 million,
0.30% of next $500 million,
0.25% of next $1 billion,
0.10% in excess of $2 billion
Developing World Series 0.90%
Hard Asset Series 0.40%
Emerging Markets Series 0.90% of first $50 million,
0.70% of next $50 million,
0.50% of next $100 million,
0.40% in excess of $200 million
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed as of the ____ day ________, 2000.
THE GCG TRUST
Attest _________________ By: ___________________
Title: _________________ Title:_________________
DIRECTED SERVICES, INC.
Attest _________________ By: ___________________
Title: _________________ Title:_________________
BARING INTERNATIONAL
INVESTMENT LIMITED
Attest _________________ By: ___________________
Title: _________________ Title:_________________
13
<PAGE>
EXHIBIT (d)(2)(Q)
AMENDED SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by Capital Guardian Trust Company("Portfolio
Manager") to the following Series of The GCG Trust, pursuant to the attached
Portfolio Management Agreement, the Manager will pay the Portfolio Manager
a fee, computed daily and payable monthly, based on the average daily net
assets of the Series at the following annual rates of the average daily net
assets of the Series:
SERIES RATE
Large Cap Value 0.50 on first $150 million;
0.45 on next $150 million;
0.35% on next $200 million; and
0.30% thereafter.
Managed Global 0.65% on first $150 million;
0.55% on next $150 million;
0.45% on next $200 million; and
0.40% thereafter.
Small Cap 0.65% on first $150 million;
0.50% on next $150 million;
0.40% on next $200 million; and
0.35% thereafter.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed as of the ____ day ________, 2000.
THE GCG TRUST
Attest _________________ By: ___________________
Title: _________________ Title:_________________
DIRECTED SERVICES, INC.
Attest _________________ By: ___________________
Title: _________________ Title:_________________
CAPITAL GUARDIAN TRUST COMPANY
Attest _________________ By: ___________________
Title: _________________ Title:_________________
<PAGE>
<PAGE>
EXHIBIT (g)(1)
CUSTODY AGREEMENT
Agreement made as of this 1st day of August,1999, among and between
THE GCG TRUST, a Massachusetts business trust organized and existing under
the laws of the Commonwealth of Massachusetts, having its principal office
and place of business at ** (hereinafter called the "Fund"), DIRECTED
SERVICES, INC. (the "Advisor") and THE BANK OF NEW YORK, a New York
corporation authorized to do a banking business, having its principal
office and place of business at One Wall Street, New York, New York
10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:
1. "Authorized Persons" shall be deemed to include any person,
whether or not such person is an officer or employee of the Fund,
duly authorized by the Board of Trustees of the Fund to execute any
Certificate, instruction, notice or other instrument on behalf of the
Fund and listed in the Certificate annexed hereto as Appendix A or
such other Certificate as may be received by the Custodian from time
to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury
book-entry system for United States and federal agency securities,
its successor or successors and its nominee or nominees.
3. "Call Option" shall mean an exchange traded option with respect
to Securities other than Stock Index Options, Futures Contracts, and
Futures Contract Options entitling the holder, upon timely exercise
and payment of the exercise price, as specified therein, to purchase
from the writer thereof the specified underlying Securities.
4. "Certificate" shall mean (a) any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be
given to the Custodian which is actually received by the Custodian
and signed on behalf of the Fund by any two Authorized Persons, and
(b) any Instructions.
<PAGE>
<PAGE>
5. "Clearing Member" shall mean a registered broker-dealer which is
a clearing member under the rules of O.C.C. and a member of a
national securities exchange qualified to act as a custodian for an
investment company, or any broker-dealer reasonably believed by the
Custodian to be such a clearing member.
6. "Collateral Account" shall mean a segregated account so
denominated which is specifically allocated to a Series and pledged
to the Custodian as security for, and in consideration of, the
Custodian's issuance of (a) any Put Option guarantee letter or
similar document described in paragraph 8 of Article V herein, or (b)
any receipt described in Article V or VIII herein.
7. "Composite Currency Unit" shall mean the European Currency Unit
or any other composite unit consisting of the aggregate of specified
amounts of specified Currencies as such unit may be constituted from
time to time.
8. "Covered Call Option" shall mean an exchange traded option
entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer
thereof the specified underlying Securities (excluding Futures
Contracts) which are owned by the writer thereof and subject to
appropriate restrictions.
9. "Currency" shall mean money denominated in a lawful currency of
any country or the European Currency Unit.
10. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange
Commission, its successor or successors and its nominee or nominees.
The term "Depository" shall further mean and include any other person
authorized to act as a depository under the Investment Company Act of
1940, as amended, its successor or successors and its nominee or
nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Trustees specifically approving deposits
therein by the Custodian.
11. "Financial Futures Contract" shall mean the firm commitment to
buy or sell fixed income securities including, without limitation,
U.S. Treasury Bills, U.S. Treasury Notes, U.S. Treasury Bonds,
domestic bank certificates of deposit, and Eurodollar certificates of
deposit, during a specified month at an agreed upon price.
12. "Futures Contract" shall mean a Financial Futures Contract
and/or Stock Index Futures Contracts.
13. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
14. "FX Transaction" shall mean any transaction for the purchase by
one party of an agreed amount in one Currency against the sale by it
to the other party of an agreed amount in another Currency.
-2-
<PAGE>
<PAGE>
15. "Instructions" shall mean instructions communications
transmitted by electronic or telecommunications media including
S.W.I.F.T., computer-to-computer interface, dedicated transmission
line, facsimile transmission signed by an Authorized Person and
tested telex.
16. "Margin Account" shall mean a segregated account in the name of
a broker, dealer, futures commission merchant, or a Clearing Member,
or in the name of the Fund for the benefit of a broker, dealer,
futures commission merchant, or Clearing Member, or otherwise, in
accordance with an agreement between the Fund, the Custodian and a
broker, dealer, futures commission merchant or a Clearing Member (a
"Margin Account Agreement"), separate and distinct from the custody
account, in which certain Securities and/or money of the Fund shall
be deposited and withdrawn from time to time in connection with such
transactions as the Fund may from time to time determine. Securities
held in the Book-Entry System or the Depository shall be deemed to
have been deposited in, or withdrawn from, a Margin Account upon the
Custodian's effecting an appropriate entry in its books and records.
17. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations
issued or guaranteed as to interest and principal by the government
of the United States or agencies or instrumentalities thereof, any
tax, bond or revenue anticipation note issued by any state or
municipal government or public authority, commercial paper,
certificates of deposit and bankers' acceptances, repurchase
agreements with respect to the same and bank time deposits, where the
purchase and sale of such securities normally requires settlement in
federal funds on the same day as such purchase or sale.
18. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of
1934, its successor or successors, and its nominee or nominees.
19. "Option" shall mean a Call Option, Covered Call Option, Stock
Index Option and/or a Put Option.
20. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Authorized Person.
21. "Put Option" shall mean an exchange traded option with respect
to Securities other than Stock Index Options, Futures Contracts, and
Futures Contract Options entitling the holder, upon timely exercise
and tender of the specified underlying Securities, to sell such
Securities to the writer thereof for the exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement pursuant
to which the Fund sells Securities and agrees to repurchase such
Securities at a described or specified date and price.
-3-
<PAGE>
<PAGE>
23. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options,
Stock Index Futures Contracts, Stock Index Futures Contract Options,
Financial Futures Contracts, Financial Futures Contract Options,
Reverse Repurchase Agreements, common stocks and other securities
having characteristics similar to common stocks, preferred stocks,
debt obligations issued by state or municipal governments and by
public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial
development bonds), bonds, debentures, notes, mortgages or other
obligations, and any certificates, receipts, warrants or other
instruments representing rights to receive, purchase, sell or
subscribe for the same, or evidencing or representing any other
rights or interest therein, or any property or assets.
24. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement
as a segregated account, by recordation or otherwise, within the
custody account in which certain Securities and/or other assets of
the Fund specifically allocated to such Series shall be deposited and
withdrawn from time to time in accordance with Certificates received
by the Custodian in connection with such transactions as the Fund may
from time to time determine.
25. "Series" shall mean the various portfolios of the Fund listed on
Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of beneficial interest of the
Fund, each of which is, in the case of a Fund having Series,
allocated to a particular Series.
27. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the
difference between the value of a particular stock index at the close
of the last business day of the contract and the price at which the
futures contract is originally struck.
28. "Stock Index Option" shall mean an exchange traded option
entitling the holder, upon timely exercise, to receive an amount of
cash determined by reference to the difference between the exercise
price and the value of the index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund and the Advisor each hereby constitutes and appoints
the Custodian as custodian of the Securities and money at any time
owned by each Series of the Fund, listed on Appendix B attached
hereto, during the period of this Agreement.
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2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and
in Article VIII, the Fund will deliver or cause to be delivered to
the Custodian all Securities and all money owned by it, at any time
during the period of this Agreement, and shall specify with respect
to such Securities and money the Series to which the same are
specifically allocated. The Custodian shall segregate, keep and
maintain the assets of the Series separate and apart. The Custodian
will not be responsible for any Securities and money not actually
received by it. The Custodian will be entitled to reverse any
credits made on the Fund's behalf where such credits have been
previously made and money is not finally collected. The Fund shall
deliver to the Custodian a certified resolution of the Board of
Trustees of the Fund, substantially in the form of Exhibit A hereto,
approving, authorizing and instructing the Custodian on a continuous
and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the
same are specifically allocated and to utilize the Book-Entry System
to the extent possible in connection with its performance hereunder,
including, without limitation, in connection with settlements of
purchases and sales of Securities, loans of Securities and deliveries
and returns of Securities collateral. Prior to a deposit of
Securities specifically allocated to a Series in the Depository, the
Fund shall deliver to the Custodian a certified resolution of the
Board of Trustees of the Fund, substantially in the form of Exhibit B
hereto, approving, authorizing and instructing the Custodian on a
continuous and ongoing basis until instructed to the contrary by a
Certificate actually received by the Custodian to deposit in the
Depository all Securities specifically allocated to such Series
eligible for deposit therein, and to utilize the Depository to the
extent possible with respect to such Securities in connection with
its performance hereunder, including, without limitation, in
connection with settlements of purchases and sales of Securities,
loans of Securities, and deliveries and returns of Securities
collateral. Securities and money deposited in either the Book-Entry
System or the Depository will be represented in accounts which
include only assets held by the Custodian for customers, including,
but not limited to, accounts in which the Custodian acts in a
fiduciary or representative capacity and will be specifically
allocated on the Custodian's books to the separate account for the
applicable Series. Prior to the Custodian's accepting, utilizing and
acting with respect to Clearing Member confirmations for Options and
transactions in Options for a Series as provided in this Agreement,
the Custodian shall have received a certified resolution of the
Fund's Board of Trustees, substantially in the form of Exhibit C
hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a
Certificate actually received by the
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Custodian, to accept, utilize and act in accordance with such
confirmations as provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts, in
the name of each Series, and shall credit to the separate account for
each Series all money received by it for the account of the Fund with
respect to such Series. Money credited to a separate account for a
Series shall be disbursed by the Custodian only
(a) as hereinafter provided;
(b) pursuant to Certificates setting forth the name and address of
the person to whom the payment is to be made, the Series account from
which payment is to be made and the purpose for which payment is to
be made; or
(c) in payment of such fees and in reimbursement of such expenses
and liabilities of the Custodian attributable to such Series as the
Custodian is entitled to received pursuant to its agreement with the
Fund.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmations and a summary, on a per
Series basis, of all transfers to or from the account of the Fund for
a Series, either hereunder or with any co-custodian or sub-custodian
appointed in accordance with this Agreement during said day. Where
Securities are transferred to the account of the Fund for a Series,
the Custodian shall also by book-entry or otherwise identify as
belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its
nominee) or shown on the Custodian's account on the books of the
Book-Entry System or the Depository. At least monthly and from time
to time, the Custodian shall furnish the Fund with a detailed
statement, on a per Series basis, of the Securities and money held by
the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and
in Article VIII, all Securities held by the Custodian hereunder,
which are issued or issuable only in bearer form, except such
Securities as are held in the Book-Entry System, shall be held by the
Custodian in that form; all other Securities held hereunder may be
registered in the name of the Fund, in the name of any duly appointed
registered nominee of the Custodian as the Custodian may from time to
time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or
nominees. The Fund agrees to furnish to the Custodian appropriate
instruments to enable the Custodian to hold or deliver in proper form
for transfer, or to register in the name of its registered nominee or
in the name of the Book-Entry System or the Depository any Securities
which it may hold hereunder and which may from time to time be
registered in the name of the Fund. The Custodian shall hold all
such Securities specifically allocated to a Series which are not held
in the Book-Entry System or in the Depository in a separate
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account in the name of such Series physically segregated at all times
from those of any other person or persons.
5. Except as otherwise provided in this Agreement and unless
otherwise instructed to the contrary by a Certificate, the Custodian
by itself, or through the use of the Book-Entry System or the
Depository with respect to Securities held hereunder and therein
deposited, shall with respect to all Securities held for the Fund
hereunder in accordance with preceding paragraph 4:
(a) collect all income, dividends and distributions due or payable;
(b) give notice to the Fund and present payment and collect the
amount payable upon such Securities which are called, but only if
either (i) the Custodian receives a written notice of such call, or
(ii) notice of such call appears in one or more of the publications
listed in Appendix C annexed hereto, which may be amended at any time
by the Custodian without the prior notification or consent of the
Fund;
(c) present for payment and collect the amount payable upon all
Securities which mature;
(d) surrender Securities in temporary form for definitive
Securities;
(e) execute, as custodian, any necessary declarations or
certificates of ownership under the Federal Income Tax Laws or the
laws or regulations of any other taxing authority now or hereafter in
effect;
(f) hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the
account of a Series, all rights and similar securities issued with
respect to any Securities held by the Custodian for such Series
hereunder; and
(g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of
calls, maturities of Securities and expiration of rights) relating to
Securities held pursuant to this Agreement which are actually
received by the Custodian, such proxies and other similar materials
to be executed by the registered owner (if Securities are registered
otherwise than in the name of the Fund), but without indicating the
manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the
Depository, shall:
(a) execute and deliver to such persons as may be designated
in such Certificate proxies, consents, authorizations, and any other
instruments whereby the
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authority of the Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in such Certificate may be exercised;
(b) deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate in exchange for other Securities
or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or
recapitalization of any corporation, or the exercise of any
conversion privilege and receive and hold hereunder specifically
allocated to such Series any cash or other Securities received in
exchange;
(c) promptly deliver any Securities held by the Custodian hereunder
for the Series specified in such Certificate to any protective
committee, reorganization committee or other person specified in such
Certificate or as required by law in connection with the
reorganization, refinancing, merger, consolidation, recapitalization
or sale of assets of any corporation, and receive and hold hereunder
specifically allocated to such Series such certificates of deposit,
interim receipts or other instruments or documents as may be issued
to it to evidence such delivery;
(d) make such transfers or exchanges of the assets of the Series
specified in such Certificate, and take such other steps as shall be
stated in such Certificate to be for the purpose of effectuating any
duly authorized plan of liquidation, reorganization, merger,
consolidation or recapitalization of the Fund; and
(e) present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article
which may be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any
instrument or certificate representing any Futures Contract, any
Option, or any Futures Contract Option until after it shall have
determined, or shall have received a Certificate from the Fund
stating, that any such instruments or certificates are available.
The Fund shall deliver to the Custodian such a Certificate no later
than the business day preceding the availability of any such
instrument or certificate. Prior to such availability, the
Custodian shall comply with Section 17(f) of the Investment Company
Act of 1940, as amended, in connection with the purchase, sale,
settlement, closing-out or writing of Futures Contracts, Options, or
Futures Contract Options by making payments or deliveries specified
in Certificates received by the Custodian in connection with any such
purchase, sale, writing, settlement or closing-out upon its receipt
from a broker, dealer, or futures commission merchant of a statement
or confirmation reasonably believed by the Custodian to be in the
form customarily used by brokers, dealers, or futures commission
merchants with respect to such Futures Contracts, Options, or Futures
Contract Options, as the case may be, confirming that such Security
is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or any
nominee
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of the Custodian) as custodian for the Fund, provided,
however, that notwithstanding the foregoing, payments to or
deliveries from the Margin Account, and payments with respect to
Securities to which a Margin Account relates, shall be made in
accordance with the terms and conditions of the Margin Account
Agreement. Whenever any such instruments or certificates are
available, the Custodian shall, notwithstanding any provision in this
Agreement to the contrary, make payment for any Futures Contract,
Option, or Futures Contract Option for which such instruments or such
certificates are available only against the delivery to the Custodian
of such instrument or such certificate, and deliver any Futures
Contract, Option or Futures Contract Option for which such
instruments or such certificates are available only against receipt
by the Custodian of payment therefor. Any such instrument or
certificate delivered to the Custodian shall be held by the Custodian
hereunder in accordance with, and subject to, the provisions of this
Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other
than a purchase of an Option, a Futures Contract, or a Futures
Contract Option, the Fund shall deliver to the Custodian (i) with
respect to each purchase of Securities which are not Money Market
Securities, a Certificate, and (ii) with respect to each purchase of
Money Market Securities, a Certificate or Oral Instructions,
specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name
of the issuer and the title of the Securities; (c) the number of
shares or the principal amount purchased and accrued interest, if
any; (d) the date of purchase and settlement; (e) the purchase price
per unit; (f) the total amount payable upon such purchase; (g) the
name of the person from whom or the broker through whom the purchase
was made, and the name of the clearing broker, if any; and (h) the
name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund, pay
to the broker specified in the Certificate out of the money held for
the account of such Series the total amount payable upon such
purchase, provided that the same conforms to the total amount payable
as set forth in such Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any
Reverse Repurchase Agreement, the Fund shall deliver to the Custodian
(i) with respect to each sale of Securities which are not Money
Market Securities, a Certificate, and (ii) with respect to each sale
of Money Market Securities, a Certificate or Oral Instructions,
specifying with respect to each such sale: (a) the Series to which
such Securities were specifically allocated; (b) the name of the
issuer and the title of the Security; (c) the number of shares
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or principal amount sold, and accrued interest, if any; (d) the date
of sale; (e) the sale price per unit; (f) the total amount payable to
the Fund upon such sale; (g) the name of the broker through whom or
the person to whom the sale was made, and the name of the clearing
broker, if any; and (h) the name of the broker to whom the Securities
are to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified in the
Certificate against payment of the total amount payable to the Fund
upon such sale, provided that the same conforms to the total amount
payable as set forth in such Certificate or Oral Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund
shall deliver to the Custodian a Certificate specifying with respect
to each Option purchased: (a) the Series to which such Option is
specifically allocated; (b) the type of Option (put or call); (c) the
name of the issuer and the title and number of shares subject to such
Option or, in the case of a Stock Index Option, the stock index to
which such Option relates and the number of Stock Index Options
purchased; (d) the expiration date; (e) the exercise price; (f) the
dates of purchase and settlement; (g) the total amount payable by the
Fund in connection with such purchase; (h) the name of the Clearing
Member through whom such Option was purchased; and (i) the name of
the broker to whom payment is to be made. The Custodian shall pay,
upon receipt of a Clearing Member's statement confirming the purchase
of such Option held by such Clearing Member for the account of the
Custodian (or any duly appointed and registered nominee of the
Custodian) as custodian for the Fund, out of money held for the
account of the Series to which such Option is to be specifically
allocated, the total amount payable upon such purchase to the
Clearing Member through whom the purchase was made, provided that the
same conforms to the total amount payable as set forth in such
Certificate.
2. Promptly after the sale of any Option purchased by the Fund
pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to each such sale:
(a) the Series to which such Option was specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer and the
title and number of shares subject to such Option or, in the case of
a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e)
the sale price; (f) the date of settlement; (g) the total amount
payable to the Fund upon such sale; and (h) the name of the Clearing
Member through whom the sale was made. The Custodian shall consent
to the delivery of the Option sold by the Clearing Member which
previously supplied the confirmation described in preceding paragraph
1 of this Article with respect to such Option against payment to the
Custodian of the total amount payable to the Fund, provided that the
same conforms to the total amount payable as set forth in such
Certificate.
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3. Promptly after the exercise by the Fund of any Call Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall
deliver to the Custodian a Certificate specifying with respect to
such Call Option: (a) the Series to which such Call Option was
specifically allocated; (b) the name of the issuer and the title and
number of shares subject to the Call Option; (c) the expiration date;
(d) the date of exercise and settlement; (e) the exercise price per
share; (f) the total amount to be paid by the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such
Call Option was exercised. The Custodian shall, upon receipt of the
Securities underlying the Call Option which was exercised, pay out of
the money held for the account of the Series to which such Call
Option was specifically allocated the total amount payable to the
Clearing Member through whom the Call Option was exercised, provided
that the same conforms to the total amount payable as set forth in
such Certificate.
4. Promptly after the exercise by the Fund of any Put Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall
deliver to the Custodian a Certificate specifying with respect to
such Put Option: (a) the Series to which such Put Option was
specifically allocated; (b) the name of the issuer and the title and
number of shares subject to the Put Option; (c) the expiration date;
(d) the date of exercise and settlement; (e) the exercise price per
share; (f) the total amount to be paid to the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such
Put Option was exercised. The Custodian shall, upon receipt of the
amount payable upon the exercise of the Put Option, deliver or direct
the Depository to deliver the Securities specifically allocated to
such Series, provided the same conforms to the amount payable to the
Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index
Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund
shall deliver to the Custodian a Certificate specifying with respect
to such Stock Index Option: (a) the Series to which such Stock Index
Option was specifically allocated; (b) the type of Stock Index Option
(put or call); (c) the number of Options being exercised; (d) the
stock index to which such Option relates; (e) the expiration date;
(f) the exercise price; (g) the total amount to be received by the
Fund in connection with such exercise; and (h) the Clearing Member
from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with
respect to such Covered Call Option: (a) the Series for which such
Covered Call Option was written; (b) the name of the issuer and the
title and number of shares for which the Covered Call Option was
written and which underlie the same; (c) the expiration date; (d) the
exercise price; (e) the premium to be received by the Fund; (f) the
date such Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received. The
Custodian shall deliver or cause to be delivered, in exchange for
receipt of the premium specified in the Certificate with respect to
such Covered Call Option, such receipts as are required in accordance
with the customs prevailing among Clearing
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Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as
may be required by such receipts. Notwithstanding the foregoing, the
Custodian has the right, upon prior written notification to the Fund,
at any time to refuse to issue any receipts for Securities in the
possession of the Custodian and not deposited with the Depository
underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described
in the preceding paragraph of this Article is exercised, the Fund
shall promptly deliver to the Custodian a Certificate instructing the
Custodian to deliver, or to direct the Depository to deliver, the
Securities subject to such Covered Call Option and specifying: (a)
the Series for which such Covered Call Option was written; (b) the
name of the issuer and the title and number of shares subject to the
Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to
the Fund upon such delivery. Upon the return and/or cancellation of
any receipts delivered pursuant to paragraph 6 of this Article, the
Custodian shall deliver, or direct the Depository to deliver, the
underlying Securities as specified in the Certificate against payment
of the amount to be received as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to
such Put Option: (a) the Series for which such Put Option was
written; (b) the name of the issuer and the title and number of
shares for which the Put Option is written and which underlie the
same; (c) the expiration date; (d) the exercise price; (e) the
premium to be received by the Fund; (f) the date such Put Option is
written; (g) the name of the Clearing Member through whom the premium
is to be received and to whom a Put Option guarantee letter is to be
delivered; (h) the amount of cash, and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be
deposited in the Senior Security Account for such Series; and (i) the
amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be deposited into the Collateral Account
for such Series. The Custodian shall, after making the deposits into
the Collateral Account specified in the Certificate, issue a Put
Option guarantee letter substantially in the form utilized by the
Custodian on the date hereof, and deliver the same to the Clearing
Member specified in the Certificate against receipt of the premium
specified in said Certificate. Notwithstanding the foregoing, the
Custodian shall be under no obligation to issue any Put Option
guarantee letter or similar document if it is unable to make any of
the representations contained therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to
the Custodian a Certificate specifying: (a) the Series to which such
Put Option was written; (b) the name of the issuer and title and
number of shares subject to the Put Option; (c) the Clearing Member
from whom the underlying Securities are to be received; (d) the total
amount payable by the Fund upon such delivery; (e) the amount of cash
and/or the amount and kind of
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Securities specifically allocated to such Series to be withdrawn from
the Collateral Account for such Series and (f) the amount of cash and/or
the amount and kind of Securities, specifically allocated to such Series,
if any, to be withdrawn from the Senior Security Account. Upon the
return and/or cancellation of any Put Option guarantee letter or similar
document issued by the Custodian in connection with such Put Option, the
Custodian shall pay out of the money held for the account of the
Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as
set forth in such Certificate against delivery of such Securities,
and shall make the withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with
respect to such Stock Index Option: (a) the Series for which such
Stock Index Option was written; (b) whether such Stock Index Option
is a put or a call; (c) the number of options written; (d) the stock
index to which such Option relates; (e) the expiration date; (f) the
exercise price; (g) the Clearing Member through whom such Option was
written; (h) the premium to be received by the Fund; (i) the amount
of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior
Security Account for such Series; (j) the amount of cash and/or the
amount and kind of Securities, if any, specifically allocated to such
Series to be deposited in the Collateral Account for such Series; and
(k) the amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in a
Margin Account, and the name in which such account is to be or has
been established. The Custodian shall, upon receipt of the premium
specified in the Certificate, make the deposits, if any, into the
Senior Security Account specified in the Certificate, and either (1)
deliver such receipts, if any, which the Custodian has specifically
agreed to issue, which are in accordance with the customs prevailing
among Clearing Members in Stock Index Options and make the deposits
into the Collateral Account specified in the Certificate, or (2) make
the deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described
in the preceding paragraph of this Article is exercised, the Fund
shall promptly deliver to the Custodian a Certificate specifying with
respect to such Stock Index Option: (a) the Series for which such
Stock Index Option was written; (b) such information as may be
necessary to identify the Stock Index Option being exercised; (c) the
Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and
whether such amount is to be paid by or to the Fund; (e) the amount
of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Margin Account; and (f) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Senior Security
Account for such Series; and the amount of cash and/or the amount and
kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the
receipt, if any, delivered pursuant to the preceding paragraph of
this Article, the Custodian shall pay out of the money held for the
account of the Series to which such Stock Index Option was
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specifically allocated to the Clearing Member specified in the
Certificate the total amount payable, if any, as specified therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in
a transaction expressly designated as a "Closing Purchase
Transaction" in order to liquidate its position as a writer of an
Option, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to the Option being purchased:
(a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the issuer
and the title and number of shares subject to the Option, or, in the
case of a Stock Index Option, the stock index to which such Option
relates and the number of Options held; (d) the exercise price; (e)
the premium to be paid by the Fund; (f) the expiration date; (g) the
type of Option (put or call); (h) the date of such purchase; (i) the
name of the Clearing Member to whom the premium is to be paid; and
(j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin
Account, or the Senior Security Account for such Series. Upon the
Custodian's payment of the premium and the return and/or cancellation
of any receipt issued pursuant to paragraphs 6, 8 or 10 of this
Article with respect to the Option being liquidated through the
Closing Purchase Transaction, the Custodian shall remove, or direct
the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing
Purchase Transaction with respect to any Option purchased or written
by the Fund and described in this Article, the Custodian shall delete
such Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein, and upon the return and/or
cancellation of any receipts issued by the Custodian, shall make such
withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a
Certificate received in connection with such expiration, exercise,
or consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect
to such Futures Contract, (or with respect to any number of identical
Futures Contract(s)): (a) the Series for which the Futures Contract
is being entered; (b) the category of Futures Contract (the name of
the underlying stock index or financial instrument); (c) the number
of identical Futures Contracts entered into; (d) the delivery or
settlement date of the Futures Contract(s); (e) the date the Futures
Contract(s) was (were) entered into and the maturity date; (f)
whether the Fund is buying (going long) or selling (going short) on
such Futures Contract(s); (g)
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the amount of cash and/or the amount and kind of Securities, if any,
to be deposited in the Senior Security Account for such Series; (h) the
name of the broker, dealer, or futures commission merchant through whom
the Futures Contract was entered into; and (i) the amount of fee or
commission, if any, to be paid and the name of the broker, dealer, or
futures commission merchant to whom such amount is to be paid. The
Custodian shall make the deposits, if any, to the Margin Account in
accordance with the terms and conditions of the Margin Account Agreement.
The Custodian shall make payment out of the money specifically allocated
to such Series of the fee or commission, if any, specified in the Certificate
and deposit in the Senior Security Account for such Series the amount
of cash and/or the amount and kind of Securities specified in said
Certificate.
2. (a) Any variation margin payment or similar payment required to
be made by the Fund to a broker, dealer, or futures commission
merchant with respect to an outstanding Futures Contract, shall be
made by the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a
broker, dealer, or futures commission merchant to the Fund with
respect to an outstanding Futures Contract, shall be received and
dealt with by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such
Futures Contract, the Fund shall deliver to the Custodian a
Certificate specifying: (a) the Futures Contract and the Series to
which the same relates; (b) with respect to a Stock Index Futures
Contract, the total cash settlement amount to be paid or received,
and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the broker,
dealer, or futures commission merchant to or from whom payment or
delivery is to be made or received; and (d) the amount of cash and/or
Securities to be withdrawn from the Senior Security Account for such
Series. The Custodian shall make the payment or delivery specified
in the Certificate, and delete such Futures Contract from the
statements delivered to the Fund pursuant to paragraph 3 of Article
III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset
a Futures Contract held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate specifying: (a) the items of
information required in a Certificate described in paragraph 1 of
this Article, and (b) the Futures Contract being offset. The
Custodian shall make payment out of the money specifically allocated
to such Series of the fee or commission, if any, specified in the
Certificate and delete the Futures Contract being offset from the
statements delivered to the Fund pursuant to paragraph 3 of Article
III herein, and make such withdrawals from the Senior Security
Account for such Series as may be specified in such Certificate. The
withdrawals, if any, to be made from the Margin Account shall be made
by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
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5. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a
futures commission merchant upon receipt of a Certificate from the
Fund specifying: (a) the name of the futures commission merchant;
(b) the specific cash and Securities to be delivered; (c) the date of
such delivery; and (d) the date of the agreement between the Fund and
such futures commission merchant entered pursuant to Rule 17f-6 under
the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall constitute (x) a representation and
warranty by the Fund that the Rule 17f-6 agreement has been duly
authorized, executed and delivered by the Fund and the futures
commission merchant and complies with Rule 17f-6, and (y) an
agreement by the Fund that the Custodian shall not be liable for the
acts or omissions of any such futures commission merchant.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by
the Fund, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to such Futures Contract Option:
(a) the Series to which such Option is specifically allocated; (b)
the type of Futures Contract Option (put or call); (c) the type of
Futures Contract and such other information as may be necessary to
identify the Futures Contract underlying the Futures Contract Option
purchased; (d) the expiration date; (e) the exercise price; (f) the
dates of purchase and settlement; (g) the amount of premium to be
paid by the Fund upon such purchase; (h) the name of the broker or
futures commission merchant through whom such option was purchased;
and (i) the name of the broker, or futures commission merchant, to
whom payment is to be made. The Custodian shall pay out of the money
specifically allocated to such Series, the total amount to be paid
upon such purchase to the broker or futures commissions merchant
through whom the purchase was made, provided that the same conforms
to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to
each such sale: (a) Series to which such Futures Contract Option was
specifically allocated; (b) the type of Futures Contract Option (put
or call); (c) the type of Futures Contract and such other information
as may be necessary to identify the Futures Contract underlying the
Futures Contract Option; (d) the date of sale; (e) the sale price;
(f) the date of settlement; (g) the total amount payable to the Fund
upon such sale; and (h) the name of the broker or futures commission
merchant through whom the sale was made. The Custodian shall consent
to the cancellation of the Futures Contract Option being closed
against payment to the Custodian of the total amount payable to the
Fund, provided the same conforms to the total amount payable as set
forth in such Certificate.
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3. Whenever a Futures Contract Option purchased by the Fund
pursuant to paragraph 1 is exercised by the Fund, the Fund shall
promptly deliver to the Custodian a Certificate specifying: (a) the
Series to which such Futures Contract Option was specifically
allocated; (b) the particular Futures Contract Option (put or call)
being exercised; (c) the type of Futures Contract underlying the
Futures Contract Option; (d) the date of exercise; (e) the name of
the broker or futures commission merchant through whom the Futures
Contract Option is exercised; (f) the net total amount, if any,
payable by the Fund; (g) the amount, if any, to be received by the
Fund; and (h) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such
Series. The Custodian shall make, out of the money and Securities
specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in
the Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the terms
and conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with
respect to such Futures Contract Option: (a) the Series for which
such Futures Contract Option was written; (b) the type of Futures
Contract Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the Futures
Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the
Fund; (g) the name of the broker or futures commission merchant
through whom the premium is to be received; and (h) the amount of
cash and/or the amount and kind of Securities, if any, to be
deposited in the Senior Security Account for such Series. The
Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the money and Securities specifically
allocated to such Series the deposits into the Senior Security
Account, if any, as specified in the Certificate. The deposits, if
any, to be made to the Margin Account shall be made by the Custodian
in accordance with the terms and conditions of the Margin Account
Agreement.
5. Whenever a Futures Contract Option written by the Fund which is
a call is exercised, the Fund shall promptly deliver to the Custodian
a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular
Futures Contract Option exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the name of the broker or
futures commission merchant through whom such Futures Contract Option
was exercised; (e) the net total amount, if any, payable to the Fund
upon such exercise; (f) the net total amount, if any, payable by the
Fund upon such exercise; and (g) the amount of cash and/or the amount
and kind of Securities to be deposited in the Senior Security Account
for such Series. The Custodian shall, upon its receipt of the net
total amount payable to the Fund, if any, specified in such
Certificate make the payments, if any, and the deposits, if any, into
the Senior Security Account as specified in the Certificate. The
deposits, if any, to be made to the Margin Account shall be made by
the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
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6. Whenever a Futures Contract Option which is written by the Fund
and which is a put is exercised, the Fund shall promptly deliver to
the Custodian a Certificate specifying: (a) the Series to which such
Option was specifically allocated; (b) the particular Futures
Contract Option exercised; (c) the type of Futures Contract
underlying such Futures Contract Option; (d) the name of the broker
or futures commission merchant through whom such Futures Contract
Option is exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by
the Fund upon such exercise; and (g) the amount and kind of
Securities and/or cash to be withdrawn from or deposited in, the
Senior Security Account for such Series, if any. The Custodian
shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the money and
Securities specifically allocated to such Series, the payments, if
any, and the deposits, if any, into the Senior Security Account as
specified in the Certificate. The deposits to and/or withdrawals
from the Margin Account, if any, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account
Agreement.
7. Whenever the Fund purchases any Futures Contract Option
identical to a previously written Futures Contract Option described
in this Article in order to liquidate its position as a writer of
such Futures Contract Option, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to the Futures
Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing
transaction; (c) the type of Futures Contract and such other
information as may be necessary to identify the Futures Contract
underlying the Futures Option Contract; (d) the exercise price; (e)
the premium to be paid by the Fund; (f) the expiration date; (g) the
name of the broker or futures commission merchant to whom the premium
is to be paid; and (h) the amount of cash and/or the amount and kind
of Securities, if any, to be withdrawn from the Senior Security
Account for such Series. The Custodian shall effect the withdrawals
from the Senior Security Account specified in the Certificate. The
withdrawals, if any, to be made from the Margin Account shall be made
by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or
purchased by the Fund and described in this Article, the Custodian
shall (a) delete such Futures Contract Option from the statements
delivered to the Fund pursuant to paragraph 3 of Article III herein
and, (b) make such withdrawals from and/or in the case of an exercise
such deposits into the Senior Security Account as may be specified in
a Certificate. The deposits to and/or withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to
Article VI hereof.
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10. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a
futures commission merchant upon receipt of a Certificate from the
Fund specifying: (a) the name of the futures commission merchant;
(b) the specific cash and Securities to be delivered; (c) the date of
such delivery; and (d) the date of the agreement between the Fund and
such futures commission merchant entered pursuant to Rule 17f-6 under
the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall constitute (x) a representation and
warranty by the Fund that the Rule 17f-6 agreement has been duly
authorized, executed and delivered by the Fund and the futures
commission merchant and complies with Rule 17f-6, and (y) an
agreement by the Fund that the Custodian shall not be liable for the
acts or omissions of any such futures commission merchant.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the
Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series for which such short sale was made; (b)
the name of the issuer and the title of the Security; (c) the number
of shares or principal amount sold, and accrued interest or
dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit; (f) the total amount credited to the Fund upon
such sale, if any, (g) the amount of cash and/or the amount and kind
of Securities, if any, which are to be deposited in a Margin Account
and the name in which such Margin Account has been or is to be
established; (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in a Senior Security Account, and
(i) the name of the broker through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker
confirming such sale and that the total amount credited to the Fund
upon such sale, if any, as specified in the Certificate is held by
such broker for the account of the Custodian (or any nominee of the
Custodian) as custodian of the Fund, issue a receipt or make the
deposits into the Margin Account and the Senior Security Account
specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund
shall promptly deliver to the Custodian a Certificate specifying with
respect to each such closing-out: (a) the Series for which such
transaction is being made; (b) the name of the issuer and the title
of the Security; (c) the number of shares or the principal amount,
and accrued interest or dividends, if any, required to effect such
closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the
net total amount payable to the Fund upon such closing-out; (g) the
net total amount payable to the broker upon such closing-out; (h) the
amount of cash and the amount and kind of Securities to be withdrawn,
if any, from the Margin Account; (i) the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from the
Senior Security Account; and (j) the name of the broker through whom
the Fund is effecting
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such closing-out. The Custodian shall, upon receipt of the net total
amount payable to the Fund upon such closing-out, and the return and/or
cancellation of the receipts, if any, issued by the Custodian with respect
to the short sale being closed-out, pay out of the money held for the
account of the Fund to the broker the net total amount payable to the broker,
and make the withdrawals from the Margin Account and the Senior Security
Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement
with respect to Securities and money held by the Custodian hereunder,
the Fund shall deliver to the Custodian a Certificate, or in the
event such Reverse Repurchase Agreement is a Money Market Security, a
Certificate or Oral Instructions specifying: (a) the Series for
which the Reverse Repurchase Agreement is entered; (b) the total
amount payable to the Fund in connection with such Reverse Repurchase
Agreement and specifically allocated to such Series; (c) the broker
or dealer through or with whom the Reverse Repurchase Agreement is
entered; (d) the amount and kind of Securities to be delivered by the
Fund to such broker or dealer; (e) the date of such Reverse
Repurchase Agreement; and (f) the amount of cash and/or the amount
and kind of Securities, if any, specifically allocated to such Series
to be deposited in a Senior Security Account for such Series in
connection with such Reverse Repurchase Agreement. The Custodian
shall, upon receipt of the total amount payable to the Fund specified
in the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior Security
Account, specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described
in preceding paragraph 1 of this Article, the Fund shall promptly
deliver a Certificate or, in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate or Oral
Instructions to the Custodian specifying: (a) the Reverse Repurchase
Agreement being terminated and the Series for which same was entered;
(b) the total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be received by
the Fund and specifically allocated to such Series in connection with
such termination; (d) the date of termination; (e) the name of the
broker or dealer with or through whom the Reverse Repurchase
Agreement is to be terminated; and (f) the amount of cash and/or the
amount and kind of Securities to be withdrawn from the Senior
Securities Account for such Series. The Custodian shall, upon
receipt of the amount and kind of Securities to be received by the
Fund specified in the Certificate or Oral Instructions, make the
payment to the broker or dealer, and the withdrawals, if any, from
the Senior Security Account, specified in such Certificate or Oral
Instructions.
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ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall
deliver or cause to be delivered to the Custodian a Certificate
specifying with respect to each such loan: (a) the Series to which
the loaned Securities are specifically allocated; (b) the name of the
issuer and the title of the Securities, (c) the number of shares or
the principal amount loaned, (d) the date of loan and delivery, (e)
the total amount to be delivered to the Custodian against the loan of
the Securities, including the amount of cash collateral and the
premium, if any, separately identified, and (f) the name of the
broker, dealer, or financial institution to which the loan was made.
The Custodian shall deliver the Securities thus designated to the
broker, dealer or financial institution to which the loan was made
upon receipt of the total amount designated as to be delivered
against the loan of Securities. The Custodian may accept payment in
connection with a delivery otherwise than through the Book-Entry
System or Depository only in the form of a certified or bank
cashier's check payable to the order of the Fund or the Custodian
drawn on New York Clearing House funds and may deliver Securities in
accordance with the customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by the
Fund, the Fund shall deliver or cause to be delivered to the
Custodian a Certificate specifying with respect to each such loan
termination and return of Securities: (a) the Series to which the
loaned Securities are specifically allocated; (b) the name of the
issuer and the title of the Securities to be returned, (c) the number
of shares or the principal amount to be returned, (d) the date of
termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any
offsetting credits as described in said Certificate), and (f) the
name of the broker, dealer, or financial institution from which the
Securities will be returned. The Custodian shall receive all
Securities returned from the broker, dealer, or financial institution
to which such Securities were loaned and upon receipt thereof shall
pay, out of the money held for the account of the Fund, the total
amount payable upon such return of Securities as set forth in the
Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to,
or withdrawals from, a Senior Security Account as specified in a
Certificate received by the Custodian. Such Certificate shall
specify the Series for which such deposit or withdrawal is to be made
and the amount of cash and/or the amount and kind of Securities
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specifically allocated to such Series to be deposited in, or withdrawn
from, such Senior Security Account for such Series. In the event that
the Fund fails to specify in a Certificate the Series, the name of the
issuer, the title and the number of shares or the principal amount of
any particular Securities to be deposited by the Custodian into, or
withdrawn from, a Senior Securities Account, the Custodian shall be
under no obligation to make any such deposit or withdrawal and shall
so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or
Clearing Member in whose name, or for whose benefit, the account was
established as specified in the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions
with respect to Securities deposited in any Margin Account shall be
dealt with in accordance with the terms and conditions of the Margin
Account Agreement.
4. The Custodian shall have a continuing lien and security interest
in and to any property at any time held by the Custodian in any
Collateral Account described herein. In accordance with applicable
law, and upon notice to the Fund the Custodian may enforce its lien
and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or
similar document or any receipt issued hereunder by the Custodian.
In the event the Custodian should realize on any such property net
proceeds which are less than the Custodian's obligations under any
Put Option guarantee letter or similar document or any receipt, such
deficiency shall be a debt owed the Custodian by the Fund within the
scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or
Securities are held specifying as of the close of business on the
previous business day: (a) the name of the Margin Account; (b) the
amount and kind of Securities held therein; and (c) the amount of
money held therein. The Custodian shall make available upon request
to any broker, dealer, or futures commission merchant specified in
the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in
which cash and/or Securities are maintained in a Collateral Account
for any Series, the Custodian shall furnish the Fund with a statement
with respect to such Collateral Account specifying the amount of cash
and/or the amount and kind of Securities held therein. No later than
the close of business next succeeding the delivery to the Fund of
such statement, the Fund shall furnish to the Custodian a Certificate
specifying the then market value of the Securities described in such
statement. In the event such then market value is indicated to be
less than the Custodian's obligation with respect to any outstanding
Put Option guarantee letter or similar document, the Fund shall
promptly specify in a Certificate the
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additional cash and/or Securities to be deposited in such Collateral
Account to eliminate such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution
of the Board of Trustees of the Fund, certified by the Secretary or
any Assistant Secretary, either (i) setting forth with respect to the
Series specified therein the date of the declaration of a dividend or
distribution, the date of payment thereof, the record date as of
which shareholders entitled to payment shall be determined, the
amount payable per Share of such Series to the shareholders of record
as of that date and the total amount payable to the Dividend Agent
and any sub-dividend agent or co-dividend agent of the Fund on the
payment date, or (ii) authorizing with respect to the Series
specified therein the declaration of dividends and distributions on a
daily basis and authorizing the Custodian to rely on Oral
Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment
shall be determined, the amount payable per Share of such Series to
the shareholders of record as of that date and the total amount
payable to the Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall
pay out of the money held for the account of each Series the total
amount payable to the Dividend Agent and any sub-dividend agent or
co-dividend agent of the Fund with respect to such Series.
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade date, and price;
and
(b) the amount of money to be received by the Custodian for the sale
of such Shares and specifically allocated to the separate account in
the name of such Series.
2. Upon receipt of such money from the Transfer Agent, the
Custodian shall credit such money to the separate account in the name
of the Series for which such money was received.
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3. Upon issuance of any Shares of any Series described in the
foregoing provisions of this Article, the Custodian shall pay, out of
the money held for the account of such Series, all original issue or
other taxes required to be paid by the Fund in connection with such
issuance upon the receipt of a Certificate specifying the amount to
be paid.
4. Except as provided hereinafter, whenever the Fund desires the
Custodian to make payment out of the money held by the Custodian
hereunder in connection with a redemption of any Shares, it shall
furnish to the Custodian a Certificate specifying:
(a) the number and Series of Shares redeemed; and
(b) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth
the Series and number of Shares received by the Transfer Agent for
redemption and that such Shares are in good form for redemption, the
Custodian shall make payment to the Transfer Agent out of the money
held in the separate account in the name of the Series the total
amount specified in the Certificate issued pursuant to the foregoing
paragraph 4 of this Article.
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian should in its sole discretion advance funds on
behalf of any Series which results in an overdraft because the money
held by the Custodian in the separate account for such Series shall
be insufficient to pay the total amount payable upon a purchase of
Securities specifically allocated to such Series, as set forth in a
Certificate or Oral Instructions, or which results in an overdraft in
the separate account of such Series for some other reason, or if the
Fund is for any other reason indebted to the Custodian with respect
to a Series, including any indebtedness to The Bank of New York under
the Fund's Cash Management and Related Services Agreement (, but not
including a borrowing for investment or for temporary or emergency
purposes using Securities as collateral pursuant to a separate
agreement and subject to the provisions of paragraph 2 of this
Article), such overdraft or indebtedness shall be deemed to be a loan
made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum
(based on a 360-day year for the actual number of days involved)
equal to 1/2% over Custodian's prime commercial lending rate in
effect from time to time, such rate to be adjusted on the effective
date of any change in such prime commercial lending rate but in no
event to be less than 6% per annum. In addition, the Fund hereby
agrees that the Custodian shall have a continuing lien, security
interest, and security entitlement in and to any property which may
include investment property or any financial asset specifically
allocated to such Series at any time held by it for the benefit of
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such Series or in which the Fund may have an interest which is then
in the Custodian's possession or control or in possession or control
of any third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any time, upon
notice to the Fund, to charge any such overdraft or indebtedness
together with interest due thereon against any balance of account
standing to such Series' credit on the Custodian's books. In
addition, the Fund hereby covenants that on each Business Day on
which either it intends to enter a Reverse Repurchase Agreement
and/or otherwise borrow from a third party, or which next succeeds a
Business Day on which at the close of business the Fund had
outstanding a Reverse Repurchase Agreement or such a borrowing, it
shall prior to 9 a.m., New York City time, advise the Custodian, in
writing, of each such borrowing, shall specify the Series to which
the same relates, and shall not incur any indebtedness not so
specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the
Custodian) from which it borrows money for investment or for
temporary or emergency purposes using Securities held by the
Custodian hereunder as collateral for such borrowings, a notice or
undertaking in the form currently employed by any such bank setting
forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to
each such borrowing: (a) the Series to which such borrowing relates;
(b) the name of the bank, (c) the amount and terms of the borrowing,
which may be set forth by incorporating by reference an attached
promissory note, duly endorsed by the Fund, or other loan agreement,
(d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the
total amount payable to the Fund on the borrowing date, (g) the
market value of Securities to be delivered as collateral for such
loan, including the name of the issuer, the title and the number of
shares or the principal amount of any particular Securities, and (h)
a statement specifying whether such loan is for investment purposes
or for temporary or emergency purposes and that such loan is in
conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date
specified in a Certificate the specified collateral and the executed
promissory note, if any, against delivery by the lending bank of the
total amount of the loan payable, provided that the same conforms to
the total amount payable as set forth in the Certificate. The
Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to
all rights therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such Securities
as additional collateral as may be specified in a Certificate to
collateralize further any transaction described in this paragraph.
The Fund shall cause all Securities released from collateral status
to be returned directly to the Custodian, and the Custodian shall
receive from time to time such return of collateral as may be
tendered to it. In the event that the Fund fails to specify in a
Certificate the Series, the name of the issuer, the title and number
of shares or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall not be
under any obligation to deliver any Securities.
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ARTICLE XV.
INSTRUCTIONS
1. With respect to any software provided by the Custodian to a Fund
in order for the Fund to transmit Instructions to the Custodian (the
"Software"), the Custodian grants to such Fund a personal,
nontransferable and nonexclusive license to use the Software solely
for the purpose of transmitting Instructions to, and receiving
communications from, the Custodian in connection with its account(s).
The Fund shall use the Software solely for its own internal and
proper business purposes, and not in the operation of a service
bureau, and agrees not to sell, reproduce, lease or otherwise
provide, directly or indirectly, the Software or any portion thereof
to any third party without the prior written consent of the
Custodian. The Fund acknowledges that the Custodian and its
suppliers have title and exclusive proprietary rights to the
Software, including any trade secrets or other ideas, concepts, know
how, methodologies, or information incorporated therein and the
exclusive rights to any copyrights, trademarks and patents (including
registrations and applications for registration of either) or
statutory or legal protections available with respect thereof. The
Fund further acknowledges that all or a part of the Software may be
copyrighted or trademarked (or a registration or claim made therefor)
by the Custodian or its suppliers. The Fund shall not take any
action with respect to the Software inconsistent with the foregoing
acknowledgments, nor shall the Fund attempt to decompile, reverse
engineer or modify the Software. The Fund may not copy, sell, lease
or provide, directly or indirectly, any of the Software or any
portion thereof to any other person or entity without the Custodian's
prior written consent. The Fund may not remove any statutory
copyright notice, or other notice including the software or on any
media containing the Software. The Fund shall reproduce any such
notice on any reproduction of the Software and shall add statutory
copyright notice or other notice to the Software or media upon the
Bank's request. Custodian agrees to provide reasonable training,
instruction manuals and access to Custodian's "help desk" in
connection with the Fund's user support necessary to use of the
Software. At the Fund's request, Custodian agrees to permit
reasonable testing of the Software by the Fund.
2. The Fund shall obtain and maintain at its own cost and expense
all equipment and services, including but not limited to
communications services, necessary for it to utilize the Software and
transmit Instructions to the Custodian. The Custodian shall not be
responsible for the reliability, compatibility with the Software or
availability of any such equipment or services or the performance or
nonperformance by any nonparty to this Custody Agreement.
3. The Fund acknowledges that the Software, all data bases made
available to the Fund by utilizing the Software (other than data
bases relating solely to the assets of the Fund and transactions with
respect thereto), and any proprietary data, processes, information
and documentation (other than which are or become part of the public
domain or are legally required to be made available to the public)
(collectively, the
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"Information"), are the exclusive and confidential
property of the Custodian. The Fund shall keep the Information
confidential by using the same care and discretion that the Fund uses
with respect to its own confidential property and trade secrets and
shall neither make nor permit any disclosure without the prior
written consent of the Custodian. Upon termination of this Agreement
or the Software license granted hereunder for any reason, the Fund
shall return to the Custodian all copies of the Information which are
in its possession or under its control or which the Fund distributed
to third parties. The provisions of this Article shall not affect
the copyright status of any of the Information which may be
copyrighted and shall apply to all Information whether or not
copyrighted.
4. The Custodian reserves the right to modify, at its own expense,
the Software from time to time without prior notice and the Fund
shall install new releases of the Software as the Custodian may
direct. The Fund agrees not to modify or attempt to modify the
Software without the Custodian's prior written consent. The Fund
acknowledges that any modifications to the Software, whether by the
Fund or the Custodian and whether with or without the Custodian's
consent, shall become the property of the Custodian.
5. THE CUSTODIAN AND ITS MANUFACTURERS AND SUPPLIERS MAKE NO
WARRANTIES OR REPRESENTATIONS OF ANY KIND WITH REGARD TO THE SOFTWARE
OR THE METHOD(S) BY WHICH THE FUND MAY TRANSMIT INSTRUCTIONS TO THE
CUSTODIAN, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
6. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY
UNITED STATES LAW. THE FUND AGREES THAT IT WILL NOT UNDER ANY
CIRCUMSTANCES RESELL, DIVERT, TRANSFER, TRANSSHIP OR OTHERWISE
DISPOSE OF THE SOFTWARE (IN ANY FORM) IN OR TO ANY OTHER COUNTRY. IF
THE CUSTODIAN DELIVERS THE SOFTWARE TO THE FUND OUTSIDE THE UNITED
STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN
ACCORDANCE WITH EXPORT ADMINISTRATIVE REGULATIONS. DIVERSION
CONTRARY TO U.S. LAWS PROHIBITED. The Fund hereby authorizes
Custodian to report its name and address to government agencies to
which Custodian is required to provide such information by law.
7. Where the method for transmitting Instructions by the Fund
involves an automatic systems acknowledgment by the Custodian of its
receipt of such Instructions, then in the absence of such
acknowledgment the Custodian shall not be liable for any failure to
act pursuant to such Instructions, the Fund may not claim that such
Instructions were received by the Custodian, and the Fund shall
deliver a Certificate by some other means.
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8. (a) The Fund agrees that the Custodian shall have no
responsibility to ensure or determine that only persons duly
authorized by the Fund transmit such Instructions to the Custodian.
The Fund will cause all persons transmitting Instructions to the
Custodian to treat applicable user and authorization codes, passwords
and authentication keys with extreme care, and irrevocably authorizes
the Custodian to act in accordance with and rely upon Instructions
received by it pursuant hereto.
(b) The Fund hereby represents, acknowledges and agrees
that it is fully informed of the protections and risks associated
with the various methods of transmitting Instructions to the
Custodian and that there may be more secure methods of transmitting
instructions to the Custodian than the method(s) selected by the
Fund. The Fund hereby agrees that the security procedures (if any)
to be followed in connection with the Fund's transmission of
Instructions provide to it a commercially reasonable degree of
protection in light of its particular needs and circumstances.
9. The Fund hereby represents, warrants and covenants to the
Custodian that this Agreement has been duly approved by a resolution
of its Board of Trustees, and that its transmission of Instructions
pursuant hereto shall at all times comply with the Investment Company
Act.
10. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24
hours after the earliest of (i) discovery thereof, (ii) the business
day on which discovery should have occurred through the exercise of
reasonable care and (iii) in the case of any error, the date of
actual receipt of the earliest notice which reflects such error, it
being agreed that discovery and receipt of notice may only occur on a
business day. The Custodian shall promptly advise the Fund whenever
the Custodian learns of any errors, omissions or interruption in, or
delay or unavailability of, the Fund's ability to send Instructions,
and in any event on the business day next succeeding the business day
after the earliest of (i) discovery thereof, (ii) the business day on
which discovery would have occurred through the exercise of
reasonable care, and (iii) in the case of an error, the date on which
the Custodian should have discovered the error through the exercise
of reasonable care, it being understood that an error in Instructions
may not be discoverable by the Custodian notwithstanding reasonable
care.
11. Custodian will indemnify and hold harmless the Fund with respect
to any liability, damages, loss or claim incurred by or brought
against Fund by reason any claim or infringement against any patent,
copyright, license or other property right arising out or by reason
of the Fund's use of the Software in the form provided under this
Section. Custodian at its own expense will defend such action or
claim brought against Fund to the extent that it is based on a claim
that the Software in the form provided by Custodian infringes any
patents, copyrights, license or other property right, provided that
Custodian is provided with reasonable written notice of such claim,
provided that the Fund has not settled, compromised or confessed any
such claim without the Custodian's written
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consent, in which event Custodian shall have no liability or obligation
hereunder, and provided Fund cooperates with and assists Custodian in
the defense of such claim. Custodian shall have the right to control
the defense of all such claims, lawsuits and other proceedings. If,
as a result of any claim of infringement against any patent, copyright,
license or other property right, Custodian is enjoined from using the
Software, or if Custodian believes that the System is likely to become
thesubject of a claim of infringement, Custodian at its option may in
its sole discretion either (a) at its expenses procure the right for
the Fund to continue to use the Software, or (b), replace or modify
the Software so as to make it non-infringing, or (c) may discontinue
the license granted herein upon written notice to Fund.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-
custodian for each Series' Securities for which the primary market is
outside the United States ("Foreign Securities") and other assets,
the foreign banking institutions and foreign securities depositories
and clearing agencies designated on Schedule I hereto ("Foreign Sub-
Custodians"), each of which has been selected by the Custodian as
custodian and not as a foreign custody manager with reasonable care.
The Fund may designate any additional foreign sub-custodian with
which the Custodian has an agreement for such entity to act as the
Custodian's agent, as its sub-custodian and any such additional
foreign sub-custodian shall be deemed added to Schedule I. Upon
receipt of a Certificate from the Fund, the Custodian shall cease the
employment of any one or more Foreign Sub-Custodians for maintaining
custody of the Fund's assets and such Foreign Sub-Custodian shall be
deemed deleted from Schedule I.
2. Each delivery of a Certificate to the Custodian in connection
with a transaction involving the use of a Foreign Sub-Custodian shall
constitute a representation and warranty by the Fund that its Board
of Trustees, or its third party foreign custody manager as defined in
Rule 17f-5 under the Investment Company Act of 1940, as amended, if
any, has determined that use of such Foreign Sub-Custodian satisfies
the requirements of such Investment Company Act of 1940 and such Rule
17f-5 thereunder.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities of such Series held by each
Foreign Sub-Custodian. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect
to any claims by the Fund or any Series against a Foreign Sub-
Custodian as a consequence of any loss, damage, cost, expense,
liability or claim sustained or incurred by the Fund or any Series if
and to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.
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4. Upon request of the Fund, the Custodian will, consistent with
the terms of the applicable Foreign Sub-Custodian agreement, use
reasonable efforts to arrange for the independent accountants of the
Fund to be afforded access to the books and records of any Foreign
Sub-Custodian insofar as such books and records relate to the
performance of such Foreign Sub-Custodian under its agreement with
the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as
mutually agreed upon, statements in respect of the securities and
other assets of each Series held by Foreign Sub-Custodians, including
but not limited to an identification of entities having possession of
each Series' Foreign Securities and other assets, and advices or
notifications of any transfers of Foreign Securities to or from each
custodial account maintained by a Foreign Sub-Custodian for the
Custodian on behalf of the Series.
6. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the
Fund's Foreign Securities, including without limitation, notices of
corporate action, proxies and proxy solicitation materials.
7. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any
Series and delivery of securities maintained for the account of such
Series may be effected in accordance with the customary or
established securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or
dealer.
8. Notwithstanding any other provision in this Agreement to the
contrary, with respect to any losses or damages arising out of or
relating to any actions or omissions of any Foreign Sub-Custodian the
sole responsibility and liability of the Custodian shall be to take
appropriate action at the Fund's expense to recover such loss or
damage from the Foreign Sub-Custodian. It is expressly understood
and agreed that the Custodian's sole responsibility and liability
shall be limited to amounts so recovered from the Foreign Sub-
Custodian.
ARTICLE XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund
shall promptly deliver to the Custodian a Certificate or Oral
Instructions specifying with respect to such FX Transaction: (a) the
Series to which such FX Transaction is specifically allocated; (b)
the type and amount of Currency to be purchased by the Fund; (c) the
type and amount of Currency to be sold by the Fund; (d) the date on
which the
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Currency to be purchased is to be delivered; (e) the date
on which the Currency to be sold is to be delivered; and (f) the name
of the person from whom or through whom such currencies are to be
purchased and sold. Unless otherwise instructed by a Certificate or
Oral Instructions, the Custodian shall deliver, or shall instruct a
Foreign Sub-Custodian to deliver, the Currency to be sold on the date
on which such delivery is to be made, as set forth in the
Certificate, and shall receive, or instruct a Foreign Sub-Custodian
to receive, the Currency to be purchased on the date as set forth in
the Certificate.
2. Where the Currency to be sold is to be delivered on the same day
as the Currency to be purchased, as specified in the Certificate or
Oral Instructions, the Custodian or a Foreign Sub-Custodian may
arrange for such deliveries and receipts to be made in accordance
with the customs prevailing from time to time among brokers or
dealers in Currencies, and such receipt and delivery may not be
completed simultaneously. The Fund assumes all responsibility and
liability for all credit risks involved in connection with such
receipts and deliveries, which responsibility and liability shall
continue until the Currency to be received by the Fund has been
received in full.
3. Any FX Transaction effected by the Custodian in connection with
this Agreement may be entered with the Custodian, any office, branch
or subsidiary of The Bank of New York Company, Inc., or any Foreign
Sub-Custodian acting as principal or otherwise through customary
banking channels. The Fund may issue a standing Certificate with
respect to FX Transaction but the Custodian may establish rules or
limitations concerning any foreign exchange facility made available
to the Fund. The Fund shall bear all risks of investing in
Securities or holding Currency. Without limiting the foregoing, the
Fund shall bear the risks that rules or procedures imposed by a
Foreign Sub-Custodian or foreign depositories, exchange controls,
asset freezes or other laws, rules, regulations or orders shall
prohibit or impose burdens or costs on the transfer to, by or for the
account of the Fund of Securities or any cash held outside the Fund's
jurisdiction or denominated in Currency other than its home
jurisdiction or the conversion of cash from one Currency into another
currency. The Custodian shall not be obligated to substitute another
Currency for a Currency (including a Currency that is a component of
a Composite Currency Unit) whose transferability, convertibility or
availability has been affected by such law, regulation, rule or
procedure. Neither the Custodian nor any Foreign Sub-Custodian shall
be liable to the Fund for any loss resulting from any of the
foregoing events.
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, neither the Custodian nor its
nominee shall be liable for any loss or damage, including counsel
fees, resulting from its action or
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omission to act or otherwise, either hereunder or under any Margin
Account Agreement, except for any such loss or damage arising out
of its own negligence, willful misconduct, or bad faith. In no
event shall the Custodian be liable to the Fund, the Advisor, or
any third party for special, indirect or consequential damages or
lost profits or loss of business, arising under or in connection
with this Agreement, even if previously informed of the possibility
of such damages and regardless of the form of action. The liability
of the Custodian hereunder shall be limited to the Fund, and shall not
extend to the Advisor, and such liability to the Fund shall be only to
the extent of direct money damages suffered by the Fund arising out of
the Custodian's own negligence, willful misconduct, or bad faith,
provided, however, that the Advisor shall be permitted to commence an
action in accordance with the terms of this Agreement on behalf of the
Fund to recover such direct money damages of the Fund. The Custodian may,
with respect to questions of law arising hereunder or under any Margin
Account Agreement, apply for and obtain the advice and opinion of
counsel to the Fund, or of its own counsel, at the expense of the
Fund, and shall be fully protected with respect to anything done or
omitted by it in good faith in conformity with such advice or
opinion. The Custodian shall be liable to the Fund for any loss or
damage resulting from the use of the Book-Entry System or any
Depository arising by reason of any negligence or willful misconduct
on the part of the Custodian or any of its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian
shall be under no obligation to inquire into, and shall not be liable
for:
(a) the validity of the issue of any Securities purchased, sold, or
written by or for the Fund, the legality of the purchase, sale or
writing thereof, or the propriety of the amount paid or received
therefor;
(b) the legality of the sale or redemption of any Shares, or the
propriety of the amount to be received or paid therefor;
(c) the legality of the declaration or payment of any dividend by
the Fund;
(d) the legality of any borrowing by the Fund using Securities as
collateral;
(e) the legality of any loan of portfolio Securities, nor shall the
Custodian be under any duty or obligation to see to it that any cash
collateral delivered to it by a broker, dealer, or financial
institution or held by it at any time as a result of such loan of
portfolio Securities of the Fund is adequate collateral for the Fund
against any loss it might sustain as a result of such loan. The
Custodian specifically, but not by way of limitation, shall not be
under any duty or obligation periodically to check or notify the Fund
that the amount of such cash collateral held by it for the Fund is
sufficient collateral for the Fund, but such duty or obligation shall
be the sole responsibility of the Fund. In
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addition, the Custodian shall be under no duty or obligation to see that
any broker, dealer or financial institution to which portfolio Securities
of the Fund are lent pursuant to Article X of this Agreement makes payment
to it of any dividends or interest which are payable to or for the account
of the Fund during the period of such loan or at the termination of
such loan, provided, however, that the Custodian shall promptly
notify the Fund in the event that such dividends or interest are not
paid and received when due; or
(f) the sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or
Collateral Account in connection with transactions by the Fund. In
addition, the Custodian shall be under no duty or obligation to see
that any broker, dealer, futures commission merchant or Clearing
Member makes payment to the Fund of any variation margin payment or
similar payment which the Fund may be entitled to receive from such
broker, dealer, futures commission merchant or Clearing Member, to
see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount
the Fund is entitled to receive, or to notify the Fund of the
Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check,
draft, or other instrument for the payment of money, received by it
on behalf of the Fund until the Custodian actually receives and
collects such money directly or by the final crediting of the account
representing the Fund's interest at the Book-Entry System or the
Depository.
4. The Custodian shall have no responsibility and shall not be
liable for ascertaining or acting upon any calls, conversions,
exchange offers, tenders, interest rate changes or similar matters
relating to Securities held in the Depository, unless the Custodian
shall have actually received timely notice from the Depository. In
no event shall the Custodian have any responsibility or liability for
the failure of the Depository to collect, or for the late collection
or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be
redeemed, retired, called or otherwise become payable. However, upon
receipt of a Certificate from the Fund of an overdue amount on
Securities held in the Depository the Custodian shall make a claim
against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute
or defend any action, suit or proceeding in respect to any Securities
held by the Depository which in its opinion may involve it in expense
or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
5. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from the
Transfer Agent of the Fund nor to take any action to effect payment
or distribution by the Transfer Agent of the Fund of any amount paid
by the Custodian to the Transfer Agent of the Fund in accordance with
this Agreement.
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6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount if the Securities upon
which such amount is payable are in default, or if payment is refused
after due demand or presentation, unless and until (i) it shall be
directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction of reimbursement of its costs and
expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign Sub-
Custodians pursuant to Article XVI appoint one or more banking
institutions as Depository or Depositories, as Sub-Custodian or
Sub-Custodians, or as Co-Custodian or Co-Custodians including, but
not limited to, banking institutions located in foreign countries, of
Securities and money at any time owned by the Fund, upon such terms
and conditions as may be approved in a Certificate or contained in an
agreement executed by the Custodian, the Fund and the appointed
institution.
8. The Custodian shall not be under any duty or obligation (a) to
ascertain whether any Securities at any time delivered to, or held by
it or by any Foreign Sub-Custodian, for the account of the Fund and
specifically allocated to a Series are such as properly may be held
by the Fund or such Series under the provisions of its then current
prospectus, or (b) to ascertain whether any transactions by the Fund,
whether or not involving the Custodian, are such transactions as may
properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Advisor
agrees to pay to the Custodian all out-of-pocket expenses and such
compensation as may be agreed upon from time to time between the
Custodian and the Fund. In the event any such amounts are not paid
by the Advisor within 120 days of the date such amounts are due to be
paid, the Custodian may charge such compensation and any expenses
with respect to a Series incurred by the Custodian in the performance
of its duties pursuant to such agreement against any money
specifically allocated to such Series. Unless and until the Fund
instructs the Custodian by a Certificate to apportion any loss,
damage, liability or expense among the Series in a specified manner,
the Custodian shall also be entitled to charge against any money held
by it for the account of a Series such Series' pro rata share (based
on such Series, net asset value at the time of the charge to the
aggregate net asset value of all Series at that time) of the amount
of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the provisions
of this Agreement provided the same have not been paid by the Advisor
with 120 days of the date such amounts are due to be paid. The
expenses for which the Custodian shall be entitled to reimbursement
hereunder shall include, but are not limited to, the expenses of
sub-custodians and foreign branches of the Custodian incurred in
settling outside of New York City transactions involving the purchase
and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and
reasonably believed by the
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Custodian to be a Certificate. The Custodian shall be entitled to rely
upon any Oral Instructions actually received by the Custodian hereinabove
provided for. The Fund agrees to forward to the Custodian a Certificate
or facsimile thereof confirming such Oral Instructions in such manner so
that such Certificate or facsimile thereof is received by the Custodian,
whether by hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such Oral
Instructions are given to the Custodian. The Custodian shall notify
the Fund promptly if it receives instructions that are contrary to
Oral Instructions. The Fund agrees that the fact that such
confirming instructions are not received, or that contrary
instructions are received, by the Custodian shall in no way affect
the validity of the transactions or enforceability of the
transactions hereby authorized by the Fund. The Fund agrees that the
Custodian shall incur no liability to the Fund in acting upon Oral
Instructions given to the Custodian hereunder concerning such
transactions provided such instructions reasonably appear to have
been received from an Authorized Person.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably
believed by the Custodian to be given in accordance with the terms
and conditions of any Margin Account Agreement. Without limiting the
generality of the foregoing, the Custodian shall be under no duty to
inquire into, and shall not be liable for, the accuracy of any
statements or representations contained in any such instrument or
other notice including, without limitation, any specification of any
amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such
books and records shall be prepared and maintained as required by the
Investment Company Act of 1940, as amended, and other applicable
securities laws and rules and regulations. The Fund, or the Fund's
authorized representatives, shall have access to such books and
records during the Custodian's normal business hours. Upon the
reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's
authorized representative, and the Fund shall reimburse the Custodian
its expenses of providing such copies. Upon reasonable request of
the Fund, the Custodian shall provide in hard copy or on micro-film,
whichever the Custodian elects, any records included in any such
delivery which are maintained by the Custodian on a computer disc, or
are similarly maintained, and the Fund shall reimburse the Custodian
for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the
Book-Entry System, the Depository or O.C.C., and with such reports on
its own systems of internal accounting control as the Fund may
reasonably request from time to time.
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14. The Fund and the Advisor, jointly and severally, each agrees to
indemnify the Custodian against and save the Custodian harmless from
all liability, claims, losses and demands whatsoever, including
attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence,
willful misconduct, or bad faith.
15. Subject to the foregoing provisions of this Agreement,
including, without limitation, those contained in Article XVI and
XVII the Custodian may deliver and receive Securities, and receipts
with respect to such Securities, and arrange for payments to be made
and received by the Custodian in accordance with the customs
prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities
against payment, delivery of such Securities and receipt of payment
therefor may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in
connection with the Custodian's delivery of Securities pursuant to
instructions of the Fund, which responsibility and liability shall
continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities
whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement, and no covenant or
obligation shall be implied in this Agreement against the Custodian.
ARTICLE XIX.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by
giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after
the date of giving of such notice. In the event such notice is given
by the Fund, it shall be accompanied by a copy of a resolution of the
Board of Trustees of the Fund, certified by the Secretary or any
Assistant Secretary, electing to terminate this Agreement and
designating a successor custodian or custodians, each of which shall
be a bank or trust company having not less than $2,000,000 aggregate
capital, surplus and undivided profits. In the event such notice is
given by the Custodian, the Fund shall, on or before the termination
date, deliver to the Custodian a copy of a resolution of the Board of
Trustees of the Fund, certified by the Secretary or any Assistant
Secretary, designating a successor custodian or custodians. In the
absence of such designation by the Fund, the Custodian may designate
a successor custodian which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus and undivided
profits. Upon the date set forth in such notice this Agreement shall
terminate, and the Custodian shall upon receipt of a notice of
acceptance by the successor custodian and payment of all fees,
expenses and other amounts then due the Custodian on
-36-
<PAGE>
<PAGE>
that date deliver directly to the successor custodian all Securities
and money then owned by the Fund and held by it as Custodian.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall
upon the date specified in the notice of termination of this
Agreement and upon the delivery by the Custodian of all Securities
(other than Securities held in the Book-Entry System which cannot be
delivered to the Fund) and money then owned by the Fund be deemed to
be its own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement, other
than the duty with respect to Securities held in the Book Entry
System which cannot be delivered to the Fund to hold such Securities
hereunder in accordance with this Agreement.
ARTICLE XX.
MISCELLANEOUS
1. The Custodian, the Advisor, and the Fund each agrees that any
non-public information obtained hereunder concerning the other
parties is confidential and may not be disclosed to any other person
without the consent of the affected party, except as may be required
by applicable law or at the request of a governmental agency. The
parties further agree that a breach of this provision would
irreparably damage the affected party and accordingly agree that each
of them is entitled, without bond or other security, to an injunction
or injunctions to prevent breaches of this provision.
Notwithstanding the foregoing, the Custodian shall have the right to
disclose the same to its internal and external auditors, accountants,
and counsel, to its regulators, and to any other person if it is
advised by its counsel that it may be liable for a failure to do so.
Where circumstances reasonably permit, the Custodian shall endeavor
to give notice of any such disclosure to the Fund.
2. Annexed hereto as Appendix A is a Certificate signed by two of
the present Authorized Persons of the Fund under its seal, setting
forth the names and the signatures of the present Authorized
Persons. The Fund agrees to furnish to the Custodian a new
Certificate in similar form in the event that any such present
Authorized Person ceases to be an Authorized Person or in the event
that other or additional Authorized Persons are elected or
appointed. Until such new Certificate shall be received, the
Custodian shall be fully protected in acting under the provisions of
this Agreement upon Oral Instructions or signatures of the Authorized
Persons as set forth in the last delivered Certificate.
3. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Custodian, shall be
sufficiently given if addressed to the Custodian and mailed or
delivered to it at its offices at 90 Washington Street, New York,
-37-
<PAGE>
<PAGE>
New York 10286, or at such other place as the Custodian may from time
to time designate in writing.
4. (a) The Custodian warrants to the Fund that it will use
commercially reasonable efforts to ensure that the computer software
and hardware systems ("Systems") that are owned by the Custodian and
used to provide services under this Agreement are 2000 Compliant or
will be made 2000 Compliant before December 31, 1999. With respect
to software that the Custodian licenses from third parties and uses
in providing the Services ("Third Party Software"), the Custodian
warrants that it has used or will use commercially reasonable efforts
to test the same by September 30, 1999 to certify, in accordance with
the Custodian's standard practices, that the Third Party Software is
2000 Compliant. If the Custodian cannot certify any Third Party
Software as 2000 Compliant, the Custodian will use commercially
reasonable efforts to replace such Third Party Software with software
that is warranted or certified by its vendor as 2000 Compliant, if
such replacement is available, compatible with the Custodian's
Systems an deemed by the Custodian as appropriate under the
circumstances. In the event that the Custodian uses third party
service providers to provide the Services or any portion thereof
("Third Party Services"), the Custodian warrants that it has in place
a program under which it will use commercially reasonable efforts to
contact such service providers and obtain from them assurances that
the Systems that they use in providing Services are 2000 Compliant.
As used herein, the term "2000 Compliant" means that the Systems will
function without material error caused by the introduction of dates
falling on or after January 1, 2000. Notwithstanding the foregoing,
the Fund acknowledges and agrees that the Custodian cannot and does
not warrant that the Systems, Third Party Software or Third Party
Services will continue to interface with the hardware, firmware,
software (including operating systems), records or data used by the
Fund or third parties, nor does the Custodian make any warranties
hereunder with respect to any public utility, communications service
provider, correspondent bank, securities or commodities exchange, or
funds transfer network.
(b) The Fund hereby makes to the Custodian the same
warranty with respect to the computer software and hardware systems
it owns and the services it obtains from third parties that the
Custodian has made in (a).
5. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Fund or the Advisor,
respectively, shall be sufficiently given if addressed to the Fund
and mailed or delivered to it at its office at the address for the
Fund or the Advisor, respectively, first above written, or at such
other place as the Fund or the Advisor may from time to time
designate in writing.
6. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties with the same
formality as this Agreement and approved by a resolution of the Board
of Trustees of the Fund.
-38-
<PAGE>
<PAGE>
7. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns;
provided, however, that this Agreement shall not be assignable by the
Fund without the written consent of the Custodian, or by the
Custodian without the written consent of the Fund, authorized or
approved by a resolution of the Fund's Board of Trustees.
8. This Agreement shall be construed in accordance with the laws of
the State of New York without giving effect to conflict of laws
principles thereof. Each party hereby consents to the jurisdiction
of a state or federal court situated in New York City, New York in
connection with any dispute arising hereunder and hereby waives its
right to trial by jury.
9. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
10. A copy of the Declaration of Trust of the Fund is on file with
the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Board
of Trustees of the Fund as Trustees and not individually and that the
obligations of this instrument are not binding upon any of the
Trustees or shareholders individually but are binding only upon the
assets and property of the Fund; provided, however, that the
Declaration of Trust of the Fund provides that the assets of a
particular Series of the Fund shall under no circumstances be charged
with liabilities attributable to any other Series of the Fund and
that all persons extending credit to, or contracting with or having
any claim against a particular Series of the Fund shall look only to
the assets of that particular Series for payment of such credit,
contract or claim.
-39-
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers, thereunto duly
authorized and their respective seals to be hereunto affixed, as of
the day and year first above written.
THE GCG TRUST
[SEAL] By:/s/Mary Bea Wilkinson
-----------------------
Attest:
/s/Marilyn Talman
- -----------------------
DIRECTED SERVICES, INC.
[SEAL] By:/s/David L. Jacobson
-----------------------
Attest:
/s/Marilyn Talman
- -----------------------
THE BANK OF NEW YORK
[SEAL] By:/s/Christopher M. Teevan
-----------------------
Name: Christopher M. Teevan
Title: Vice President
Attest:
/s/Joseph Morgan
- -----------------------
<PAGE>
<PAGE>
APPENDIX A
The following persons have been duly authorized in conformity
with the Fund's Declaration of Trust and By-Laws to execute any
Certificate, instruction, notice or other instrument on behalf of the
Fund, and the signatures set forth opposite their respective names
are their true and correct signatures:
Name Position Signature
---- -------- ---------
The GCG Trust
- -------------
R. Brock Armstrong President /s/R. Brock Armstrong
---------------------
Barnett Chernow Vice President /s/Barnett Chernow
---------------------
Mary Bea Wilkinson Treasurer /s/Mary Bea Wilkinson
---------------------
Myles R. Tashman Secretary /s/Myles R. Tashman
---------------------
Marilyn Talman Assistant Secretary /s/Marilyn Talman
---------------------
Christopher W. Smythe Assistant Treasurer /s/Christopher W. Smythe
---------------------
Todd Nevenhoven Assistant Treasurer /s/Todd Nevenhoven
---------------------
Directed Services, Inc.
- -----------------------
Lawrence Barnes Director - Treasury /s/Lawrence Barnes
---------------------
Ron Blasdell Senior Vice President /s/Ron Blasdell
---------------------
David Jacobson Senior Vice President /s/David Jacobson
---------------------
E. Robert Koster Chief Financial Officer /s/E. Robert Koster
---------------------
Renee J. Murphy Director - Budget /s/Renee J. Murphy
---------------------
<PAGE>
<PAGE>
APPENDIX B
SERIES
Liquid Asset Series
Limited Maturity Bond Series
Global Fixed Income Series
Total Return Series
Equity Income Series
Fully Managed Series
Rising Dividends Series
Capital Growth Series
Growth Series
Value Equity Series
Research Series
Mid-Cap Growth Series
All-Growth Series
Growth Opportunities Series
Strategic Equity Series
Capital Appreciation Series
Small Cap Series
Real Estate Series
Hard Assets Series
Managed Global Series
Developing World Series
Emerging Markets Series
Fund for Life Series
Market Manager Series
<PAGE>
<PAGE>
APPENDIX C
I, Christopher M. Teevan, a Vice President with THE BANK OF NEW
YORK do hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
<PAGE>
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned,______________________,hereby certifies that he
or she is the duly elected and acting__________________of The GCG Trust,
a Massachusetts business trust (the "Fund"), and further certifies that
the following resolution was adopted by the Board of Trustees of the
Fund at a meeting duly held on____________, 1999, at which a quorum was
at all times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to a Custody Agreement between The Bank of New York and the Fund
dated as of_____________________, 1999, (the "Custody Agreement")
is authorized and instructed on a continuous and ongoing basis to
deposit in the Book-Entry System, as defined in the Custody Agreement,
all securities eligible for deposit therein, regardless of the Series
to which the same are specifically allocated, and to utilize the
Book-Entry System to the extent possible in connection with its
performance thereunder, including, without limitation, in connection
with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
The GCG Trust, as of the_________day of_______________, 1999.
______________________
[SEAL]
<PAGE>
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned,______________, hereby certifies that he or she
is the duly elected and acting___________of The GCG Trust, a Massachusetts
business trust (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Trustees of the Fund at a
meeting duly held on________________, 1999, at which a quorum was at all
times present and that such resolution has not been modified or rescinded
and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to a Custody Agreement between The Bank of New York and the Fund
dated as of__________________, 1999, (the"Custody Agreement") is
authorized and instructed on a continuous and ongoing basis until
such time as it receives a Certificate, as defined in the Custody
Agreement, to the contrary to deposit in the Depository, as defined
in the Custody Agreement, all securities eligible for deposit therein,
regardless of the Series to which the same are specifically
allocated, and to utilize the Depository to the extent possible
in connection with its performance thereunder, including,
without limitation, in connection with settlements of purchases
and sales of securities, loans of securities, and deliveries and
returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
The GCG Trust, as of the__________day of__________, 1999.
________________________
[SEAL]
<PAGE>
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned,___________________, hereby certifies that he or
she is the duly elected and acting_____________of The GCG Trust, a
Massachusetts business trust (the "Fund"), and further certifies that
the following resolution was adopted by the Board of Trustees of the
Fund at a meeting duly held on_____________________, 1999, at which a
quorum was at all times present and that such resolution has not been
modified or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to a Custody Agreement between The Bank of New York and the Fund
dated as of_______________, 1999, (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis until
such time as it receives a Certificate, as defined in the Custody
Agreement, to the contrary to deposit in the Participants Trust
Company as Depository, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of the Series
to which the same are specifically allocated, and to utilize the
Participants Trust Company to the extent possible in connection
with its performance thereunder, including, without limitation,
in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
The GCG Trust, as of the___________day of____________, 1999.
____________________________
[SEAL]
<PAGE>
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned,________________, hereby___________certifies that
he or she is the duly elected and acting______________of The GCG Trust,
a Massachusetts business trust (the "Fund"), and further certifies that
the following resolution was adopted by the Board of Trustees of the
Fund at a meeting duly held on_________________, 1999, at which a quorum
was at all times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to a Custody Agreement between The Bank of New York and the Fund
dated as of_______________, 1999, (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis until
such time as it receives a Certificate, as defined in the Custody
Agreement, to the contrary, to accept, utilize and act with respect
to Clearing Member confirmations for Options and transaction in
Options, regardless of the Series to which the same are specifically
allocated, as such terms are defined in the Custody Agreement,
as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
The GCG Trust, as of the___________day of_________, 1999.
____________________________
[SEAL]
<PAGE>
<PAGE>
EXHIBIT D
The undersigned,______________, hereby certifies that he or she
is the duly elected and acting_______________of The GCG Trust, a
Massachusetts business trust (the "Fund"), further certifies that the
following resolutions were adopted by the Board of Trustees of the Fund
at a meeting duly held on________________, 1999, at which a quorum was at
all times present and that such resolutions have not been modified or
rescinded and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant
to the Custody Agreement between The Bank of New York and the
Fund dated as of______________, 1999 (the "Custody Agreement") is
authorized and instructed on a continuous and ongoing basis to act
in accordance with, and to rely on Instructions (as defined in the
Custody Agreement).
RESOLVED, that the Fund shall establish access codes and
grant use of such access codes only to Authorized Persons of the
Fund as defined in the Custody Agreement, shall establish
internal safekeeping procedures to safeguard and protect the
confidentiality and availability of user and access codes,
passwords and authentication keys, and shall use Instructions
only in a manner that does not contravene the Investment Company
Act of 1940, as amended, or the rules and regulations
thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
The GCG Trust, as of the ____________day of___________, 1999.
_________________________
[SEAL]
<PAGE>
<PAGE>
EXHIBIT (h)(2)(J)
ADDENDUM TO ORGANIZATIONAL AGREEMENT
------------------------------------
The Organizational Agreement, made the 28th day of December,
1988 among The GCG Trust (the "Trust"), Directed Services, Inc.
("DSI"), and Golden American Life Insurance Company ("Golden
American") (the "Organizational Agreement"), as amended by the
Assignment Agreement to the Organizational Agreement dated March 20,
1991 and Addenda to the Organizational Agreement dated October 1,
1993, November 7, 1994, December 29, 1995, March 4, 1997 and August 19,
1997 is hereby amended by the addition of the provisions set forth
in this Addendum to the Organizational Agreement, which is dated as of
the 16th day of February 1999.
WITNESSETH:
-----------
WHEREAS, the Trust is authorized to issue separate series, each
of which will offer a separate class of shares of beneficial
interest, each series having its own investment objective or
objectives, policies, or limitations;
WHEREAS, the Trust currently offers shares in multiple series,
may offer shares of additional series in the future, and intends to
offer shares of additional series in the future;
WHEREAS, the Trust has established two new series designated as
the Large Cap Value Series and the International Equity Series; and
WHEREAS, the Trust and Golden American desire that the, the Large
Cap Value Series and the International Equity Series be sold to the
separate accounts of Golden American to fund benefits under variable life
insurance policies and variable annuity contracts issued by Golden
American;
NOW THEREFORE, in consideration of the mutual promises and
covenants contained in this Addendum, it is agreed between the
parties hereto as follows:
1. The Large Cap Value Series and the International
Equity Series, together with all other Series listed on Exhibit B
to the Organizational Agreement, shall be series under the
Organizational Agreement.
2. Exhibit B to the Organizational Agreement shall be
replaced with a new Exhibit B, a copy of which is attached hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum
to be executed as of the date indicated above.
THE GCG TRUST
Attest /s/Patrick Ivkovich By:/s/Myles R. Tashman
------------------- ---------------------------
Title: Senior Legal Analyst Title: Secretary
-------------------- ------------------------
DIRECTED SERVICES, INC.
Attest /s/Patrick Ivkovich By:/s/David L. Jacobson
------------------- ---------------------------
Title: Senior Legal Analyst Title: SVP
-------------------- ------------------------
GOLDEN AMERICAN
LIFE INSURANCE COMPANY
Attest /s/Patrick Ivkovich By:/s/David L. Jacobson
------------------- ---------------------------
Title: Senior Legal Analyst Title: SVP
-------------------- ------------------------
<PAGE>
<PAGE>
EXHIBIT B
The Series of The GCG Trust, as described in the attached
Organizational Agreement, are as follows:
Equity Income Series [formerly Multiple Allocation Series]
Fully Managed Series
Limited Maturity Bond Series
Hard Assets Series
Real Estate Series
All-Growth Series
Liquid Asset Series
Capital Appreciation Series
Rising Dividends Series
Emerging Markets Series
Market Manager Series
Value Equity Series
Strategic Equity Series
Small Cap Series
Mid-Cap Growth Series
Total Return Series
Research Series
Growth & Income Series
Growth Series [formerly Value + Growth Series]
Global Fixed Income Series
Growth Opportunities Series
Developing World Series
International Equity Series
Large Cap Value Series
<PAGE>
<PAGE>
EXHIBIT (h)(2)(K)
ADDENDUM TO ORGANIZATIONAL AGREEMENT
------------------------------------
The Organizational Agreement, made the 28th day of December,
1988 among The GCG Trust (the "Trust"), Directed Services, Inc.
("DSI"), and Golden American Life Insurance Company ("Golden
American") (the "Organizational Agreement"), as amended by the
Assignment Agreement to the Organizational Agreement dated March 20,
1991 and Addenda to the Organizational Agreement dated October 1,
1993, November 7, 1994, December 29, 1995, March 4, 1997, August 19,
1997 and February 16, 1999 is hereby amended by the addition of the
provisions set forth in this Addendum to the Organizational
Agreement, which is dated as of the 15th day of June 1999.
WITNESSETH:
-----------
WHEREAS, the Trust is authorized to issue separate series, each
of which will offer a separate class of shares of beneficial
interest, each series having its own investment objective or
objectives, policies, or limitations;
WHEREAS, the Trust currently offers shares in multiple series,
may offer shares of additional series in the future, and intends to
offer shares of additional series in the future;
WHEREAS, the Trust has established three new series designated
as the Investors Series, the All Cap Series and the Large Cap Growth
Series; and
WHEREAS, the Trust and Golden American desire that the All Cap
Series, the Large Cap Growth Series and the Investors Series be sold to
the separate accounts of Golden American to fund benefits under variable
life insurance policies and variable annuity contracts issued by Golden
American;
NOW THEREFORE, in consideration of the mutual promises and
covenants contained in this Addendum, it is agreed between the
parties hereto as follows:
1. The Investors Series, the All Cap Series and the
Large Cap Growth Series, together with all other Series listed on
Exhibit B to the Organizational Agreement, shall be series under
the Organizational Agreement.
2. Exhibit B to the Organizational Agreement shall be replaced
with a new Exhibit B, a copy of which is attached hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum
to be executed as of the date indicated above.
THE GCG TRUST
By:/s/Myles R. Tashman
---------------------------
Title: Secretary
------------------------
DIRECTED SERVICES, INC.
By:/s/David L. Jacobson
---------------------------
Title: SVP
------------------------
GOLDEN AMERICAN
LIFE INSURANCE COMPANY
By:/s/David L. Jacobson
---------------------------
Title: SVP
------------------------
<PAGE>
<PAGE>
EXHIBIT B
The Series of The GCG Trust, as described in the attached
Organizational Agreement, are as follows:
Equity Income Series [formerly Multiple Allocation Series]
Fully Managed Series
Limited Maturity Bond Series
Hard Assets Series
Real Estate Series
All-Growth Series
Liquid Asset Series
Capital Appreciation Series
Rising Dividends Series
Emerging Markets Series
Market Manager Series
Value Equity Series
Strategic Equity Series
Small Cap Series
Mid-Cap Growth Series
Total Return Series
Research Series
Capital Growth Series [formerly Growth & Income Series]
Growth Series [formerly Value + Growth Series]
Global Fixed Income Series
Growth Opportunities Series
Developing World Series
International Equity Series
Large Cap Value Series
All Cap Fund Series
Investors Series
<PAGE>
<PAGE>
EXHIBIT (i)
SUTHERLAND
ASBILL & 1275 Pennsylvania Avenue, NW
BRENNAN LLP Washington, D.C. 20004-2415
Attorneys at Law 202.383.0100
202.637.3593
www.sablaw.com
STEPHEN E. ROTH
DIRECT LINE: (202) 383-0158
Internet: [email protected]
```
CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP
We consent to the reference to our firm under the heading
"Legal Counsel" in the prospectuses and under "Counsel" in the statement
of additional information included in Post-Effective Amendment No. 42
to the Registration Statement on Form N-1A for The GCG Trust (File Nos.
33-23512, 811-5629). In giving this consent, we do not admit that we
are in the category of persons whose consent is required under Section 7
of the Securities Act of 1933.
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
----------------------
Stephen E. Roth
Washington, D.C.
February 25, 2000
- --------------------------------------------------------------------
Atlanta Austin New York Tallahassee Washington, DC
<PAGE>
EXHIBIT (j)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Independent
Auditors" and "Financial Highlights" in the Prospectuses and "Independent
Auditors" and "Financial Statements" in the Statements of Additional
Information and to the incorporation by reference in this Post-Effective
Amendment No. 42 to the Registration Statement (Form N-1A)(No.33-23512)
of The GCG Trust of our reports dated February 9, 2000, included in the
1999 Annual Reports to shareholders.
/s/ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 24, 2000
.
<PAGE>
EXHIBIT (p)(1)
ING VARIABLE ANNUITIES
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being duly elected or
appointed Trustees and/or Officers of The GCG Trust (the "Trust"), constitute
and appoint Myles R. Tashman, and Marilyn Talman, and each of them, his or her
true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution for him or her in his or her name, place and stead, in any
and all capacities, to sign the following the Trust registration statements,
and current amendments to registration statements, and to file the same, with
all exhibits thereto, 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 or 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:
Post-Effective Amendment currently designated #42 to The GCG
Trust Registration Statement on Form N-1A (Nos. 033-23512; 811-5629)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Barnett Chernow President, Chairman and February 22 ,2000
- ---------------------- Trustee
Barnett Chernow
/s/ John R. Barmeyer Trustee February 23, 2000
- ----------------------
John R. Barmeyer
/s/ Myles R. Tashman Secretary February 22, 2000
- ----------------------
Myles R. Tashman
/s/ Mary Bea Wilkinson Treasurer February 22, 2000
- ----------------------
Mary Bea Wilkinson
/s/ Elizabeth J. Newell Trustee February 23, 2000
- ----------------------
Elizabeth J. Newell
Trustee
- ---------------------- -----------------
J. Michael Earley
/s/ Barbara Gitenstein Trustee February 24, 2000
- ----------------------
R. Barbara Gitenstein
/s/ Robert A. Grayson Trustee February 23, 2000
- ----------------------
Robert A. Grayson
/s/ Stanley B. Seidler Trustee February 22, 2000
- ----------------------
Stanley B. Seidler
/s/ Roger B. Vincent Trustee February 22, 2000
- ----------------------
Roger B. Vincent
<PAGE>
