<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998
REGISTRATION NO. 2-86082
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 24 [X]
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 25 [X]
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MAINSTAY VP SERIES FUND, INC.
(FORMERLY KNOWN AS NEW YORK LIFE MFA SERIES FUND, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
51 MADISON AVENUE, NEW YORK, NEW YORK 10010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER: (212) 576-7000
------------------
A. THOMAS SMITH III, ESQ.
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
JEFFREY S. PURETZ
DECHERT PRICE & RHOADS
1775 EYE STREET, N.W.
SUITE 1100
WASHINGTON, D.C. 20006
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
[ ] Immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] On , pursuant to paragraph (b)(1)(v) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[X] on May 1, 1998 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.
------------------
PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, THE
REGISTRANT HEREBY DECLARES THAT THE ISSUER HAS REGISTERED AN INDEFINITE NUMBER
OR AMOUNT OF SECURITIES UNDER THE SECURITIES ACT OF 1933. ON MARCH _____, 1998,
THE REGISTRANT SUBMITTED ITS RULE 24f-2 NOTICE FOR THE REGISTRANT'S MOST RECENT
FISCAL YEAR ON EDGAR.
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<PAGE> 2
<TABLE>
<CAPTION>
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS (PART A) AND STATEMENT OF ADDITIONAL INFORMATION
(PART B) OF INFORMATION REQUIRED BY FORM N-1A
PART A
FORM N-1A ITEM PROSPECTUS CAPTION
<S> <C>
1. Cover Page.............................. Cover Page
2. Synopsis................................ Not Applicable
3. Condensed Financial Information......... Financial Highlights
4. General Description of Registrant....... The Fund and the Separate Accounts;
The Fund and the Variable Accounts;
Other Information About the Portfolios;
The Fund and its Management
5. Management of the Fund.................. The Fund and Its Management; Custodian
6. Capital Stock and Other Securities...... The Fund and Its Management; Capital Stock;
Taxes, Dividends and Distributions; Other
Information
7. Purchase of Securities Being Offered.... Purchase and Redemption of Shares
8. Redemption or Repurchase................ Purchase and Redemption of Shares
9. Pending Legal Proceedings............... Not Applicable
<CAPTION>
PART B
FORM N-1A ITEM STATEMENT OF ADDITIONAL INFORMATION CAPTION
<S> <C>
10. Cover Page.............................. Cover Page
11. Table of Contents....................... Table of Contents
12. General Information and History......... Not Applicable
13. Investment Objectives and Policies...... MainStay VP Series Fund, Inc.; Investment
Policies
14. Management of the Registrant............ Management of the Fund
15. Control Persons and Principal Holders of
Securities.......................... Management of the Fund; Purchase and
Redemption of Shares; General Information
16. Investment Advisory and Other Services.. Management of the Portfolios;
The Investment Advisers
17. Brokerage Allocation.................... Portfolio Brokerage
18. Capital Stock and Other Securities...... Purchase and Redemption of Shares; General
Information
19. Purchase, Redemption and Pricing of
Securities Being Offered............ Determination of Net Asset Value;
Purchase and Redemption of Shares
20. Tax Status.............................. Taxes
21. Underwriters............................ Not Applicable
22. Calculation of Yield Quotations of Money
Market Funds........................ Investment Performance Calculations
23. Financial Statements.................... Financial Statements
</TABLE>
<PAGE> 3
MainStay VP Series Fund, Inc. Prospectus May 1, 1998
- --------------------------------------------------------------------------------
-
<TABLE>
<S> <C>
MAINSTAY VP SERIES FUND, INC.
OFFERS 15 PORTFOLIOS
Growth
Capital Appreciation Portfolio...... page A-8
Eagle Growth Equity Portfolio....... page A-9
Growth Equity Portfolio............. page A-10
Indexed Equity Portfolio............ page A-11
International Equity Portfolio...... page A-12
Lord Abbett Developing Growth
Portfolio......................... page A-13
Growth & Income
American Century Income & Growth
Portfolio......................... page A-14
Convertible Portfolio............... page A-15
Dreyfus Large Company Value
Portfolio......................... page A-16
Total Return Portfolio.............. page A-17
Value Portfolio..................... page A-18
Income
Bond Portfolio...................... page A-19
Government Portfolio................ page A-20
High Yield Corporate Bond
Portfolio......................... page A-21
Cash Management Portfolio........... page A-22
</TABLE>
Read This:
These Portfolios aren't federally
insured or guaranteed by the U.S.
Government. Shares of these Portfolios
are not deposits or obligations of, or
guaranteed or insured by any financial
institution, the Federal Deposit
Insurance Corporation or any other
government agency. Investments in the
Portfolios are subject to investment
risks, including possible loss of
principal.
NO GUARANTEES. There are no guarantees
that a Portfolio will meet its
objectives. All mutual funds involve
risk, including the potential to lose
some or all of your original investment.
Except for money market funds, the price
of a mutual fund share will fluctuate
and, when sold, may be higher or lower
than your original purchase price.
Furthermore, although the Cash
Management Portfolio attempts to
maintain a stable net asset value of $1
per share, there can be no assurance
that it will succeed in doing so.
THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Please read this prospectus carefully
before you invest, and keep it for
future reference. We hope you will
easily find and understand the
information you need; but if you have
any suggestions for improvement--or if
you need any help--please ask your
registered representative.
This prospectus includes information
you should know before investing. For
even more details, write to MainStay
VP Series Fund, Inc., 51 Madison
Avenue, New York, NY 10010 or call
(800) 598-2019 for a free copy of the
current Statement of Additional
Information (SAI). The SAI is
incorporated by reference into this
prospectus and also has been filed
with the Securities and Exchange
Commission. The Securities and
Exchange Commission maintains a
website (http://www.sec.gov) that
contains the SAI, material
incorporated by reference and other
information regarding registrants that
file electronically with the SEC.
A-1
<PAGE> 4
WHAT'S INSIDE?
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-
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE FUND AND THE SEPARATE ACCOUNTS...................................................... A-3
Financial Highlights............................................................... A-4
OTHER INFORMATION ABOUT THE PORTFOLIOS.................................................. A-23
General Investment Considerations.................................................. A-23
Convertible Portfolio.............................................................. A-23
High Yield Corporate Bond Portfolio................................................ A-23
Indexed Equity Portfolio........................................................... A-24
International Equity Portfolio..................................................... A-24
Investments and Investment Practices............................................... A-25
Other Information.................................................................. A-29
THE FUND AND ITS MANAGEMENT............................................................. A-29
Investment Advisers................................................................ A-29
Administrator...................................................................... A-30
Capital Stock...................................................................... A-31
PURCHASE AND REDEMPTION OF SHARES....................................................... A-31
TAXES, DIVIDENDS AND DISTRIBUTIONS...................................................... A-32
Taxes.............................................................................. A-32
Dividends and Distributions........................................................ A-32
GENERAL INFORMATION..................................................................... A-33
Custodian.......................................................................... A-33
Performance and Yield Information.................................................. A-33
Reports to Shareholders............................................................ A-33
Other Information.................................................................. A-33
APPENDIX A.............................................................................. AA-1
</TABLE>
------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN, OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE INVESTMENT
ADVISERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
A-2
<PAGE> 5
THE FUND AND THE SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
-
This Prospectus describes the shares offered by MainStay VP Series Fund,
Inc. (the "Fund"). The Fund, a diversified open-end management investment
company, is a Maryland corporation organized on June 3, 1983.
The Fund issues for investment by the Separate Accounts sixteen separate
classes of capital stock, each of which represents a separate portfolio of
investments--the MainStay VP Capital Appreciation Portfolio ("Capital
Appreciation"), the MainStay VP Cash Management Portfolio ("Cash Management"),
the MainStay VP Convertible Portfolio ("Convertible"), the MainStay VP
Government Portfolio ("Government"), the MainStay VP High Yield Corporate Bond
Portfolio ("High Yield Corporate Bond"), the MainStay VP International Equity
Portfolio ("International Equity"), the MainStay VP Total Return Portfolio
("Total Return"), the MainStay VP Value Portfolio ("Value"), the MainStay VP
Bond Portfolio ("Bond"), the MainStay VP Growth Equity Portfolio ("Growth
Equity"), the MainStay VP Indexed Equity Portfolio ("Indexed Equity"), the
MainStay VP American Century Income & Growth Portfolio ("American Century Income
& Growth"), the MainStay VP Dreyfus Large Company Value Portfolio ("Dreyfus
Large Company Value"), the MainStay VP Eagle Growth Equity Portfolio ("Eagle
Growth Equity") and the MainStay VP Lord Abbett Developing Growth Portfolio
("Lord Abbett Developing Growth"). In many respects, each Portfolio resembles a
separate fund. At the same time, in certain important respects, the Fund is
treated as a single entity.
Shares of the Portfolios are currently offered to the Separate Accounts to
fund multifunded retirement annuity policies and variable life insurance
policies issued by New York Life Insurance and Annuity Corporation ("NYLIAC")
(collectively, "Policies" and individually, "Policy"). Certain of the Portfolios
also offer their shares to other separate accounts of NYLIAC to fund other
annuity policies and variable life insurance policies.
The terms "shareholder" or "shareholders" in this Prospectus refer to the
Separate Accounts, and the rights of the Separate Accounts as shareholders are
different from the rights of an owner ("Owner") of a Policy. The rights of an
Owner are described in the Policy. The current prospectus for the Policy (which
is attached at the front of this Prospectus) describes the rights of the
Separate Accounts as shareholders and the rights of an Owner. The Separate
Accounts invest in shares of the Portfolios in accordance with allocation
instructions received from Owners.
The current prospectus for the Policy describes the Policy and the
relationship between changes in the value of shares of the Portfolios and the
benefits payable under a Policy.
A-3
<PAGE> 6
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
-
The following per share data (for a share outstanding throughout the
period) and selected ratios with respect to each portfolio of the Fund has been
audited by Price Waterhouse LLP, Independent Accountants, whose report on the
Financial Statements containing such information is incorporated by reference in
the Statement of Additional Information. This information should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 1997, which appear in the Statement of Additional Information.
Additional information regarding the performance of the Fund is contained in the
Fund's annual report to shareholders which may be obtained without charge by
writing or calling the Fund at the address and telephone number given on the
front cover page of this prospectus. Information on the American Century Income
& Growth Portfolio, Dreyfus Large Company Value Portfolio, Eagle Growth Equity
Portfolio and Lord Abbett Developing Growth Portfolio is not presented since
these Portfolios had not commenced operations on December 31, 1997.
<TABLE>
<CAPTION>
CAPITAL APPRECIATION CASH MANAGEMENT
PORTFOLIO PORTFOLIO
--------------------------------------------- --------------------------------
FOR THE YEAR ENDED JAN. 29, FOR THE YEAR ENDED
DECEMBER 31, 1993** TO DECEMBER 31,
-------------------------------- DEC. 31, --------------------------------
1996 1995 1994 1993 1996 1995 1994
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD............................... $ 15.49 $ 11.45 $ 12.03 $ 10.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------- -------- -------- --------
Net investment income.................. 0.01 0.06 0.05 0.02 0.05 0.05 0.04
Net realized and unrealized gain (loss)
on investments....................... 2.90 4.04 (0.58) 2.03 -- -- --
-------- -------- -------- --------- -------- -------- --------
Total from investment operations....... 2.91 4.10 (0.53) 2.05 0.05 0.05 0.04
-------- -------- -------- --------- -------- -------- --------
Less dividends and distributions:
From net investment income........... (0.01) (0.06) (0.05) (0.02) (0.05) (0.05) (0.04)
From net realized gain on
investments........................ -- -- -- -- -- -- --
-------- -------- -------- --------- -------- -------- --------
Total dividends and distributions...... (0.01) (0.06) (0.05) (0.02) (0.05) (0.05) (0.04)
-------- -------- -------- --------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD....... $ 18.39 $ 15.49 $ 11.45 $ 12.03 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======= =======
Total investment return#............... 18.75% 35.78% (4.38%) 20.54% 4.95% 5.59% 3.82%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Net investment income................ 0.09% 0.57% 0.63% 0.46%* 4.92% 5.44% 3.97%
Net expenses......................... 0.73% 0.73% 0.73% 0.73%* 0.62% 0.62% 0.62%
Expenses (before reimbursement)...... 0.75% 0.90% 0.91% 1.15%* 0.64% 0.94% 0.89%
Portfolio turnover rate................ 16% 35% 39% 28% -- -- --
Average commission rate paid........... $ 0.0600 (a) (a) (a) -- -- --
Net assets at end of period (in
000's)............................... $503,622 $244,536 $113,999 $43,485 $118,347 $87,839 $71,116
<CAPTION>
GOVERNMENT
CONVERTIBLE PORTFOLIO
PORTFOLIO ---------------------------------------------
-----------
JAN. 29, OCT. 1, FOR THE YEAR ENDED JAN. 29,
1993** TO 1996** TO DECEMBER 31, 1993** TO
DEC. 31, DEC. 31, -------------------------------- DEC. 31,
1993 1996 1996 1995 1994 1993
--------- ----------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD............................... $ 1.00 $ 10.00 $ 10.01 $ 9.21 $ 10.15 $ 10.00
--------- ----------- -------- -------- -------- ---------
Net investment income.................. 0.02 0.10 0.65 0.75 0.75 0.82
Net realized and unrealized gain (loss)
on investments....................... -- 0.29 (0.42) 0.80 (0.94) (0.25)
--------- ----------- -------- -------- -------- ---------
Total from investment operations....... 0.02 0.39 0.23 1.55 (0.19) 0.57
--------- ----------- -------- -------- -------- ---------
Less dividends and distributions:
From net investment income........... (0.02) (0.10) (0.65) (0.75) (0.75) (0.42)
From net realized gain on
investments........................ -- (0.02) -- -- -- --
--------- ----------- -------- -------- -------- ---------
Total dividends and distributions...... (0.02) (0.12) (0.65) (0.75) (0.75) (0.42)
--------- ----------- -------- -------- -------- ---------
NET ASSET VALUE AT END OF PERIOD....... $ 1.00 $ 10.27 $ 9.59 $ 10.01 $ 9.21 $ 10.15
======== ========= ======= ======= ======= ========
Total investment return#............... 2.40% 3.89% (2.28%) 16.72% (1.84%) 5.63%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Net investment income................ 2.65%* 5.14%* 6.66% 7.80% 8.16% 8.46%*
Net expenses......................... 0.62%* 0.73%* 0.67% 0.67% 0.67% 0.67%*
Expenses (before reimbursement)...... 1.10%* 1.46%* 0.71% 0.82% 0.87% 1.02%*
Portfolio turnover rate................ -- 15% 304% 592% 483% 501%
Average commission rate paid........... -- $0.0537 -- -- -- --
Net assets at end of period (in
000's)............................... $26,733 $15,464 $ 73,123 $64,812 $61,641 $46,766
</TABLE>
- ------------
* Annualized.
** Commencement of operations.
# The total investment return quotations reflected above do not reflect
expenses incurred by the Separate Accounts or in connection with the
Policies. Including such expenses in these quotations would have reduced
such returns for all periods shown. Total return is not annualized.
(a) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
A-4
<PAGE> 7
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
-
<TABLE>
<CAPTION>
HIGH YIELD INTERNATIONAL TOTAL RETURN
CORPORATE EQUITY PORTFOLIO
BOND PORTFOLIO PORTFOLIO ---------------------------------------------
-------------------- ----------------------
FOR YEAR MAY 1, FOR YEAR MAY 1, FOR THE YEAR ENDED JAN. 29,
ENDED 1995** TO ENDED 1995** TO DECEMBER 31, 1993** TO
DEC. 31, DEC. 31, DEC. 31, DEC. 31, -------------------------------- DEC. 31,
1996 1995 1996 1995 1996 1995 1994 1993
-------- -------- --------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD................. $ 10.55 $ 10.00 $ 10.20 $ 10.00 $ 13.26 $ 10.58 $ 11.32 $ 10.00
-------- -------- --------- --------- -------- -------- -------- ---------
Net investment income....... 0.59 0.37 0.44 0.64 0.30 0.31 0.27 0.16
Net realized and unrealized
gain (loss) on
investments............... 1.22 0.61 0.06 0.01 1.30 2.69 (0.72) 1.34
Net realized and unrealized
gain on foreign currency
transactions.............. -- -- 0.56 0.05 -- -- -- --
-------- -------- --------- --------- -------- -------- -------- ---------
Total from investment
operations................ 1.81 0.98 1.06 0.70 1.60 3.00 (0.45) 1.50
-------- -------- --------- --------- -------- -------- -------- ---------
Less dividends and
distributions:
From net investment
income.................. (0.59) (0.37) (0.60) (0.06) (0.30) (0.32) (0.29) (0.16)
From net realized gain on
investments and foreign
currency transactions... (0.16) (0.04) (0.01) (0.44) -- -- -- --
In excess of net realized
gain on investments..... -- (0.02) -- -- -- -- -- (0.02)
-------- -------- --------- --------- -------- -------- -------- ---------
Total dividends and
distributions............. (0.75) (0.43) (0.61) (0.50) (0.30) (0.32) (0.29) (0.18)
-------- -------- --------- --------- -------- -------- -------- ---------
NET ASSET VALUE AT END OF
PERIOD.................... $ 11.61 $ 10.55 $ 10.65 $ 10.20 $ 14.56 $ 13.26 $ 10.58 $ 11.32
======== ======= ======= ======== ======== ======== ======== ========
Total investment return#.... 17.16% 10.06% 10.54% 6.96% 12.08% 28.33% (3.99%) 15.04%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Net investment income..... 8.59% 10.02%* 1.01% 1.07%* 2.52% 3.06% 3.50% 3.48%*
Net expenses.............. 0.67% 0.67%* 0.97% 0.97%* 0.69% 0.69% 0.69% 0.69%*
Expenses (before
reimbursement).......... 0.71% 1.25%* 1.51% 2.51%* 0.71% 0.81% 0.88% 1.07%*
Portfolio turnover rate..... 149% 95% 16% 14% 175% 253% 297% 197%
Average commission rate
paid...................... $ 0.0613 (a) $0.0364 (a) $ 0.0599 (a) (a) (a)
Net assets at end of period
(in 000's)................ $205,001 $43,314 $34,509 $14,631 $332,897 $194,893 $122,333 $55,548
<CAPTION>
INDEXED EQUITY
VALUE PORTFOLIO
PORTFOLIO ---------------------------------------------
---------------------
FOR YEAR MAY 1, FOR THE YEAR ENDED JAN. 29,
ENDED 1995** TO DECEMBER 31, 1993** TO
DEC. 31, DEC. 31, -------------------------------- DEC. 31,
1996 1995 1996 1995 1994 1993
-------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD................. $ 11.58 $ 10.00 $ 13.53 $ 10.38 $ 10.58 $ 10.00
-------- --------- -------- -------- -------- ---------
Net investment income....... 0.17 0.10 0.24 0.27 0.24 0.19
Net realized and unrealized
gain (loss) on
investments............... 2.52 1.58 2.79 3.55 (0.15) 0.67
Net realized and unrealized
gain on foreign currency
transactions.............. -- -- -- -- -- --
-------- --------- -------- -------- -------- ---------
Total from investment
operations................ 2.69 1.68 3.03 3.82 0.09 0.86
-------- --------- -------- -------- -------- ---------
Less dividends and
distributions:
From net investment
income.................. (0.17) (0.10) (0.24) (0.28) (0.24) (0.19)
From net realized gain on
investments and foreign
currency transactions... (0.20) -- (0.22) (0.39) (0.05) (0.08)
In excess of net realized
gain on investments..... -- -- -- -- -- (0.01)
-------- --------- -------- -------- -------- ---------
Total dividends and
distributions............. (0.37) (0.10) (0.46) (0.67) (0.29) (0.28)
-------- --------- -------- -------- -------- ---------
NET ASSET VALUE AT END OF
PERIOD.................... $ 13.90 $ 11.58 $ 16.10 $ 13.53 $ 10.38 $ 10.58
======== ======== ======== ======== ======= ========
Total investment return#.... 23.22% 16.76% 22.42% 36.89% 0.76% 8.53%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Net investment income..... 2.10% 2.57%* 2.14% 2.52% 2.61% 2.54%*
Net expenses.............. 0.73% 0.73%* 0.47% 0.47% 0.47% 0.47%*
Expenses (before
reimbursement).......... 0.79% 1.45%* 0.50% 0.62% 0.68% 0.96%*
Portfolio turnover rate..... 41% 20% 3% 5% 8% 7%
Average commission rate
paid...................... $ 0.0593 (a) $ 0.0498 (a) (a) (a)
Net assets at end of period
(in 000's)................ $120,415 $24,429 $223,945 $105,171 $63,164 $43,081
</TABLE>
- ------------
* Annualized.
** Commencement of operations.
# The total investment return quotations reflected above do not reflect
expenses incurred by the Separate Accounts or in connection with the
Policies. Including such expenses in these quotations would have reduced
such returns for all periods shown. Total return is not annualized.
(a) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
A-5
<PAGE> 8
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BOND PORTFOLIO
--------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF YEAR................................ $ 13.42 $ 12.09 $ 13.43 $ 12.91 $ 12.77
-------- -------- -------- -------- --------
Net investment income............................................... 0.87 0.88 0.88 0.95 0.92
Net realized and unrealized gain (loss) on investments.............. (0.59) 1.33 (1.34) 0.53 0.13
-------- -------- -------- -------- --------
Total from investment operations.................................... 0.28 2.21 (0.46) 1.48 1.05
-------- -------- -------- -------- --------
Less dividends:
From net investment income........................................ (0.87) (0.88) (0.88) (0.96) (0.91)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR...................................... $ 12.83 $ 13.42 $ 12.09 $ 13.43 $ 12.91
======== ======== ======== ======== ========
Total investment return#............................................ 2.05% 18.31% (3.39%) 11.40% 8.26%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income............................................. 6.31% 6.55% 6.53% 6.79% 7.54%
Net expenses...................................................... 0.58% 0.62% 0.62%++ 0.27%++ 0.25%
Expenses (before reimbursement)................................... 0.58% 0.91% 0.67%++ 0.27%++ 0.25%
Portfolio turnover rate............................................. 103% 81% 88% 41% 10%
Net assets at end of year (in 000's)................................ $226,375 $235,030 $206,686 $228,683 $203,947
<CAPTION>
1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF YEAR................................ $ 11.86 $ 12.09 $ 11.80 $ 11.99 $ 13.55
-------- -------- -------- -------- --------
Net investment income............................................... 1.02 1.12 1.11 1.20 1.06
Net realized and unrealized gain (loss) on investments.............. 0.91 (0.23) 0.30 (0.21) (0.91)
-------- -------- -------- -------- --------
Total from investment operations.................................... 1.93 0.89 1.41 0.99 0.15
-------- -------- -------- -------- --------
Less dividends:
From net investment income........................................ (1.02) (1.12) (1.12) (1.18) (1.71)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR...................................... $ 12.77 $ 11.86 $ 12.09 $ 11.80 $ 11.99
======== ======== ======== ======== ========
Total investment return#............................................ 16.27% 7.36% 11.95% 8.26% 1.07%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income............................................. 8.22% 8.88% 8.83% 8.66% 8.15%
Net expenses...................................................... 0.25% 0.25% 0.25% 0.26% 0.25%
Expenses (before reimbursement)................................... 0.25% 0.25% 0.25% 0.26% 0.25%
Portfolio turnover rate............................................. 57% 81% 20% 105% 53%
Net assets at end of year (in 000's)................................ $164,124 $138,826 $134,542 $122,725 $130,901
</TABLE>
- ------------
++ At the Fund's shareholder meeting on December 14, 1993, the shareholders
voted to have the Bond Portfolio assume certain administrative and
operating expenses of the Fund previously borne by New York Life.
# The total investment return quotations reflected above do not reflect
expenses incurred by the Separate Accounts or in connection with the
Policies. Including such expenses in these quotations would have reduced
such returns for all periods shown.
A-6
<PAGE> 9
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
-
<TABLE>
<CAPTION>
GROWTH EQUITY PORTFOLIO
--------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF YEAR................................ $ 17.22 $ 14.69 $ 15.64 $ 15.53 $ 15.57
-------- -------- -------- -------- --------
Net investment income............................................... 0.18 0.22 0.22 0.24 0.22
Net realized and unrealized gain (loss) on investments.............. 4.06 4.06 (0.03) 1.88 1.72
-------- -------- -------- -------- --------
Total from investment operations.................................... 4.24 4.28 0.19 2.12 1.94
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income........................................ (0.18) (0.22) (0.22) (0.25) (0.22)
From net realized gain on investments............................. (2.65) (1.53) (0.92) (1.76) (1.76)
-------- -------- -------- -------- --------
Total dividends and distributions................................... (2.83) (1.75) (1.14) (2.01) (1.98)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR...................................... $ 18.63 $ 17.22 $ 14.69 $ 15.64 $ 15.53
======== ======== ======== ======== ========
Total investment return# 24.50% 29.16% 1.20% 13.71% 12.42%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income............................................. 0.98% 1.29% 1.41% 1.42% 1.50%
Net expenses...................................................... 0.58% 0.62% 0.62%++ 0.27%++ 0.27%
Expenses (before reimbursement)................................... 0.58% 0.91% 0.65%++ 0.27%++ 0.27%
Portfolio turnover rate............................................. 104% 104% 108% 121% 82%
Average commission rate paid........................................ $ 0.0595 (a) (a) (a) (a)
Net assets at end of year (in 000's)................................ $564,685 $427,507 $330,161 $319,196 $272,834
<CAPTION>
1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF YEAR................................ $ 13.00 $ 14.22 $ 12.70 $ 11.22 $ 11.87
-------- -------- -------- -------- --------
Net investment income............................................... 0.27 0.32 0.42 0.46 0.36
Net realized and unrealized gain (loss) on investments.............. 4.10 (1.20) 2.82 1.43 (0.49)
-------- -------- -------- -------- --------
Total from investment operations.................................... 4.37 (0.88) 3.24 1.89 (0.13)
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income........................................ (0.29) (0.33) (0.44) (0.41) (0.52)
From net realized gain on investments............................. (1.51) (0.01) (1.28) -- --
-------- -------- -------- -------- --------
Total dividends and distributions................................... (1.80) (0.34) (1.72) (0.41) (0.52)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR...................................... $ 15.57 $ 13.00 $ 14.22 $ 12.70 $ 11.22
======== ======== ======== ======== ========
Total investment return# 33.62% (6.19%) 25.51% 16.85% (1.13%)
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income............................................. 1.78% 2.33% 2.80% 3.32% 2.71%
Net expenses...................................................... 0.29% 0.29% 0.28% 0.30% 0.26%
Expenses (before reimbursement)................................... 0.29% 0.29% 0.28% 0.30% 0.26%
Portfolio turnover rate............................................. 100% 114% 108% 111% 71%
Average commission rate paid........................................ (a) (a) (a) (a) (a)
Net assets at end of year (in 000's)................................ $204,147 $152,824 $171,116 $150,538 $156,198
</TABLE>
- ------------
++ At the Fund's shareholder meeting on December 14, 1993, the shareholders
voted to have the Growth Equity Portfolio assume certain administrative and
operating expenses of the Fund previously borne by New York Life.
# The total investment return quotations reflected above do not reflect
expenses incurred by the Separate Accounts or in connection with the
Policies. Including such expenses in these quotations would have reduced
such returns for all periods shown.
(a) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
A-7
<PAGE> 10
Capital Appreciation Portfolio
The Portfolio's objective is:
to seek long-term growth of capital. Dividend
income, if any, is an incidental consideration.
WHO SHOULD INVEST? Investors who seek growth and
are willing to accept a higher level of risk for
higher return potential.
The Portfolio invests in:
The Portfolio maintains a flexible approach towards investing in various types
of companies as well as types of securities, depending upon the economic
environment and the relative attractiveness of the various securities markets.
Under normal market conditions...
...SECURITIES ISSUED BY COMPANIES WITH INVESTMENT CHARACTERISTICS SUCH AS:
- - participation in expanding markets;
- - increasing unit sales volume;
- - growth in revenues and earnings per share superior to that of the average of
common stocks comprising indices such as the Standard & Poor's 500 Composite
Price Index (S&P 500); or
- - increasing return on investment.
...ANY OTHER SECURITIES WHICH, IN THE JUDGMENT OF MACKAY-SHIELDS ARE READY FOR A
RISE IN PRICE, or expected to undergo an acceleration in growth of earnings
because of special factors such as new management, new products, changes in
consumer demand or changes in the economy.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
RISKS? The Portfolio may purchase securities carrying above-average risk
relative to common stock indices such as the Dow Jones Industrial Average and
the S&P 500. Opportunities for greater gain frequently involve correspondingly
greater risk of loss.
WHO'S MANAGING YOUR MONEY?
EDMUND SPELMAN AND RUDY CARRYL OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Spelman is a Director at MacKay-Shields who specializes in equities. He
joined the firm in 1991 after working as an analyst at Oppenheimer & Co. since
1983. Mr. Spelman has acted as a portfolio manager of the Capital Appreciation
and Total Return Portfolios since their inceptions. Mr. Carryl joined
MacKay-Shields Financial Corporation as a Director in 1992. He has fifteen years
of investment management and research experience. Mr. Carryl was research
director and senior portfolio manager at Value Line, Inc. from 1978-1992. Mr.
Carryl has acted as a portfolio manager of the Capital Appreciation and Total
Return Portfolios since their inceptions.
A-8
<PAGE> 11
Eagle Growth Equity Portfolio
The Portfolio's objective is:
to seek growth through long-term capital appreciation.
WHO SHOULD INVEST? Investors who seek growth and are willing to accept a higher
level of risk for higher return potential.
The Portfolio invests in:
common stocks that the sub-adviser believes have sufficient growth potential to
offer above average long-term capital appreciation. Companies in which Eagle
will invest will have at least one of the following characteristics at the time
of purchase:
- - expected earnings-per-share growth greater than the average of the S&P 500, or
- - return on equity greater than the average for the S&P 500.
Under normal market conditions...
...AT LEAST 65% OF THE PORTFOLIO'S TOTAL ASSETS will be invested in U.S. common
stocks. A majority of the Eagle Growth Equity Portfolio's total assets will be
invested in common stock with market capitalization of greater than $5 billion
at the time of purchase.
With respect to the other 35% of its total assets, the Portfolio may invest in
common stocks of foreign issuers, ADRs, foreign currency transactions with
respect to underlying common stocks, preferred stock, investment grade
securities convertible into common stocks, futures contracts, options on equity
securities or equity security indices, rights or warrants to subscribe for or
purchase common stocks, obligations of the U.S. Government, its agencies and
instrumentalities (including repurchase agreements thereon) and in securities
that track the performance of a broad-based securities index, such as SPDRs.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See pages 21-25,
"Investments and Investment Practices," for details.)
RISKS? Investment in common stocks is subject to the risk of changing economic
conditions and the risks inherent in management's ability to anticipate such
changes. The Portfolio invests primarily in common stocks and, therefore, is
exposed to the risks of investing in those securities, including fluctuations in
value.
Eagle manages a portfolio of Heritage Series Trust (the "Trust") which served as
the model for the Portfolio of the Fund. The portfolio of the Trust has
substantially the same investment objectives and policies as the Portfolio of
the Fund. In addition, Eagle intends the Portfolio of the Fund and the
corresponding portfolio of the Trust to be managed by the same personnel and to
continue to have closely similar investment strategies, techniques, and
characteristics.
Past investment performance of the Trust portfolio, as shown in the table below,
may be relevant to your consideration of the Portfolio. The investment
performance of the Trust portfolio is not necessarily indicative of future
performance of the Portfolio. Also, the operating expenses of the Portfolio will
be different from, and may be higher than, the operating expenses of the
corresponding Trust portfolio. The investment performance of the Trust portfolio
is provided merely to indicate the experience of Eagle in managing a similar
portfolio.
<TABLE>
<CAPTION>
AS OF 12/31/97
----------------------------------------
ONE THREE FIVE TEN
YEAR YEAR YEAR YEAR
INCEPTION TOTAL TOTAL TOTAL TOTAL
FUND NAME DATE RETURN RETURN RETURN RETURN
----------------------- ---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Heritage Series Trust:
Growth Equity Fund
</TABLE>
WHO'S MANAGING YOUR MONEY?
EAGLE ASSET MANAGEMENT, INC. serves as sub-adviser to this portfolio, and has
been managing private accounts since 1976 for a diverse group of clients.
KENNETH W. CORBA, Executive Vice President and Chief Investment Officer of Eagle
since 1995. From 1984 to 1995 Mr. Corba held various portfolio management
positions with Stein Roe & Farnham, Inc.
A-9
<PAGE> 12
Growth Equity Portfolio
The Portfolio's objective is:
to seek long term growth of capital, with income as a secondary consideration.
WHO SHOULD INVEST? Investors who seek growth and are willing to accept a higher
level of risk for higher return potential.
The Portfolio invests in:
Under normal market conditions...
...COMMON STOCKS of well established, well managed companies which appear to
have better than average growth potential.
...IN ADDITION TO COMMON STOCKS, the Portfolio may invest up to 10% of its total
assets in securities convertible into or with rights to purchase common stocks,
such as warrants.
The Portfolio may also make loans of portfolio securities and may invest in
foreign securities.
The Portfolio will seek to identify companies which are considered to represent
good value based on historical investment standards, including price/book value
ratios and price/earnings ratios.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
RISKS? Investment in common stocks is subject to the risk of changing economic
conditions and the risks inherent in management's ability to anticipate such
changes. The Portfolio invests primarily in common stocks and, therefore, is
exposed to the risks of investing in those securities, including fluctuations in
value.
WHO'S MANAGING YOUR MONEY?
JAMES AGOSTISI AND PATRICIA S. ROSSI OF NEW YORK LIFE INSURANCE COMPANY.
Mr. Agostisi is an Investment Vice President of New York Life. He joined New
York Life in 1984 and subsequently served as its head money market trader. From
1989 to 1994 he worked as a research analyst in both equities and high yield
securities. Ms. Rossi joined New York Life as an Investment Vice President in
1995 with eighteen years of investment management and research experience. Prior
to joining New York Life, Ms. Rossi was a portfolio manager for the United
Church of Christ--Pension Boards.
A-10
<PAGE> 13
Indexed Equity Portfolio
The Portfolio's objective is:
to provide investment results that correspond to the total return performance
(reflecting reinvestment of dividends) of common stocks in the aggregate, as
represented by the S&P 500.
WHO SHOULD INVEST? Investors who seek growth and are willing to accept a higher
level of risk for higher return potential.
SEE PAGE 20 for more details about the Portfolio.
The Portfolio invests in:
Under normal market conditions...
...AT LEAST 80% OF ITS TOTAL ASSETS IN STOCKS LISTED IN THE INDEX. The Portfolio
will attempt to be fully invested at all times, and will invest in stocks in the
same proportions as they are invested in the Index.
The Portfolio may utilize stock index options and stock index futures contracts
and options on stock index futures contracts to a limited extent. Options,
futures contracts, and options on futures contracts may be used for several
reasons: to maintain cash reserves while remaining fully invested, to facilitate
trading, or to reduce transactions costs. The Portfolio may enter into options
and futures contracts only to the extent that obligations under such contracts
or transactions represent not more than 20% of the Portfolio's total assets.
The Portfolio may invest in securities of foreign issuers included in the Index.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
RISKS? An investment in this Portfolio involves risks similar to those of
investing directly in common stocks. The Portfolio uses the Index because it
represents about two-thirds of the total market value of all common stocks and
is well-known to investors. The Index also represents total return performance
including reinvested dividends of the stocks in the Index. If the value of the
Index declines, the NAV of shares of the Portfolio will also decline.
WHO'S MANAGING YOUR MONEY?
JAMES MEHLING OF MONITOR CAPITAL ADVISORS, INC.
Mr. Mehling joined Monitor Capital Advisors in 1991 after working as director of
risk management in the investment department of New York Life Insurance Company.
Mr. Mehling is currently Chief Investment Officer for Monitor. He began his
career in financial services with Merrill Lynch in 1976 and was with County
NatWest Government Securities from 1987-1989. Mr. Mehling has served as
portfolio manager to the Portfolio since 1993.
The Index is a broad measurement of stock market performance composed of 500
common stocks selected by Standard & Poor's ("S&P").
The Portfolio is neither sponsored by nor affiliated with S&P.
By including a stock in the Index, neither S&P nor the Portfolio's Adviser takes
any stance on the stock's investment value.
A-11
<PAGE> 14
International Equity Portfolio
The Portfolio's objective is:
to seek long-term growth of capital by investing in a portfolio consisting
primarily of non-U.S. equity securities. Current income is a secondary
objective.
WHO SHOULD INVEST? Investors who prefer the higher return potential of
international equities or want to add diversification to their domestic
investments.
SEE PAGE 20 for more details about the Portfolio.
The Portfolio invests in:
Under normal market conditions...
...AT LEAST 65% OF ITS TOTAL ASSETS IN A DIVERSIFIED PORTFOLIO OF EQUITY
SECURITIES, which may include common stocks, preferred stocks, warrants, and
other equity securities of issuers, wherever organized, who do business mainly
outside the U.S. Eligible investments include any equity or equity-related
investments, domestic or foreign, whether denominated in foreign currencies or
U.S. dollars.
...A VARIETY OF COUNTRIES and will be invested in a minimum of five countries
exclusive of the United States. This includes countries with established
economies, emerging market countries, including countries in Latin America and
other newly industrialized countries such as South Korea and Taiwan, which
MacKay-Shields believes present favorable investment opportunities.
The Portfolio may enter into or purchase securities or securities index options,
foreign currency options, and futures contracts and related options with respect
to securities, indexes of securities or currencies. (For more details, see page
20, "Other Information About the Portfolios--International Equity Portfolio.")
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
THIS PORTFOLIO IS FOR LONG-TERM INVESTORS WHO SEEK GROWTH OVER CURRENT INCOME.
It is not designed as a way to speculate on short-term stock market swings.
Investors should be able to tolerate sudden, sometimes substantial fluctuations
in value.
RISKS? Alone, this Portfolio is not a balanced investment plan. It is
appropriate for investors wanting investments in markets outside the U.S. while
seeking to avoid undue volatility. The orientation is in avoiding excessive
risk, although there are risks associated with any investment. Due to this
philosophy, the Portfolio may not attain as high a return as more aggressively
managed international funds--although the Portfolio is expected to outperform
some funds in down markets. There is no guarantee that the Portfolio will
succeed in achieving its objective.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see page 22, "Investments and Investment
Practices--Foreign Securities.")
WHO'S MANAGING YOUR MONEY?
SHIGEMI TAKAGI OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Takagi is a Director of MacKay-Shields. He specializes in international
equity securities. Mr. Takagi joined MacKay-Shields in 1989, after working at
First Boston Corporation as an equity analyst in their international equity
research department. He has served as a portfolio manager since the Portfolio
was started in 1995.
Securities of issuers in one country may be denominated in the currency of
another country.
A-12
<PAGE> 15
Lord Abbett Developing Growth Portfolio
The Portfolio's objective is:
long-term growth of capital through a diversified and actively-managed portfolio
consisting of developing growth companies, many of which are traded over the
counter.
WHO SHOULD INVEST? Investors seeking growth and who are comfortable with the
higher risks involved in smaller company stocks.
The Portfolio invests in:
the common stock of developing growth companies. At any given time, there are
many hundreds of publicly-traded corporations in the developing growth phase. In
choosing among them, the sub-adviser looks for special characteristics that will
help their growth. These can include a unique product or service for which the
sub-adviser foresees a rising demand; a special area of technological expertise;
the ability to service a region that is growing faster than average; a
competitive advantage or new opportunities in foreign trade or arising from
shifts in government priorities and programs; or an ability to take advantage of
growth of consumers' discretionary income and demographic changes.
The sub-adviser also looks for certain financial characteristics such as: at
least five years of higher-than-average growth of revenues and earnings per
share; higher-than-average returns on equity; the ability to finance growth in
the form of a lower-than-average ratio of long-term debt to capital and
price/earnings ratios that are below expected growth rates.
The sub-adviser also looks for certain characteristics of management in addition
to those that are implied by the financial data. The sub-adviser looks for
management that is well-seasoned and diverse in its talent and that is
aggressive enough to seize the opportunities the sub-adviser perceives in each
company's future. Finally, the sub-adviser looks for management that has
demonstrated an ability to manage through a full economic cycle.
Securities the sub-adviser considers for the Portfolio are analyzed solely on
traditional investment fundamentals. In addition to the financial data already
mentioned, the sub-adviser evaluates the market for each company's products or
services, the strengths and weaknesses of competitors, the availability of raw
materials, diversity of product mix, etc. Finally, in assembling our portfolio,
the sub-adviser tries to diversify investments. Within the bounds of other
criteria, the sub-adviser tries to invest in many securities and industries in
order to minimize risk.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See pages 21-25,
"Investments and Investment Practices," for details.)
RISKS? An investment in this Portfolio is not intended as a complete investment
program. Because stocks of developing growth companies entail more risk and have
more volatile prices than those of mature companies, the Portfolio's NAV per
share is likely to experience above-average fluctuations.
Lord, Abbett manages the Lord Abbett Developing Growth Fund ("LADGF") which
served as the model for the Portfolio of the Fund. The LADGF has substantially
the same investment objectives and policies as the Portfolio of the Fund. In
addition, Lord Abbett intends the Portfolio of the Fund and the LADGF to be
managed by the same personnel and to continue to have closely similar investment
strategies, techniques, and characteristics.
Past investment performance of LADGF, as shown in the table below, may be
relevant to your consideration of the Portfolio. The investment performance of
LADGF is not necessarily indicative of future performance of the Portfolio.
Also, the operating expenses of the Portfolio will be different from, and may be
higher than, the operating expenses of LADGF. The investment performance of
LADGF is provided merely to indicate the experience of Lord Abbett in managing a
similar portfolio.
<TABLE>
<CAPTION>
AS OF 12/31/97
----------------------------------------
ONE THREE FIVE TEN
YEAR YEAR YEAR YEAR
INCEPTION TOTAL TOTAL TOTAL TOTAL
FUND NAME DATE RETURN RETURN RETURN RETURN
------------------ ---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Lord Abbett
Developing Growth
Fund, Inc.
</TABLE>
WHO'S MANAGING YOUR MONEY?
LORD, ABBETT & CO. serves as sub-adviser to this Portfolio and has been an
investment manager for 67 years and currently manages approximately $25 billion
in assets.
STEPHEN J. MCGRUDER serves as portfolio manager and has been a portfolio manager
at Lord, Abbett since May 1995. He previously served as Vice President of Wafra
Investor Advisory Group from October 1988.
A-13
<PAGE> 16
American Century Income & Growth Portfolio
The Portfolio's objective is:
dividend growth, current income and capital appreciation. The Portfolio will
seek to achieve its objective by investing in common stocks.
WHO SHOULD INVEST? Investors who seek a combination of income and growth
potential.
The Portfolio invests in:
...primarily equity securities of the 1,500 largest companies traded in the
United States (ranked by market capitalization).
The sub-adviser uses quantitative management strategies in pursuit of the
Portfolio's investment objective. Quantitative management combines two
investment management approaches. The first is active management, which allows
the sub-adviser to select investments for the Portfolio without reference to an
index or investment model. The second is indexing, in which the sub-adviser
tries to match the Portfolio's composition to that of a particular index.
The primary management technique the sub-adviser uses is portfolio optimization.
The sub-adviser constructs the Portfolio's portfolio to match the risk
characteristics of the S&P 500 and then optimizes the portfolio to achieve the
desired balance of risk and return potential. This includes targeting a dividend
yield that exceeds that of the S&P 500.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See pages 21-25,
"Investments and Investment Practices," for details.)
RISKS? Investment in common stocks is subject to the risk of changing economic
conditions and the risks inherent in management's ability to anticipate such
changes. The Portfolio invests primarily in common stocks and, therefore, is
exposed to the risks of investing in those securities, including fluctuations in
value.
American Century manages a portfolio of American Century Quantitative Equity
Funds ("ACQEF") which served as the model for the Portfolio of the Fund. The
portfolio of ACQEF has substantially the same investment objectives and policies
as the Portfolio of the Fund. In addition, American Century intends the
Portfolio of the Fund and the corresponding portfolio of ACQEF to be managed by
the same personnel and to continue to have closely similar investment
strategies, techniques, and characteristics.
Past investment performance of the ACQEF portfolio, as shown in the table below,
may be relevant to your consideration of the Portfolio. The investment
performance of the ACQEF portfolio is not necessarily indicative of future
performance of the Portfolio. Also, the operating expenses of the Portfolio will
be different from, and may be higher than, the operating expenses of the
corresponding ACQEF portfolio. The investment performance of the ACQEF portfolio
is provided merely to indicate the experience of American Century in managing a
similar portfolio.
<TABLE>
<CAPTION>
AS OF 12/31/97
----------------------------------------
ONE THREE FIVE TEN
YEAR YEAR YEAR YEAR
INCEPTION TOTAL TOTAL TOTAL TOTAL
FUND NAME DATE RETURN RETURN RETURN RETURN
---------------- ---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ACQEF:
Income & Growth
Portfolio
</TABLE>
WHO'S MANAGING YOUR MONEY?
AMERICAN CENTURY INVESTMENT MANAGEMENT INC. serves as sub-adviser to this
Portfolio and has been providing investment advisory services to investment
companies and institutional investors since it was founded in 1958.
JOHN SCHNIEDWIND, Senior Vice President and Group Head -- Quantitative Equity,
joined American Century in 1982.
KURT BORGWARDT, Director of Quantitative Research, joined American Century in
1990 and has served as the Director of Quantitative Research since then.
A-14
<PAGE> 17
Convertible Portfolio
The Portfolio's objective is:
to seek capital appreciation together with current income. Certain of the
Portfolio's investments have speculative characteristics.
WHO SHOULD INVEST? Investors who want income from securities that may offer
growth potential if converted into common stock.
SEE PAGE 19 for more details about the Portfolio.
The Portfolio invests in:
Under normal market conditions...
...AT LEAST 65% OF THE VALUE OF ITS TOTAL ASSETS IN "CONVERTIBLE SECURITIES",
that is, bonds, debentures, corporate notes, preferred stocks or other
securities which are convertible into common stock.
The Portfolio takes a flexible approach, investing in a broad range of
securities of a variety of companies and industries.
...NOT MORE THAN 5% OF ITS TOTAL ASSETS IN SECURITIES rated less than B by S&P
or B by Moody's Investors Service, Inc. ("Moody's"), or, if unrated, that are
judged to be of comparable quality by MacKay-Shields.
The Portfolio may invest without restriction in securities rated BB or B by S&P
or Ba or B by Moody's.
...THE BALANCE OF THE PORTFOLIO MAY BE INVESTED IN NON-CONVERTIBLE DEBT OR
EQUITY SECURITIES or U.S. Government securities or may be held in cash or cash
equivalents.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
RISKS? The total return for a convertible security will be partly dependent upon
the performance of the underlying common stock into which it can be converted.
Securities rated in categories lower than Baa by Moody's or BBB by S&P,
sometimes referred to as "junk bonds", are not considered "investment grade" and
generally involve more investment risks than securities rated investment grade,
including risks of price volatility, greater risk of issuer default on payments
of interest or repayment of principal, and other characteristics that may be
regarded as speculative. In addition, Moody's regards securities rated Baa as
having speculative characteristics. (See page 24, "Risks of Investing in High
Yield Securities" for more details; and Appendix A for a description of
ratings.)
WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE,
NEIL FEINBERG AND
THOMAS WYNN OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Laplaige is President, Managing Director and Chief Investment Officer of
MacKay-Shields. He joined the firm in 1982, became a Director in 1988, Managing
Director in 1991 and a member of the Board of Directors in 1993. He has managed
this Portfolio since its inception and is also a portfolio manager of the Value
Portfolio and the High Yield Corporate Bond Portfolio. Mr. Feinberg is a
Director of MacKay-Shields and has been a portfolio manager for the Convertible
Portfolio since its inception. He joined MacKay-Shields in 1992. Prior to
joining MacKay-Shields, Mr. Feinberg was employed by National Securities and
Research Corporation as an analyst (1989-1992). Mr. Wynn has been a portfolio
manager for the Portfolio since 1997 and joined the firm in 1995 as a research
analyst. He was previously a portfolio manager at Fiduciary Trust for nine years
and has over twelve years experience in investment management and research.
A-15
<PAGE> 18
Dreyfus Large Company Value Portfolio
The Portfolio's objective is:
Capital Appreciation. It seeks to achieve this objective by investing
principally in a portfolio of publicly-traded equity securities of domestic and
foreign issuers which are characterized as value companies by the sub-adviser.
WHO SHOULD INVEST? Investors who seek to maximize total return from securities
which may have more potential than the market currently sees.
The Portfolio invests in:
Under normal market conditions...
...AT LEAST 65% OF THE VALUE OF ITS TOTAL ASSETS will be invested in equity
securities of domestic and foreign issuers which are characterized as "value"
companies. Value companies are those the sub-adviser believes have relatively
low price to book ratios, low price to earnings ratios or higher than average
dividend payments in relation to price. The Portfolio invests, under normal
market conditions, substantially all of its assets in equity securities of
issuers with market capitalizations of between $900 million and $90 billion.
Equity securities consist of common stocks, convertible securities and preferred
stocks.
In an effort to increase returns, the Portfolio may engage in various investment
techniques, such as leveraging, lending portfolio securities, foreign currency
transactions, options and futures transactions and short-selling.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See pages 21-25,
"Investments and Investment Practices," for details.)
RISKS? The Portfolio invests primarily in common stocks and, therefore, is
exposed to the risks of investing in those securities, including fluctuations in
value.
Dreyfus manages a portfolio of Dreyfus Growth and Value Funds, Inc. ("DGVF")
which served as the model for the Portfolio of the Fund. The portfolio of DGVF
has substantially the same investment objectives and policies as the Portfolio
of the Fund. In addition, Dreyfus intends the Portfolio of the Fund and the
corresponding portfolio of DGVF to be managed by the same personnel and to
continue to have closely similar investment strategies, techniques, and
characteristics.
Past investment performance of the DGVF portfolio, as shown in the table below,
may be relevant to your consideration of the Portfolio. The investment
performance of the DGVF portfolio is not necessarily indicative of future
performance of the Portfolio. Also, the operating expenses of the Portfolio will
be different from, and may be higher than, the operating expenses of the
corresponding DGVF portfolio. The investment performance of the DGVF portfolio
is provided merely to indicate the experience of Dreyfus in managing a similar
portfolio.
<TABLE>
<CAPTION>
AS OF 12/31/97
----------------------------------------
ONE THREE FIVE TEN
YEAR YEAR YEAR YEAR
INCEPTION TOTAL TOTAL TOTAL TOTAL
FUND NAME DATE RETURN RETURN RETURN RETURN
------------------- ---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
DGVF:
Dreyfus Large
Company Value Fund
</TABLE>
WHO'S MANAGING YOUR MONEY?
THE DREYFUS CORPORATION, formed in 1947, serves as sub-adviser to this
Portfolio, and manages over $82 billion in assets.
TIMOTHY M. GHRISKEY is the Portfolio Manager and has been with Dreyfus since
July 1995. From 1988 to June 1995 Mr. Ghirskey was Vice President and Associate
Managing Partner of Loomis, Sayles & Company.
A-16
<PAGE> 19
Total Return Portfolio
The Portfolio's objective is:
to realize current income consistent with reasonable opportunity for future
growth of capital and income.
The Portfolio maintains a flexible approach by investing in a broad range of
securities, which may be diversified by company, by industry and by type. The
Portfolio may invest in common stocks, preferred stocks, convertible securities,
warrants and fixed-income securities, such as bonds and other debt obligations,
including money market instruments.
WHO SHOULD INVEST? Investors who seek a combination of income and growth
potential and want to manage risk through diversification.
The Portfolio invests in:
Under normal market conditions...
...A MINIMUM OF 30% OF THE PORTFOLIO'S NET ASSETS will be invested in equity
securities. A majority of the Portfolio's equity securities will normally
consist of stocks of companies with growth in revenues and earnings per share
superior to that of the average of common stocks comprising indices such as the
S&P 500. The Portfolio will also invest in stocks and other equity securities
which it believes to be undervalued.
...A MINIMUM OF 30% OF NET ASSETS will be invested in debt securities. It is
contemplated that the Portfolio's long-term debt investments will consist
primarily of securities which are rated A or better by S&P or Moody's or, if
unrated, deemed to be of comparable creditworthiness by MacKay-Shields.
...UP TO 20% OF THE VALUE OF THE PORTFOLIO'S INVESTMENT in debt securities may
be in securities rated below A, provided that they are rated at least Ba by
Moody's, or BB by S&P, or, if unrated, deemed to be of comparable
creditworthiness by MacKay-Shields.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
RISKS? The Portfolio may allocate its assets among equity and debt securities
and, therefore, has some exposure to the risks of both common stocks and bonds.
Investments in securities rated Ba by Moody's or BB by S&P involve special risks
not generally associated with investing in securities rated in higher rating
categories, including greater volatility of price, greater risk of issuer
default, or other characteristics that may be regarded as speculative.
Securities rated lower than Baa by Moody's or lower than BBB by S&P or, if not
rated, of equivalent quality, are sometimes referred to as "high yield" (or
"junk") bonds. (See page 24, "Risks of Investing in High Yield Securities" for
more details; and Appendix A for rating descriptions.)
WHO'S MANAGING YOUR MONEY?
RAVI AKHOURY, EDMUND SPELMAN AND RUDY CARRYL OF MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury joined MacKay-Shields as a Director in 1984, became a Managing
Director in 1988, became President and a member of the Board of Directors in
1989, and became Chairman and Chief Executive Officer in 1992. Prior thereto, he
worked for four years as a fixed income manager for Fischer Francis Trees &
Watts and for seven years as a fixed income manager for the Equitable Life
Assurance Society. He has been a portfolio manager of the Total Return Portfolio
since 1993, and also manages the Government Portfolio. Biographies for Mr.
Spelman and Mr. Carryl appear on page 8.
A-17
<PAGE> 20
Value Portfolio
The Portfolio's objective is:
to realize maximum long-term total return from a combination of capital growth
and income. The Portfolio is not designed or managed primarily to produce
current income.
WHO SHOULD INVEST? Investors who seek to maximize
total return from securities which may have more
potential than the market currently sees.
The Portfolio invests in:
The Portfolio takes a flexible approach emphasizing investment in common stocks
which are, in the opinion of MacKay-Shields, undervalued at the time of
purchase.
Under normal market conditions...
...AT LEAST 65% OF ITS TOTAL ASSETS IN COMMON STOCKS WHICH:
- - it believes to be undervalued in the market relative to comparable securities;
- - are dividend-paying common stocks that are listed on a national securities
exchange or traded in the over-the-counter market but the Portfolio may also
invest in non-dividend paying stocks in accordance with MacKay-Shields'
judgment.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
Usually stocks deemed to be fully valued will be replaced by securities which
are deemed to be undervalued in the marketplace.
In analyzing different securities, MacKay-Shields will consider ratios of market
price to book value, estimated liquidating value and cash flow as significant
factors in assessing relative value, while growth rates and forecasts of future
earnings will be factors of lesser significance.
RISKS? The Portfolio invests primarily in common stocks and, therefore, is
exposed to the risks of investing in those securities, including fluctuations in
value.
WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE AND JEFFREY SIMON OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Laplaige, President, Managing Director and Chief Investment Officer of
MacKay-Shields, has served as a portfolio manager of the Value Portfolio since
1995. His biography is on page 12. Mr. Simon is a Director of MacKay-Shields and
specializes in equity securities. He joined MacKay-Shields in 1993 after working
as a senior equity research analyst and portfolio manager at National Securities
and Research Corporation (1991-1992) and Neuberger & Berman (1987-1991). Mr.
Simon has served as a portfolio manager of the Portfolio since 1996.
A-18
<PAGE> 21
Bond Portfolio
The Portfolio's objective is:
to seek the highest income over the long term consistent with preservation of
principal.
WHO SHOULD INVEST? Investors who seek to combine high current income and safety
of principal.
The Portfolio invests in:
Under normal market conditions...
...AT LEAST 75% OF ITS TOTAL ASSETS in debt securities which have a rating
within the four highest grades as determined by either S&P or Moody's, in
obligations (whether or not rated) of the United States Government and its
agencies and instrumentalities or temporarily in money market instruments
(including repurchase agreements) and cash. See Appendix A to this Prospectus
for further details about the ratings given by S&P and Moody's.
...UP TO 25% OF ITS TOTAL ASSETS in debt securities which are rated lower than
the four highest grades described above, but which are rated at least B, or in
convertible debt securities, and preferred and convertible preferred stocks.
The Portfolio may also make loans of portfolio securities and may invest in
foreign securities.
The Bond Portfolio will not invest directly in common stocks, but it may retain
up to 10% of its total assets in common stocks acquired by conversion of fixed
income securities or by exercising warrants purchased together with such
securities.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
RISKS? Securities rated by S&P or Moody's below the four highest grades are not
considered "investment grade" and generally involve more investment risks than
securities rated investment grade, including risks of price volatility, greater
risk of issuer default on payments of interest or repayment of principal, and
other characteristics that may be regarded as speculative. (See "Risks of
Investing in High Yield Securities," at page 24.)
WHO'S MANAGING YOUR MONEY?
ALBERT R. CORAPI, JR. AND CELIA M. HOLTZBERG OF NEW YORK LIFE INSURANCE COMPANY.
Mr. Corapi joined New York Life in 1985. He is an Investment Vice President and
Portfolio Manager. He has been responsible for managing the Bond Portfolio since
1990. Prior to that he served on the bond trading desk. Before joining New York
Life, he was a U.S. Government securities sales representative with Harris Trust
and Savings Bank. Ms. Holtzberg is a Vice President in the Investment Department
of New York Life. She joined New York Life in 1986 as a Senior Investment
Analyst in the portfolio management unit and currently heads the Fixed Income
Portfolio Management, Public Bond Trading and Quantitative Analysis Groups.
Prior to joining New York Life, Ms. Holtzberg worked as a portfolio manager for
Helmsley Spear Inc.
A-19
<PAGE> 22
Government Portfolio
The Portfolio's objective is:
to seek a high level of current income, consistent with safety of principal.
WHO SHOULD INVEST? Investors who seek to combine high current income and safety
of principal.
The Portfolio invests in:
Under normal market conditions...
...65% OF ITS TOTAL ASSETS IN U.S. GOVERNMENT SECURITIES, WHICH INCLUDE THE
FOLLOWING:
- - U.S. Treasury obligations, which differ only in their interest rates,
maturities and times of issuance, including U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and
U.S. Treasury bonds (generally, maturities greater than ten years); and
- - obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities which are supported by: (i) the full faith and credit of the
U.S. Government (e.g., Government National Mortgage Association ("GNMA")
certificates); (ii) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Government (e.g., bonds issued by the
Federal National Mortgage Association ("FNMA")); (iii) the credit of the
instrumentality (e.g., bonds issued by the Federal Home Loan Mortgage
Corporation ("FHLMC")); or (iv) the discretionary authority of the U.S.
Government to purchase certain obligations of U.S. Government agencies or
instrumentalities.
The remaining 35% of the value of the Portfolio's total assets may be invested
in cash or cash equivalent obligations. Such assets may also be invested in
securities such as privately-issued collateralized mortgage obligations which
are not U.S. Government securities.
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
RISKS? Although some of the instruments the Portfolio purchases are backed by
the U.S. Government and its agencies, shares of the Portfolio are not guaranteed
and the Portfolio's NAV will fluctuate. Generally, when interest rates fall, the
NAV rises; and when interest rates rise, the NAV declines.
Mortgage-backed securities may be prepaid prior to maturity. Prepayment rates
may be affected by changes in mortgage rates. During periods of falling rates,
prepayments tend to increase; during periods of rising rates, they tend to
decrease. Prepayments usually are reinvested at different rates than the
original investment. As a result, these securities can increase in value less
than "non-callable" bonds during falling rate periods, yet involve comparable
risks during rising rate periods.
WHO'S MANAGING YOUR MONEY?
RAVI AKHOURY AND EDWARD MUNSHOWER OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Akhoury, Chairman and CEO of MacKay-Shields, has served as portfolio manager
of the Government Portfolio since 1993. His biography appears on page 13. Mr.
Munshower is a Director of MacKay-Shields and has been a portfolio manager for
the Government Portfolio since 1993. He joined MacKay-Shields as a fixed income
investment specialist in 1985 after having been an investment analyst for New
York Life Insurance Company. Mr. Munshower has over 14 years of experience in
investment management and research.
A-20
<PAGE> 23
High Yield Corporate Bond Portfolio
The Portfolio's objective is:
to maximize current income through investment in a diversified portfolio of high
yield, high risk debt securities which are ordinarily in the lower rating
categories of recognized rating agencies (that is, rated Baa to B by Moody's or
BBB to B by S&P). Capital appreciation is a secondary objective. THE POTENTIAL
FOR A HIGHER YIELD IS ACCOMPANIED BY HIGHER RISK. CERTAIN OF THE PORTFOLIO'S
INVESTMENTS ARE SPECULATIVE.
WHO SHOULD INVEST? Investors who want to maximize current income and can accept
the higher risk of securities with high yield potential.
SEE PAGE 19 for more details about the Portfolio.
The Portfolio invests in:
Under normal market conditions...
...AT LEAST 65% OF ITS TOTAL ASSETS IN CORPORATE DEBT SECURITIES: all types of
foreign and domestic debt securities ordinarily in the lower rating categories
of Moody's (Baa to B) and S&P (BBB to B). These securities tend to offer yields
above those that are rated higher and are considered speculative.
...WITHOUT RESTRICTION IN SECURITIES rated Ba or B by Moody's or BB or B by S&P,
(or unrated, but considered to be of comparable quality by MacKay-Shields), the
Portfolio will invest no more than 15% of the value of its net assets in
securities rated lower than B by Moody's or S&P (or unrated, but considered to
be of comparable quality by MacKay-Shields).
...OTHER INVESTMENTS SUITABLE FOR MOST OR ALL PORTFOLIOS. (See page 19, "General
Investment Considerations" and pages 21-25, "Investments and Investment
Practices," for details.)
RISKS? Generally, when interest rates fall, the NAV rises; and when interest
rates rise, the NAV declines.
Securities rated lower than Baa by Moody's or BBB by S&P or, if not rated, of
equivalent quality, are sometimes referred to as "high yield" securities or
"junk bonds." These securities are considered speculative and involve greater
volatility of price and risk of principal and income default than securities in
the higher rating categories. (For a more complete discussion of those risks,
see page 24, "Risks of Investing in High Yield Securities".) MacKay-Shields
seeks to reduce risk through diversification, credit analysis and attention to
current developments and trends in both the economy and financial markets. (See
Appendix A for a description of ratings.)
If MacKay-Shields is incorrect in its expectations of changes in interest rates,
or in its evaluation of the normal yield relationship between two securities,
the Portfolio's income, NAV and potential capital gains could decrease; or the
potential loss could increase. This and other factors may affect the income
available for distribution to shareholders.
WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE AND STEVEN TANANBAUM OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Laplaige, President Managing Director and Chief Investment Officer of
MacKay-Shields, has served as portfolio manager of the High Yield Corporate Bond
Portfolio since 1993. His biography is on page 12. Mr. Tananbaum is a Director
of MacKay-Shields. He specializes in high yield securities and has been a
portfolio manager for the Portfolio since 1993. Mr. Tananbaum joined
MacKay-Shields in 1989, after working as a high yield and merger associate
intern in the corporate finance department of Kidder Peabody.
A-21
<PAGE> 24
Cash Management Portfolio
The Portfolio's objective is:
to seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity. The Portfolio seeks to maintain a stable
net asset value of $1.00 per share. There is no assurance that the Portfolio
will be able to achieve this objective.
WHO SHOULD INVEST? Investors who are averse to risk or want to earn competitive
yields on cash they're planning to spend or invest in the near future.
The Portfolio invests in:
...SHORT-TERM (maturing in 397 days or less) U.S. Government securities;
...OBLIGATIONS OF BANKS (including certificates of deposit and bankers'
acceptances) that have capital, surplus, and undivided profits (as of the date
of their most recently published financial statements) in excess of
$100,000,000; and obligations of other banks or savings and loan associations if
such obligations are federally insured, provided that not more than 10% of the
total assets of the Portfolio will be invested in such other insured
obligations;
...COMMERCIAL PAPER (short-term unsecured promissory notes of corporations
including variable rate master demand notes);
...SHORT-TERM (maturing in one year or less) corporate obligations; and
...OBLIGATIONS OF U.S. AND NON-U.S. ISSUERS denominated in U.S. dollars and in
securities of foreign branches of U.S. banks, such as negotiable certificates of
deposit (Eurodollars), and including variable rate master demand notes and
floating rate notes.
...UP TO 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER, except this
limitation shall not apply to U.S. Government securities and repurchase
agreements thereon. The Portfolio may, however, invest more than 5% of its total
assets in the securities of a single issuer if they are rated in the highest
category by at least two major rating agencies for a period of up to three
business days after the purchase thereof, although the Portfolio may not make
more than one such investment at any one time.
...UP TO 5% OF ITS TOTAL ASSETS IN SECURITIES THAT WERE rated in the top two
categories by at least two nationally recognized rating agencies, but not rated
in the highest category by two or more major rating agencies ("Second Tier");
or, if unrated, deemed to be of comparable quality by MacKay-Shields when
acquired.
...THE GREATER OF 1% OF ITS TOTAL ASSETS or one million dollars, measured at the
time of investment, in the securities of a single issuer which were Second Tier
Securities when acquired by the Portfolio.
RISKS? Investments by the Portfolio must present minimal credit risk and, if
rated, be rated within one of the two highest rating categories for short-term
debt obligations by at least two major rating agencies assigning a rating to the
securities or issuer, or, if only one rating agency has assigned a rating, by
that agency. Purchases of securities which are unrated or rated by only one
rating agency must be approved or ratified by the Fund's Board of Directors.
This Portfolio generally can't invest in securities with remaining maturities
longer than 397 days (13 months). In addition, the weighted average portfolio
maturity may not exceed 90 days. (See the SAI for a more detailed explanation.)
A-22
<PAGE> 25
OTHER INFORMATION ABOUT THE PORTFOLIOS
- --------------------------------------------------------------------------------
-
GENERAL INVESTMENT CONSIDERATIONS
The investment objectives of each Portfolio are deemed to be fundamental
and may not be changed without the approval of a majority of the outstanding
voting shares of that Portfolio. There is no assurance that any Portfolio will
achieve its investment objective.
Because each Portfolio has different investment objectives and policies,
the investment returns of each Portfolio and the degree of financial and market
risks to which each Portfolio is subject can be expected to differ. Financial
risk refers to the ability of an issuer of a debt security to pay interest and
repay principal, and to the earnings stability and overall financial soundness
of an issuer of an equity security. Market risk refers to the degree to which
the price of a security will react to changes in conditions in securities
markets in general and, particularly for debt securities, to changes in the
overall level of interest rates.
Each Portfolio is also expected to have a different portfolio turnover
rate, which may be higher during periods of significant market volatility.
Increased turnover usually results in higher brokerage costs, which must be
borne directly by the Portfolios; however, a high turnover rate may not have any
effect on the tax obligations of the Fund since the Fund intends to qualify as a
"regulated investment company" under the provisions of Subchapter M of the
Internal Revenue Code, as amended which allows the Fund to avoid federal income
tax. (See "Taxes" at page 27 and the Statement of Additional Information.)
In times of unusual or adverse market conditions, for temporary defensive
purposes, each Portfolio, except the Indexed Equity Portfolio, may invest
without limit in cash and cash equivalents (see "Cash Equivalents" on page 22).
CONVERTIBLE PORTFOLIO
In selecting convertible securities for purchase or sale, MacKay-Shields
takes into account a variety of investment considerations, including credit
risk, projected interest return and the premium for the convertible security
relative to the underlying common stock.
During the fiscal year ended December 31, 1997, based upon the
dollar-weighted average ratings of the Portfolio holdings at the end of each
month in the Portfolio's fiscal year, the Portfolio had the following
percentages of its net assets invested in securities rated in the categories
indicated (all ratings are by S&P):
31.05% in securities rated AAA
4.15% in securities rated AA
15.21% in securities rated A
15.88% in securities rated BBB
13.51% in securities rated BB
15.05% in securities rated B
0.62% in securities rated CCC
0.85% in cash and cash equivalents
3.68% in equity securities
These figures are intended solely to provide disclosure about the
Portfolio's asset composition during its fiscal year ended December 31, 1997.
The asset composition after this time may or may not be the same as represented
by such figures. In addition, the categories reflect ratings by S&P, and ratings
assigned by Moody's may not be consistent with ratings assigned by S&P or other
credit rating services, and MacKay-Shields may not necessarily agree with a
rating assigned by any credit rating agency.
HIGH YIELD CORPORATE BOND PORTFOLIO
Debt securities in which this Portfolio may invest include all types of
debt obligations of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
conditional sales contracts, commercial paper and U.S. Government securities
(including obligations, such as repurchase agreements, secured by such
instruments). Debt securities may have fixed, variable or floating (including
inverse floating) rates of interest.
The Portfolio may invest up to 40% of the value of its total assets in each
of the electric utility and telephone industries, but will not invest more than
25% in either of those industries unless yields available for four consecutive
weeks in the four highest rating categories on new issue bonds in such industry
(issue size of $50 million or more) have averaged in excess of 105% of yields of
new issue long-term industrial bonds similarly rated (issue size of $50 million
or more). Concentration of the Portfolio's assets in these industries may
subject the Portfolio to greater price volatility and lessen the benefits of
reducing risk typically associated with greater asset diversification.
MacKay-Shields seeks to reduce risk through diversification, credit
analysis and attention to current developments and trends in both the economy
and financial markets. In addition, investments in foreign securities may serve
to provide further diversification. (See "Foreign Securities" on page 22 and
"Risks of Investing in High Yield Securities" on page 24.)
A-23
<PAGE> 26
During the fiscal year ended December 31, 1997, based upon the
dollar-weighted average ratings of the Portfolio's holdings at the end of each
month in the Portfolio fiscal year, the Portfolio had the following percentages
of its net assets invested in securities rated in the categories indicated (all
ratings are by S&P):
30.64% in securities rated AAA
1.30% in securities rated BBB
10.77% in securities rated BB
40.35% in securities rated B
5.98% in securities rated CCC
0.15% in securities rated D
3.09% in unrated securities
0.94% in cash and cash equivalents
6.78% in equity securities
These figures are intended solely to provide disclosure about the
Portfolio's asset composition during its fiscal year ended December 31, 1997.
The asset composition after this time may or may not be the same as represented
by such figures. In addition, the categories reflect ratings by S&P, and ratings
assigned by Moody's may not be consistent with ratings assigned by S&P or other
credit rating services, and MacKay-Shields may not necessarily agree with a
rating assigned by any credit rating agency.
For temporary defensive purposes the Portfolio may invest more than 25% of
its total assets in U.S. Government securities during periods of abnormal market
conditions. Also, for temporary defensive purposes, the Portfolio may invest
without limit in corporate debt securities rated A or higher by Moody's or S&P
whenever deemed appropriate by MacKay-Shields in response to market conditions.
INDEXED EQUITY PORTFOLIO
Monitor, the Portfolio's investment adviser, seeks to provide investment
results which mirror the performance of the S&P 500. Monitor attempts to achieve
this objective by investing in all stocks in the S&P 500 in the same proportion
as their representation in the S&P 500. The Portfolio will be managed using
mathematical algorithms to determine which stocks are to be purchased or sold to
replicate the S&P 500 to the extent feasible. From time to time, adjustments may
be made in the Portfolio's portfolio because of changes in the composition of
the S&P 500, but such changes should be infrequent. The correlation between the
performance of the Indexed Equity Portfolio and the S&P 500 is expected to be at
least 0.95. A correlation of 1.00 would indicate perfect correlation, which
would be achieved when the net asset value of the Portfolio, including the value
of its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in the S&P 500. Unlike other funds which generally seek to
beat market averages, often with unpredictable results, index funds seek to
match their respective indexes. No attempt is made to manage the Portfolio in
the traditional sense using economic, financial and market analysis.
Monitor believes the indexing approach described above is an effective
method of duplicating percentage changes in the S&P 500. It is a reasonable
expectation that there will be a close correlation between the Portfolio's
performance and that of the S&P 500 in both rising and falling markets. The
Portfolio's ability to track the S&P 500, however, may be affected by, among
other things, transaction costs, changes in either the composition of the S&P
500 or number of shares outstanding for the components of the S&P 500, and the
timing and amount of shareholder contributions and redemptions, if any.
Although the Portfolio normally seeks to remain substantially fully
invested in securities in the S&P 500, the Portfolio may invest temporarily in
certain short-term money market instruments. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity to meet shareholder
redemptions. These securities include: obligations issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities or by any of the
states, repurchase agreements, reverse repurchase agreements, securities of
money market funds, time deposits, certificates of deposit, bankers' acceptances
and commercial paper. The Portfolio also may borrow money for temporary or
emergency purposes, purchase securities on a when-issued basis, and enter into
firm commitments to purchase securities.
INTERNATIONAL EQUITY PORTFOLIO
In making investment decisions for this Portfolio, MacKay-Shields will
consider such factors as prospects for relative economic growth, government
policies influencing exchange rates and business considerations, and the quality
of individual issuers. In addition, in managing the Portfolio assets,
MacKay-Shields will determine in its good faith judgment:
1. The country allocation among the international equity markets;
2. The currency exposure (asset allocation across currencies); and
3. The diversified security holdings within each equity market.
The Portfolio has no present intention of altering its general policy of
investing, under normal conditions, in foreign equity securities. However, under
exceptional conditions abroad or when it is believed that economic or
A-24
<PAGE> 27
market conditions warrant, the Portfolio may, for temporary defensive purposes,
invest part or all of its portfolio in equity securities of U.S. issuers; notes
and bonds which at the time of their purchase are rated BBB or higher by S&P or
Baa or higher by Moody's (see Appendix A to this Prospectus "Ratings of Debt
Securities and Commercial Paper").
The Portfolio also may invest in foreign securities in the form of American
Depository Receipts (ADRs), European Depository Receipts (EDRs), Global
Depository Receipts (GDRs), International Depository Receipts (IDRs) or other
similar securities convertible into securities of foreign issuers. ADRs
(sponsored or unsponsored) are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying foreign securities. Most ADRs are
traded on a U.S. stock exchange. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR. EDRs and IDRs are receipts typically issued
by a European bank or trust company evidencing ownership of the underlying
foreign securities. GDRs are receipts issued by either a U.S. or non-U.S.
banking institution evidencing ownership of the underlying foreign securities.
To hedge the market value of securities held, proposed to be held or sold,
or relating to foreign currency exchange rates, the Portfolio may enter into or
purchase securities or securities index options, foreign currency options, and
futures contracts and related options with respect to securities, indexes of
securities or currencies. The Portfolio also may buy and sell currencies on a
spot or forward basis. Subject to compliance with applicable rules, futures
contracts and related options may be used for any legally permissible purpose,
including as a substitute for acquiring a basket of securities and to reduce
transaction costs. The Portfolio also may purchase securities on a when-issued
or forward commitment basis and engage in portfolio securities lending. The
Portfolio may use all of these techniques (1) in an effort to manage cash flow
and remain fully invested in the stock and currency markets, instead of or in
addition to buying and selling stocks and currencies, or (2) in an effort to
hedge against a decline in the value of securities or currencies owned by it or
an increase in the price of securities which it plans to purchase. See
"Investments and Investment Practices," for additional information on the
Portfolio's permitted investments.
MacKay-Shields believes that active currency management can enhance
portfolio returns through opportunities arising from interest rate differentials
between instruments denominated in different currencies and/or changes in value
between currencies. Moreover, MacKay-Shields believes active currency management
can be employed as an overall portfolio risk management tool. For example, in
its view, foreign currency management can provide overall portfolio risk
diversification when combined with a portfolio of foreign securities, and the
market risks of investing in specific foreign markets can at times be reduced by
currency strategies which may not involve the currency in which the foreign
security is denominated.
INVESTMENTS AND INVESTMENT PRACTICES
Information about the following types of investments, investment practices
and related risks appears below: Asset-Backed and Mortgage-Backed Securities;
Brady Bonds; Cash Equivalents; Debt Securities; Floaters and Inverse Floaters;
Foreign Securities; Lending of Portfolio Securities; Liquidity; Options on
Securities; Repurchase Agreements; Reverse Repurchase Agreements; Risk
Management Techniques; Risks of Investing in High Yield Securities; Short Sales
Against the Box; When-Issued Securities; and Zero Coupon Bonds. For more
information about the investments, investment practices and risks described in
this section, please see the SAI.
ASSET-BACKED AND MORTGAGE-BACKED SECURITIES
Each Portfolio, except the Indexed Equity Portfolio, may purchase
asset-backed and mortgage-backed securities. Asset-backed and mortgage-backed
securities are securities which derive their value from underlying pools of
loans that may include interests in pools of lower-rated debt securities,
consumer loans or mortgages, or complex instruments such as collateralized
mortgage obligations and stripped mortgage-backed securities. The value of these
securities may be significantly affected by changes in interest rates, the
market's perception of issuers and the creditworthiness of the parties involved.
The ability of a Portfolio to successfully utilize these instruments may depend
in part upon the ability of the Adviser to forecast interest rates and other
economic factors correctly. Some securities may have a structure that makes
their reaction to interest rate changes and other factors difficult to predict,
making their value highly volatile. These securities may also be subject to
prepayment risk and if the security has been purchased at a premium the amount
of the premium would be lost in the event of prepayment.
BRADY BONDS
The Convertible, High Yield Corporate Bond and Total Return Portfolios may
each invest a portion of its assets in Brady Bonds, which are securities created
through
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the exchange of existing commercial bank loans to sovereign entities for new
obligations in connection with debt restructurings.
For further information see "Brady Bonds" in the SAI.
CASH EQUIVALENTS
Each of the Portfolios may invest in cash or cash equivalents, which
include, but are not limited to: short-term obligations issued or guaranteed as
to interest and principal by the U.S. Government or any agency or
instrumentality thereof (including repurchase agreements collateralized by such
securities); obligations of banks (certificates of deposit, bankers' acceptances
and time deposits) which at the date of investment have capital, surplus, and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100,000,000, and obligations of other banks or savings
and loan associations if such obligations are federally insured; commercial
paper which at the date of investment is rated A-1 by S&P, or P-1 by Moody's or,
if not rated, is issued or guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding debt issue rated
AA or better by S&P or Aa or better by Moody's; short-term corporate obligations
which at the date of investment are rated AA or better by S&P or Aa or better by
Moody's; and other debt instruments not specifically described if such
instruments are deemed by the Directors to be of comparable high quality and
liquidity. In addition, the International Equity Portfolio may invest in foreign
cash and cash equivalents.
DEBT SECURITIES
Debt securities may have fixed, variable or floating (including inverse
floating) rates of interest. To the extent that a Portfolio invests in debt
securities, it will be subject to certain risks. The value of the debt
securities held by a Portfolio, and thus the net asset value of the shares of a
Portfolio, generally will fluctuate depending on a number of factors, including,
among others, changes in the perceived creditworthiness of the issuers of those
securities, movements in interest rates, the average maturity of a Portfolio's
investments, changes in relative values of the currencies in which a Portfolio's
investments are denominated relative to the U.S. dollar, and the extent to which
a Portfolio hedges its interest rate, credit and currency exchange rate risks.
Generally, a rise in interest rates will reduce the value of fixed income
securities held by a Portfolio, and a decline in interest rates will increase
the value of fixed income securities held by a Portfolio.
FLOATERS AND INVERSE FLOATERS
Each Portfolio, other than the Capital Appreciation, Value, Growth Equity
and Indexed Equity Portfolios, may, to the extent permitted by law, invest in
floating rate debt instruments ("floaters"). The interest rate on a floater is a
variable rate which is tied to another interest rate, such as a money-market
index or Treasury bill rate.
Each Portfolio, other than the Capital Appreciation, Cash Management,
Government, Value, Growth Equity and Indexed Equity Portfolios may, to the
extent permitted by law, invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an inverse floater resets
in the opposite direction from the market rate of interest to which the inverse
floater is indexed. The leverage associated with inverse floaters may result in
greater volatility in their market values. Certain inverse floaters may be
determined to be illiquid securities.
FOREIGN SECURITIES
Each Portfolio, except the Government Portfolio, may purchase foreign
securities. The Bond, Growth Equity and Lord Abbett Developing Growth Portfolios
may purchase foreign securities up to a maximum of 10% of the Portfolio's total
assets. The Indexed Equity Portfolio will invest in foreign securities to the
extent that foreign securities are included in the S&P 500. Securities of
foreign issuers, particularly nongovernmental issuers, involve risks which are
not ordinarily associated with investing in securities of domestic issuers.
These risks include changes in interest rates, in currency exchange rates, and
currency exchange control regulations. In addition, investments in foreign
countries could be affected by other factors, including the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more volatility
in foreign securities markets, the possibility of expropriation, the possibility
of heavy taxation, the impact of political, social or diplomatic developments,
limitations on the movement of funds or other assets of a Portfolio between
different countries, difficulties in invoking legal process abroad and enforcing
contractual obligations, and the difficulty of assessing economic trends in
foreign countries.
LENDING OF PORTFOLIO SECURITIES
Each Portfolio except the Cash Management Portfolio may lend securities in
accordance with procedures adopted by the Board of Directors, to certain
broker-dealers and institutions as a means of earning additional income. This
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practice could result in a loss or a delay in recovering the Portfolio's
securities from the borrower if the borrower were to fail financially and the
collateral is insufficient to replace the full amount of the loaned securities.
The borrower would be liable for the shortage, but recovery by the Portfolio
cannot be assured.
LIQUIDITY
In order to assure that each Portfolio of the Fund has sufficient
liquidity, as a matter of operating policy the Capital Appreciation,
Convertible, Government, International Equity, Total Return and Indexed Equity
Portfolios may not invest more than 15% of their respective net assets in
illiquid securities. These are securities subject to legal or contractual
restrictions on resale (other than restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933), repurchase agreements
maturing in more than seven days, certain options traded over-the-counter,
securities for which market quotations are not readily available or other
securities which legally, or in the opinion of the applicable investment
adviser, are deemed illiquid. The Cash Management, Eagle Growth Equity, High
Yield Corporate Bond, Value, Bond and Growth Equity Portfolios are limited to an
investment of no more than 10% of their respective net assets in such
securities.
OPTIONS ON SECURITIES
Each Portfolio, except the Cash Management, Bond and Growth Equity
Portfolios, may sell (write) covered put and call options and purchase put and
call options on any securities in which it may invest that are traded on U.S. or
foreign securities and options exchanges and in the over-the-counter market,
each in accordance with its respective investment objectives and policies.
Call options sold by a Portfolio are agreements by a Portfolio, for a
premium received by the Portfolio, to sell a particular security in its
portfolio at a specified price if the option is exercised during the option
period. Put options sold by a Portfolio are agreements by a Portfolio, for a
premium received by the Portfolio, to purchase specified securities at a
specified price if the option is exercised during the option period.
The Government Portfolio may not write any covered put options on U.S.
Government securities if, as a result, more than 50% of its total assets (taken
at current value) would be subject to put options written by such Portfolio. The
Fund has adopted a nonfundamental policy that each of the Capital Appreciation,
Convertible, Government, High Yield Corporate Bond, Total Return and Value
Portfolios may write covered call or put options with respect to no more than
25% of the value of its net assets, may purchase protective puts (in which the
security to be sold is identical or substantially identical to a security
already held by the Portfolio or to a security which the Portfolio has the right
to purchase) with a value up to 25% of its net assets and may purchase calls and
puts other than protective puts, with a value of up to 5% of the Portfolio's net
assets.
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium received
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 obligations
as a writer continue, has retained the risk of loss should the price of the
underlying security decline. A covered put writer assumes the risk that the
market price for the underlying security will fall below the exercise price, in
which case the writer could be required to purchase the security at a higher
price than the then-current market price of the security. In both cases, the
writer 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 elect a closing purchase transaction in order to
terminate its obligation under the option and must deliver or purchase the
underlying securities at the exercise price.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements, including foreign
repurchase agreements, to earn income. A repurchase agreement is an agreement
whereby a Portfolio purchases securities and the seller agrees to repurchase the
securities within a particular time at a specified price. Such price will exceed
the original purchase price, the difference being income to the Portfolio, and
will be unrelated to the interest rate on the purchased security. The Directors
have reviewed and approved certain sellers who they believe to be creditworthy
and have authorized the Portfolios to enter into repurchase agreements with such
sellers. In the event of the bankruptcy of the seller or the failure of the
seller to repurchase the securities as agreed, a Portfolio could suffer losses,
including loss of interest on or principal of the security and costs associated
with delay and enforcement of the repurchase agreement.
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REVERSE REPURCHASE AGREEMENTS
Each Portfolio may enter into reverse repurchase agreements, including
foreign reverse repurchase agreements. These agreements involve the sale of debt
securities (obligations) held by a Portfolio, with an agreement to repurchase
the obligations at an agreed upon price, date and interest payment. If the buyer
of the debt securities pursuant to the reverse repurchase agreement becomes
bankrupt, realization upon the underlying securities may be delayed and there is
a risk of loss due to any decline in their value. Reverse repurchase agreements
will not extend for more than 30 days nor will such agreements involve more than
10% of the net assets of a Portfolio.
RISK MANAGEMENT TECHNIQUES
The Portfolios can use various techniques to increase or decrease their
exposure to changing security prices, interest rates, currency exchange rates,
commodity prices or other factors that affect security values. These techniques
may involve derivative transactions such as buying and selling futures contracts
and options on futures contracts, entering into foreign currency transactions
(such as forward foreign currency exchange contracts and options on foreign
currencies) and purchasing put or call options on securities indexes.
The Portfolios can use these practices in an attempt to adjust the risk and
return characteristics of their portfolios of investments. When a Portfolio uses
such techniques in an attempt to reduce risk it is known as "hedging". If a
Portfolio's investment adviser judges market conditions incorrectly or employs a
strategy that does not correlate well with the Portfolio's investments, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the volatility of
a Portfolio and may involve a small investment of cash relative to the magnitude
of the risk assumed. In addition, these techniques could result in a loss if the
counterparty to the transaction does not perform as promised. For more
information on risk management techniques used by the Portfolios, see
"Investment Practices Common to Two or More Portfolios" in the SAI.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
Securities rated lower than Baa by Moody's or lower than BBB by S&P or, if
not rated, deemed to be of equivalent quality by the Portfolio's investment
adviser, are sometimes referred to as "high yield" or "junk" bonds and are
considered speculative. In addition, securities rated Baa are considered by
Moody's to have some speculative characteristics. Investors should consider the
following risks associated with high yield bonds before investing in the Bond,
Convertible, High Yield Corporate Bond and Total Return Portfolios. High yield
securities tend to be less sensitive to interest rate changes than higher-rated
investments, but are more sensitive to adverse economic changes and corporate
developments. This may affect the issuer's ability to make principal and
interest payments on these securities. There is also a greater risk of price
declines due to changes in the issuer's creditworthiness. Because the market for
high yield securities may be less active than for higher-rated securities, it
may be difficult for a Portfolio to sell the securities. Less liquidity in the
trading market for high yield securities could also adversely affect the price
of the securities. See the Appendix for more information on debt security
ratings.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which the Portfolio sells a security it
does not own in anticipation of a possible decline in market price. A short sale
"against the box" is a short sale where, at the time of the short sale, the
Portfolio owns or has the right to obtain securities equivalent in kind and
amount. The Capital Appreciation, Convertible, Government, High Yield Corporate
Bond, International Equity, Total Return, Value and Indexed Equity Portfolios
may only enter into short sales against the box for, among other reasons, to
hedge against a market decline in the value of the security owned or to defer
recognition of a gain or loss for Federal income tax purposes on the security
owned by the Portfolio. Short sales "against the box" will be limited to no more
than 5% of the Portfolio's net assets (25% with respect to the Convertible
Portfolio).
If the value of a security sold short against the box increases, the
Portfolio would suffer a loss when it purchases or delivers to the selling
broker the security sold short. If a broker, with which the Portfolio has open
short sales, were to become bankrupt, a Portfolio could experience losses or
delays in recovering gains on short sales. The Portfolios will only enter into
short sales against the box with brokers they believe are creditworthy.
WHEN-ISSUED SECURITIES
Each Portfolio may from time to time purchase securities on a "when-issued"
basis. Debt securities are often issued on this basis. The price of such
securities is fixed at the time a commitment to purchase is made, but delivery
and payment for the when-issued securities take place at a later date. During
the period between purchase and settlement, no payment is made by the Portfolio
and
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no interest accrues to the Portfolio. The market value of the when-issued
securities may be more or less than the purchase price payable at settlement
date. Each Portfolio will establish a segregated account in which it will
maintain liquid assets at least equal in value to commitments for when-issued
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date.
ZERO COUPON BONDS
The Portfolios may purchase zero coupon bonds, which are debt obligations
issued without any requirement for the periodic payment of interest. Zero coupon
bonds are issued at a significant discount from face value. Zero coupon bonds
tend to be more volatile than conventional debt securities.
OTHER INFORMATION
In addition to the investment policies described above, each Portfolio's
investment program is subject to further restrictions which are described in the
SAI. Unless otherwise specified, the policies and restrictions for each
Portfolio are non-fundamental and may be changed without shareholder approval.
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
-
The Fund is a mutual fund, technically known as an open-end, diversified
management investment company. The Board of Directors supervises the business
affairs and investments of each Portfolio, which are managed on a daily basis by
each Portfolio's investment adviser.
INVESTMENT ADVISERS
MacKay-Shields Financial Corporation, 9 West 57th Street, New York, NY
10019, is the investment adviser to the Capital Appreciation, Cash Management,
Convertible, Government, High Yield Corporate Bond, International Equity, Total
Return and Value Portfolios. MacKay-Shields is a wholly-owned subsidiary of
NYLIFE Inc. and an indirect wholly-owned subsidiary of New York Life.
MacKay-Shields was incorporated in 1960 as an independent investment advisory
firm and was privately held until 1984 when it became an autonomously managed
subsidiary of New York Life. As of December 31, 1996, MacKay-Shields managed
over $23.7 billion in assets, primarily for institutional clients.
New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010 is
the investment adviser to the American Century Income & Growth, Bond, Dreyfus
Large Company Value, Eagle Growth Equity, Growth Equity and Lord Abbett
Developing Growth Portfolios. New York Life manages other assets, including
assets held in its own general account and various separate accounts (amounting
to $78.8 billion as of December 31, 1996) and in the general account and various
separate accounts of NYLIAC (amounting to $17.0 billion as of December 31,
1996).
The investment adviser to the Indexed Equity Portfolio is Monitor Capital
Advisers, Inc., 504 Carnegie Center, Princeton, NJ 08540. As of December 31,
1996, Monitor managed over $1.8 billion in assets. Monitor, which was
incorporated in 1988, is a wholly-owned subsidiary of NYLIFE Inc. and an
indirect wholly-owned subsidiary of New York Life.
Pursuant to the Investment Advisory Agreements for each Portfolio,
MacKay-Shields, New York Life or Monitor (each an "Adviser" and collectively the
"Advisers"), is subject to the supervision of the Directors and in conformity
with the stated policies of each Portfolio, continuously manages the portfolio
of each Portfolio that it advises, including the purchase, retention and
disposition of securities and other supervision of its assets, and maintains
certain records relating thereto. New York Life, with the approval of the Board
of Directors, selects and employs Sub-Advisers for some of the Portfolios,
monitors the Sub-Adviser's investment programs and results, and coordinates the
investment activities of the Sub-Advisers to help ensure compliance with
regulatory restrictions. The Sub-Advisers, subject to the supervision of New
York Life, are responsible for deciding which portfolio securities to purchase
and sell for their respective Portfolios and for placing those Portfolios'
portfolio transactions. New York Life pays the fees of each Portfolio's
Sub-Adviser. The Sub-Adviser Agreements can be terminated by New York Life or by
the Directors in which case they would no longer manage the Portfolio.
The Fund, on behalf of each Portfolio, pays MacKay-Shields, New York Life
or Monitor a monthly fee for the investment advisory services performed at an
annual
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percentage of the average daily net assets of that Portfolio as follows:
<TABLE>
<CAPTION>
ANNUAL
RATE
----------
<S> <C>
Capital Appreciation Portfolio..... .36%
Cash Management Portfolio.......... .25%
Convertible Portfolio.............. .36%
Government Portfolio............... .30%
High Yield Corporate Bond
Portfolio........................ .30%
International Equity Portfolio..... .60%
Total Return Portfolio............. .32%
Value Portfolio.................... .36%
American Century Income & Growth
Portfolio........................ .50%
Bond Portfolio..................... .25%
Dreyfus Large Company Value
Portfolio........................ .60%
Eagle Growth Equity Portfolio...... .50%
Growth Equity Portfolio............ .25%
Lord Abbett Developing Growth
Portfolio........................ .60%
Indexed Equity Portfolio........... .10%
</TABLE>
SUB-ADVISERS. Each Sub-Adviser is employed by New York Life, subject to
approval by the Board of Directors, and the shareholders of the applicable
Portfolio. New York Life recommends Sub-Advisers to the Fund's Board of
Directors based upon its continuing quantitative and qualitative evaluation of
the Sub-Adviser's skill in managing assets using specific investment styles and
strategies.
Each Sub-Adviser has discretion to purchase and sell securities for the
assets of its respective Portfolio in accordance with that Portfolio's
Investment objectives, policies and restrictions. Although the Sub-Advisers are
subject to general supervision by the Fund's Board of Directors and New York
Life, these parties do not evaluate the investment merits of specific securities
transactions.
American Century Investment Management, Inc., whose principal place of
business is American Century Tower, 4500 Main Street, Kansas City, Missouri
64111, serves as Sub-Adviser to the American Century Income & Growth Portfolio,
and is paid a monthly fee by New York Life at an annual percentage of net assets
of that Portfolio of .40% on assets up to $100 million, .35% on assets from $100
million to $200 million and .30% on assets over $200 million.
The Dreyfus Corporation, whose principal place of business is 200 Park
Avenue, New York, New York 10166, serves as Sub-Adviser to the Dreyfus Large
Company Value Portfolio, and is paid a monthly fee by New York Life at an annual
percentage of net assets of that Portfolio of .50% on assets up to $100 million,
.45% on assets from $100 million to $250 million and .40% on assets over $250
million. The Dreyfus Corporation is a wholly owned subsidiary of Mellon Bank
Corporation, which provides a comprehensive range of financial products and
services.
The Eagle Asset Management, Inc., whose principal place of business is St.
Petersburg, Florida, serves as Sub-Adviser to the Eagle Growth Equity Portfolio,
and is paid a monthly fee by New York Life at an annual percentage of net assets
of that Portfolio of .45% on assets up to $50 million, .40% on assets from $50
million to $300 million and .30% on assets over $300 million. Eagle Asset
Management is a wholly owned subsidiary of Raymond James Financial, Inc., which
together with its subsidiaries, provides a wide range of financial services to
retail and institutional clients.
Lord, Abbett & Co., whose principal place of business is 767 Fifth Avenue,
New York, New York 10153, serves as Sub-Adviser to the Lord Abbett Developing
Growth Portfolio, and is paid a monthly fee by New York Life at an annual
percentage of net assets of that Portfolio of 50%.
ADMINISTRATOR
NYLIAC (the "Administrator"), 51 Madison Avenue, New York, NY 10010, a
corporation organized under the laws of the State of Delaware and a wholly-owned
subsidiary of New York Life, is the Administrator for the Portfolios. NYLIAC
has, pursuant to a subadministration agreement, retained NYLIFE Distributors
Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York
Life, to perform certain of the services to be provided by NYLIAC pursuant to
the terms of the Administration Agreement.
Under the Administration Agreement for each Portfolio, NYLIAC administers
the Portfolios' business affairs, subject to the supervision of the Directors
and, in connection therewith, furnishes the Portfolios with office facilities
and is responsible for ordinary clerical, recordkeeping and bookkeeping services
and for the financial and accounting records required to be maintained by the
Portfolios, excluding those maintained by the Portfolios' Custodian, except
those as to which the Administrator has supervisory functions, and other than
those being maintained by the Advisers. In connection with its administration of
the business affairs of the Portfolios, the Administrator bears the following
expenses:
(a) the salaries and expenses of all personnel of the Fund and the
Administrator, except the fees and expenses of Directors not affiliated
with the Administrator or the Advisers; and
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(b) all expenses incurred by the Administrator in connection with
administering the ordinary course of the Portfolios' business, other than
those assumed by the Portfolios.
Except for the expenses to be paid by the Advisers and the Administrator as
described above, the Fund, on behalf of each Portfolio, is responsible for the
payment of expenses related to each Portfolio's operations, including (i) the
fees payable to the Advisers and the Administrator, (ii) the fees and expenses
of Directors who are not affiliated with the Advisers or the Administrator,
(iii) certain fees and expenses of the Fund's Custodian, including the cost of
pricing a Portfolio's shares, (iv) the charges and expenses of the Fund's legal
counsel and independent accountants, (v) brokers' commissions and any issue or
transfer taxes chargeable to the Fund, on behalf of a Portfolio, in connection
with its securities transactions, (vi) the fees of any trade association of
which a Portfolio or the Fund is a member, (vii) the cost of share certificates
representing shares of a Portfolio, (viii) reimbursement of a portion of the
organization expenses of a Portfolio and the fees and expenses involved in
registering and maintaining registration of the Fund and of its shares with the
SEC, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (ix) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and preparing, printing and mailing prospectuses and reports
to shareholders, (x) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of a Portfolio's
business, and (xi) all taxes and business fees payable by a Portfolio to
federal, state or other governmental agencies. Fees and expenses of legal
counsel, registering shares, holding meetings and communicating with
shareholders include an allocable portion of the cost of maintaining an internal
legal and compliance department.
The Fund, on behalf of each Portfolio, pays the Administrator a monthly fee
for the services performed and the facilities furnished by the Administrator at
an annual rate of .20% of the average daily net assets of each Portfolio.
The payment of the investment management and the administration fees, as
well as other operating expenses, will affect the Indexed Equity Portfolio's
ability to track the S&P 500 exactly.
CAPITAL STOCK
All shares of common stock of the Fund, of whatever class, are entitled to
one vote, and votes are generally on an aggregate basis. However, on matters
where the interests of the Portfolios differ (such as approval of an investment
advisory agreement or a change in fundamental investment policies), the voting
is on a Portfolio-by-Portfolio basis. The Fund does not hold routine annual
shareholder's meetings. The shares of each Portfolio, when issued, are fully
paid and non-assessable, have no preference, conversion, exchange or similar
rights, and are freely transferable. In addition, each issued and outstanding
share in a Portfolio is entitled to participate equally in dividends and
distributions declared by such Portfolio. NYLIAC is the legal owner of the
shares and as such has the right to vote to elect the Board of Directors of the
Fund, to vote upon certain matters that are required by the Investment Company
Act of 1940 to be approved or ratified by the shareholders of a mutual fund and
to vote upon any other matter that may be voted upon at a shareholders' meeting.
However, in accordance with its view of present applicable law, NYLIAC will vote
the shares of the Fund at special meetings of the shareholders of the Fund in
accordance with instructions received from Owners. The current prospectus for
the Policy (which is attached at the front of this Prospectus) more fully
describes voting rights of an Owner.
PURCHASE AND REDEMPTION OF SHARES
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-
Shares in each of the Portfolios of the Fund are offered to and are
redeemed by the Separate Accounts at a price equal to their respective net asset
value per share. No sales or redemption charge is applicable to the purchase or
redemption of the Portfolios' shares.
The Fund determines the net asset value per share of each Portfolio on each
day the New York Stock Exchange is open for trading. Net asset value per share
is calculated as of the first close of the New York Stock Exchange (normally
4:00 p.m. Eastern time) for each Portfolio for purchases and redemptions of
shares of each Portfolio by dividing the current market value (amortized cost in
the case of the Cash Management Portfolio) of total Portfolio assets, less
liabilities, by the total number of shares of that Portfolio outstanding.
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TAXES, DIVIDENDS AND DISTRIBUTIONS
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TAXES
Each Portfolio intends to elect to qualify as a "regulated investment
company" under the provisions of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). If each Portfolio qualifies as a "regulated
investment company" and complies with the appropriate provisions of the Code,
each Portfolio will be relieved of federal income tax on the amounts
distributed. Federal tax laws impose a four percent nondeductible excise tax on
each regulated investment company with respect to an amount, if any, by which
such company does not meet specified distribution requirements. Each Portfolio
intends to comply with such distribution requirements and therefore does not
expect to incur the four percent nondeductible excise tax.
In order for the Separate Accounts to comply with regulations under Section
817(h) of the Code, each Portfolio will diversify its investments so that on the
last day of each quarter of a calendar year, no more than 55% of the value of
each Separate Accounts' proportionate share of the assets owned by each of the
regulated investment companies in which it owns shares is represented by any one
investment, no more than 70% is represented by any two investments, no more than
80% is represented by any three investments, and no more than 90% is represented
by any four investments. For this purpose, securities of a single issuer are
treated as one investment and each U.S. Government agency or instrumentality is
treated as a separate issuer. Any security issued, guaranteed, or insured (to
the extent so guaranteed or insured) by the U.S. Government or an agency or
instrumentality of the U.S. Government is treated as a security issued by the
U.S. Government or its agency or instrumentality, whichever is applicable.
Since the sole shareholders of the Fund will be separate accounts, no
discussion is included herein as to the federal income tax consequences at the
shareholder level. For information concerning the federal income tax
consequences to purchasers of the Policies, see the attached prospectus for the
Policy.
DIVIDENDS AND DISTRIBUTIONS
The Cash Management Portfolio (which seeks to maintain a constant net asset
value of $1.00 per share) will declare a dividend of its net investment income
daily and distribute such dividend monthly; a shareholder of that Portfolio
begins to earn dividends on the next business day following the receipt of the
shareholder's investment by the Portfolio. Each Portfolio other than the Cash
Management Portfolio declares and distributes a dividend of net investment
income, if any, annually. Shareholders of each Portfolio, other than the Cash
Management Portfolio, will begin to earn dividends on the first business day
after the shareholder's purchase order has been received. Distributions
reinvested in shares will be made after the first business day of each month
following declaration of the dividend. Each Portfolio will distribute its net
long-term capital gains, if any, after utilization of any capital loss
carryforwards after the end of each fiscal year. The Portfolios may declare an
additional distribution of investment income and capital gains in October,
November or December (which would be paid before February 1 of the following
year) to avoid the excise tax on income not distributed in accordance with the
applicable timing requirements.
A-32
<PAGE> 35
GENERAL INFORMATION
- --------------------------------------------------------------------------------
-
CUSTODIAN
For the Capital Appreciation, Cash Management, Convertible, Government,
High Yield Corporate Bond, International Equity, Total Return, Value, American
Century Income & Growth, Dreyfus Large Company Value, Eagle Growth Equity, Lord
Abbett Developing Growth, and Indexed Equity Portfolios, The Bank of New York,
110 Washington Street, New York, New York 10286 is the custodian of the
Portfolios' assets. For the Bond and Growth Equity Portfolios, The Chase
Manhattan Bank, N.A. (formerly Chemical Bank), 3 Chase Metro Tech Center,
Brooklyn, New York 11245 is the custodian of the Portfolios' assets.
PERFORMANCE AND YIELD INFORMATION
From time to time, the Fund may advertise yields and total returns for the
Portfolios. In addition, the Fund may advertise the effective yield of the Cash
Management Portfolio. These figures will be based on historical information and
are not intended to indicate future performance. Information on the calculation
of performance data is included in the SAI.
REPORTS TO SHAREHOLDERS
The Fund will send annual and semi-annual reports to Owners showing the
financial conditions of the Portfolios and the investments held in each.
OTHER INFORMATION
Inquiries and requests for the Statement of Additional Information should
be directed to the Fund at (800) 598-2019 or 51 Madison Avenue, New York, New
York 10010.
A-33
<PAGE> 36
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A-34
<PAGE> 37
APPENDIX A
RATINGS OF DEBT SECURITIES AND COMMERCIAL PAPER
- --------------------------------------------------------------------------------
-
DEBT SECURITIES RATINGS
Moody's Investors Services, Inc. describes the grades of corporate debt
securities as follows:
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment at some time in the future.
BAA Bonds which are rated Baa are 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. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
</TABLE>
Standard & Poor's Corporation describes the grades of corporate debt
security as follows:
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's Corporation. The
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 small degree.
A Debt rated A has 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 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.
BB Standard & Poor's Corporation describes the BB and B rated issues together with B issues
rated CCC, CC and C.
B Debt in these categories is regarded on balance as predominantly
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
</TABLE>
COMMERCIAL PAPER RATINGS
A Standard & Poor's Corporation Commercial Paper Rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days.
AA-1
<PAGE> 38
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity for
timely payment. Issues in this category are delineated with the numbers 1, 2 and 3
indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess overwhelming
safety characteristics will be denoted with a ("-") sign designation.
A-2 Capacity for timely payment on issues with this designation is strong. However, the
relative degree of safety is not as high as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
</TABLE>
Moody's Investors Services, Inc. employs the following three designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers of commercial paper not having an original maturity in excess
of nine months:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earning and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
AA-2
<PAGE> 39
MAINSTAY VP SERIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
------------------------
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement of Additional Information expands upon
subjects discussed in the Fund's current Prospectus. Accordingly, this
Statement of Additional Information should be read in conjunction with the
Fund's current Prospectus, dated May 1, 1998 which may be obtained by calling
the Fund at (800) 598-2019, or writing the Fund at 51 Madison Avenue, New York,
New York 10010. Terms used in the Fund's current Prospectus are incorporated in
this Statement.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
MAINSTAY VP SERIES FUND, INC. INVESTMENT POLICIES ....................................4
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP
CAPITAL APPRECIATION, CASH
MANAGEMENT, CONVERTIBLE, GOVERNMENT, TOTAL RETURN,
VALUE AND INDEXED EQUITY PORTFOLIOS .....................................4
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP
HIGH YIELD CORPORATE BOND PORTFOLIO .....................................6
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP
INTERNATIONAL EQUITY PORTFOLIO ..........................................7
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP
BOND ("BOND") AND MAINSTAY VP GROWTH
EQUITY ("GROWTH EQUITY") PORTFOLIOS .....................................9
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
DREYFUS LARGE COMPANY VALUE PORTFOLIO ..................................10
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
AMERICAN CENTURY INCOME & GROWTH PORTFOLIO .............................11
</TABLE>
<PAGE> 40
<TABLE>
<S> <C>
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
LORD ABBETT DEVELOPING GROWTH
PORTFOLIO .................................................12
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
EAGLE GROWTH EQUITY PORTFOLIO .............................14
ADDITIONAL NON-FUNDAMENTAL INVESTMENT
RESTRICTIONS APPLICABLE TO CERTAIN PORTFOLIOS .............15
OTHER INVESTMENT POLICIES OF THE HIGH YIELD
CORPORATE BOND PORTFOLIO ..................................20
OTHER INVESTMENT POLICIES OF THE BOND AND GROWTH
EQUITY ....................................................21
OTHER INVESTMENT POLICIES OF THE GOVERNMENT
PORTFOLIO .................................................22
OTHER INVESTMENT POLICIES OF THE CASH MANAGEMENT
PORTFOLIO .................................................23
OTHER INVESTMENT POLICIES OF THE DREYFUS LARGE
COMPANY VALUE PORTFOLIO ...................................25
OTHER INVESTMENT POLICIES OF THE EAGLE GROWTH
EQUITY PORTFOLIO ..........................................28
CERTAIN INVESTMENT PRACTICES COMMON TO TWO OR
MORE PORTFOLIOS ...........................................30
ARBITRAGE ..........................................................30
FLOATERS AND INVERSE FLOATERS ......................................30
HIGH YIELD SECURITIES ..............................................31
ZERO COUPON BONDS ..................................................32
SHORT SALES AGAINST THE BOX ........................................32
REPURCHASE AGREEMENTS ..............................................33
REVERSE REPURCHASE AGREEMENTS ......................................34
LENDING OF PORTFOLIO SECURITIES ....................................34
BORROWING ..........................................................35
FOREIGN SECURITIES .................................................35
FOREIGN CURRENCY TRANSACTIONS ......................................36
BRADY BONDS ........................................................39
WHEN-ISSUED SECURITIES .............................................40
MORTGAGE-RELATED AND OTHER ASSET-BACKED
SECURITIES ................................................41
OPTIONS ON SECURITIES ..............................................47
FUTURES TRANSACTIONS ...............................................54
SECURITIES INDEX OPTIONS ...........................................63
ADDITIONAL INVESTMENT POLICIES APPLICABLE TO THE
INTERNATIONAL EQUITY PORTFOLIO ............................64
SWAP AGREEMENTS ....................................................64
STATE INSURANCE LAW REQUIREMENTS ...................................66
PORTFOLIO TURNOVER .................................................66
</TABLE>
<PAGE> 41
<TABLE>
<S> <C>
MANAGEMENT OF THE FUND ............................................................67
COMPENSATION TABLE ................................................................69
INVESTMENT ADVISERS ................................................69
ADMINISTRATION AGREEMENTS ..........................................71
PORTFOLIO BROKERAGE ................................................72
DETERMINATION OF NET ASSET VALUE ..................................................73
HOW PORTFOLIO SECURITIES WILL BE VALUED ............................73
INVESTMENT PERFORMANCE CALCULATIONS ...............................................75
CASH MANAGEMENT PORTFOLIO YIELD ....................................75
CONVERTIBLE, GOVERNMENT, HIGH YIELD CORPORATE BOND
AND BOND PORTFOLIOS YIELD .......................................76
TOTAL RETURN CALCULATIONS ..........................................76
PURCHASE AND REDEMPTION OF SHARES .................................................80
TAXES .............................................................................81
GENERAL INFORMATION ...............................................................81
LEGAL COUNSEL .....................................................................84
FINANCIAL STATEMENTS ................................................................84
</TABLE>
<PAGE> 42
MAINSTAY VP SERIES FUND, INC. INVESTMENT POLICIES
Each Portfolio has a separate investment objective or
objectives which it pursues through separate investment policies as described
in the Prospectus and below. The following discussion elaborates on the
presentation of the Portfolios' investment policies contained in the
Prospectus.
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP
CAPITAL APPRECIATION, CASH MANAGEMENT, CONVERTIBLE,
GOVERNMENT, TOTAL RETURN, VALUE AND INDEXED EQUITY PORTFOLIOS
The investment objectives and investment restrictions set
forth below apply to the MainStay VP Capital Appreciation ("Capital
Appreciation"), MainStay VP Cash Management ("Cash Management"), MainStay VP
Convertible ("Convertible"), MainStay VP Government ("Government"), MainStay VP
Total Return ("Total Return"), MainStay VP Value ("Value") and MainStay VP
Indexed Equity ("Indexed Equity") Portfolios and are fundamental policies of
each of these Portfolios; i.e., they may not be changed with respect to a
Portfolio without a majority vote of the outstanding shares of that Portfolio.
None of the above-designated Portfolios will:
(1) invest more than 5% of the value of the total assets
of a Portfolio in the securities of any one issuer, except in U.S. Government
securities;
(2) purchase the securities of any issuer if such
purchase would cause more than 10% of the voting securities of such issuer to
be held by a Portfolio, except that this restriction does not apply to U.S.
Government securities;
(3) borrow money (except from banks on a temporary basis
for extraordinary or emergency purposes), issue senior securities (except as
appropriate to evidence indebtedness that a Portfolio is permitted to incur)
and/or pledge, mortgage or hypothecate its assets, except that a Portfolio may
(i) borrow money or enter into reverse repurchase agreements, but only if
immediately after each borrowing there is asset coverage of 300%, (ii) enter
into transactions in options, forward currency contracts, futures and options
on futures as described in the Prospectus and in this Statement of Additional
Information (the deposit of assets in escrow in connection with the writing of
secured put and covered 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 deposits for futures contracts and related
options contracts will not be deemed to be pledges of a Portfolio's assets),
and (iii) to secure permitted borrowings, pledge securities having a market
value at the time of pledge not exceeding 15% of the cost of a Portfolio's
total assets;
-4-
<PAGE> 43
(4) act as underwriter of the securities issued by
others, except to the extent that purchases of securities, in accordance with a
Portfolio's investment objectives and policies directly from the issuer thereof
and the later disposition thereof, may be deemed to be underwriting;
(5) purchase securities if such purchase would cause more
than 25% in the aggregate of the market value of the total assets of a
Portfolio to be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that there is no
limitation in respect to investments in U.S. Government securities and except
that more than 25% of the market value of the total assets of the Cash
Management Portfolio will be invested in the securities of banks and bank
holding companies, including certificates of deposit and bankers' acceptances.
For the purposes of this restriction, telephone companies are considered to be
a separate industry from gas or electric utilities, and wholly-owned finance
companies are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of the parents;
(6) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (other than securities of companies that invest in or
sponsor those programs and except futures contracts, including but not limited
to contracts for the future delivery of securities and futures contracts based
on securities indexes or related options thereon), each Portfolio reserving the
freedom of action to hold and to sell real estate acquired for any Portfolio as
a result of the ownership of securities. Forward foreign currency exchange
contracts, options on currency, currency futures contracts and options on such
futures contracts are not deemed to be investments in a prohibited commodity or
commodity contract for the purpose of this restriction; or
(7) lend any funds or other assets, except that a
Portfolio may, consistent with its investment objectives and policies: (i)
invest in debt obligations including bonds, debentures or other debt
securities, bankers' acceptances and commercial paper, even though the purchase
of such obligations may be deemed to be the making of loans; (ii) enter into
repurchase agreements; and (iii) lend its portfolio securities in accordance
with applicable guidelines established by the Securities and Exchange
Commission ("SEC") and any guidelines established by the Fund's Board of
Directors; or
(8) issue senior securities, except as appropriate to
evidence indebtedness that a Portfolio is permitted to incur and except for
shares of existing or additional series of the Fund.
"Value" for the purposes of all investment restrictions shall
mean the value used in determining a Portfolio's net asset value.
- 5 -
<PAGE> 44
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
MAINSTAY VP HIGH YIELD CORPORATE BOND PORTFOLIO
The investment restrictions set forth below apply to the
MainStay VP High Yield Corporate Bond ("High Yield Corporate Bond") Portfolio
and are fundamental policies of this Portfolio; i.e., they may not be changed
with respect to the Portfolio without a majority vote of the outstanding shares
of the Portfolio.
The High Yield Corporate Bond Portfolio will not:
(1) invest more than 5% of the value of its total assets
in the securities of any one issuer, except U.S. Government securities;
(2) purchase the securities of any issuer if such
purchase would cause more than 10% of the voting securities of such issuer to
be held by the Portfolio;
(3) borrow money except from banks on a temporary basis
for extraordinary or emergency purposes, and no purchases of securities will be
made while such borrowings exceed 5% of the value of the Portfolio's assets, or
pledge, mortgage or hypothecate its assets, except that, to secure permitted
borrowings, it may pledge securities having a market value at the time of
pledge not exceeding 15% of the cost of the Portfolio's total assets, and
except in connection with permitted transactions in options, futures contracts
and options on futures contracts;
(4) act as underwriter of the securities issued by
others, except to the extent that the purchase of securities in accordance with
the Portfolio's investment objectives and policies directly from the issuer
thereof and the later disposition thereof may be deemed to be underwriting;
(5) purchase securities if such purchase would cause more
than 25% in the aggregate of the market value of the total assets of the
Portfolio to be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that there is no
limitation in respect to investments in U.S. Government securities (for the
purposes of this restriction, telephone companies are considered to be a
separate industry from gas or electric utilities, and wholly owned finance
companies are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of the parents)
except that up to 40% of the Portfolio's total assets, taken at market value,
may be invested in each of the electric utility and telephone industries, but
it will not invest more than 25% in either of those industries unless yields
available for four consecutive weeks in the four highest rating categories on
new issue bonds in such industry (issue size of $50 million or more) have
averaged in excess of 105% of yields of new issue long-term industrial bonds
similarly rated (issue size of $50 million or more);
- 6 -
<PAGE> 45
(6) issue senior securities, except as appropriate to
evidence indebtedness that a Portfolio is permitted to incur and except for
shares of existing or additional series of the Fund;
(7) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures contracts, including but not limited to
contracts for the future delivery of securities and futures contracts based on
securities indexes or related options thereon), the Fund reserving the freedom
of action to hold and to sell real estate acquired for any Portfolio as a
result of the ownership of securities. Forward foreign currency exchange
contracts, options on currency, currency futures contracts and options on such
futures contracts are not deemed to be an investment in a prohibited commodity
or commodity contract for the purpose of this restriction; or
(8) make loans to other persons, except loans of
portfolio securities and except to the extent that the purchase of debt
obligations and the entry into repurchase agreements in accordance with such
Portfolio's investment objectives and policies may be deemed to be loans.
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
MAINSTAY VP INTERNATIONAL EQUITY PORTFOLIO
The investment restrictions set forth below apply to the
MainStay VP International Equity ("International Equity") Portfolio and are
fundamental investment policies; i.e., they may not be changed with respect to
this Portfolio without a majority vote of the outstanding shares of that
Portfolio. The International Equity Portfolio may not:
(1) invest in a security if, as a result of such
investment, more than 25% of its total assets would be invested in the
securities of issuers in any particular 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);
(2) invest in a security if, with respect to 75% of its
total assets, more than 5% of its total assets 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, its agencies or
instrumentalities;
(3) invest in a security if, with respect to 75% of its
assets, it would hold more than 10% of the outstanding voting securities of any
one issuer, except that this restriction does not apply to U.S. Government
securities;
- 7 -
<PAGE> 46
(4) purchase or sell real estate, including real estate
limited partnership interests (although it may purchase securities secured by
real estate or interests therein, or securities issued by companies which
invest in real estate, or interests therein);
(5) purchase or sell commodities, commodities contracts,
or oil, gas or mineral programs or interests in oil, gas or mineral leases
(other than securities of companies that invest in or sponsor those programs),
except that, subject to restrictions described in the Prospectus and elsewhere
in this Statement of Additional Information (i) this Portfolio may enter into
futures contracts and options on futures contracts and may enter into forward
foreign currency contracts and foreign currency options; and (ii) may purchase
or sell currencies on a spot or forward basis and may enter into futures
contracts on securities, currencies or on indexes of such securities or
currencies, or any other financial instruments, and may purchase and sell
options on such futures contracts;
(6) borrow money, issue senior securities, or pledge,
mortgage or hypothecate its assets, except that the Portfolio may (i) borrow
from banks or enter into reverse repurchase agreements, but only if immediately
after each borrowing there is asset coverage of 300%, and (ii) enter into
transactions in options, forward currency contracts, futures and options on
futures as described in the Prospectus and in this Statement of Additional
Information (the deposit of assets in escrow in connection with the writing of
secured put and covered 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 deposits for futures contracts and related
options contracts will not be deemed to be pledges of the Portfolio's assets);
(7) lend any funds or other assets, except that the
Portfolio may, consistent with its investment objective and policies: (i)
invest in debt obligations including bonds, debentures or other debt
securities, bankers' acceptances and commercial paper, even though the purchase
of such obligations may be deemed to be the making of loans; (ii) enter into
repurchase agreements; and (iii) lend its portfolio securities in accordance
with applicable guidelines established by the SEC and any guidelines
established by the Company's Directors; or
(8) act as an underwriter of securities of other issuers,
except to the extent that in connection with the disposition of portfolio
securities, it may be deemed to be an underwriter under the Federal securities
laws; or
(9) issue senior securities, except as appropriate to
evidence indebtedness that the Portfolio is permitted to incur and except for
shares of existing or additional series of the Fund.
- 8 -
<PAGE> 47
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
MAINSTAY VP BOND ("BOND") AND MAINSTAY VP GROWTH EQUITY
("GROWTH EQUITY") PORTFOLIOS
In addition to the fundamental investment policies set forth
above, neither Portfolio will:
(1) purchase securities on margin or otherwise borrow
money or issue senior securities, except that any Portfolio may (a) borrow up
to 5% of the value of its total assets from banks for extraordinary or
emergency purposes (such as to permit the Portfolio to honor redemption
requests which might otherwise require the sale of securities at a time when
that is not in the Portfolio's best interest), or (b) obtain such short-term
credits as it needs for the clearance of securities transactions. A Portfolio
will not purchase investment securities while borrowings are outstanding and,
in addition, the interest which must be paid on any borrowed money will reduce
the amount available for investment. Reverse repurchase agreements are not
considered "borrowings" for purposes of this restriction, and, to the extent
permitted by applicable law, the Portfolios may enter into such agreements;
(2) lend money, except that a Portfolio may purchase
privately placed bonds, notes, debentures or other obligations customarily
purchased by institutional or individual investors (which obligations may or
may not be convertible into stock or accompanied by warrants or rights to
acquire stock), provided that such loans will not exceed 10% of the net asset
value of each Portfolio. Repurchase agreements and publicly traded debt
obligations are not considered "loans" for purposes of this restriction, and a
Portfolio may enter into such purchases in accordance with its investment
objectives and policies and any applicable restrictions. A Portfolio may also
make loans of its securities of up to 20% of the value of the Portfolio's total
assets;
(3) underwrite the securities of other issuers, except
where, in selling portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933 (the "1933 Act") when
selling securities acquired pursuant to paragraph 2 above;
(4) purchase securities in order to exercise control over
the management of any company, or to cause more than 25% of a Portfolio's total
assets to consist of (a) securities other than securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities) which, together
with other securities of the same issuer owned by the Portfolio, constitute
more than 5% of the value of the Portfolio's total assets or (b) voting
securities of issuers more than 10% of whose voting securities are owned by the
Fund;
- 9 -
<PAGE> 48
(5) make an investment if this would cause more than 25%
of the value of the Portfolio's total assets to be invested in securities
issued by companies principally engaged in any one industry except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. Neither utilities nor energy
companies are considered to be a single industry for purposes of this
restriction. Instead, they will be divided according to their services. For
example, gas, electric and telephone utilities will each be considered a
separate industry;
(6) write or purchase any put options or engage in any
combination of put and call options;
(7) make short sales of securities;
(8) invest in commodities or commodity contracts;
(9) buy or sell real estate or mortgages, except that the
Portfolios may invest in shares of real estate investment trusts and of other
issuers that engage in real estate operations, and in public sold mortgage
backed certificates in accordance with their investment objectives and
policies; or
(10) issue senior securities, except as appropriate to
evidence indebtedness that a Portfolio is permitted to incur and except for
shares of existing or additional series of the Fund. Except for those
investment policies of a Portfolio specifically identified as fundamental in
this Statement of Additional Information, all other investment policies and
practices described in the Prospectus and this Statement of Additional
Information may be changed by the Directors without the approval of
shareholders.
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
DREYFUS LARGE COMPANY VALUE PORTFOLIO
The investment restrictions set forth below apply to the
Dreyfus Large Company Value Portfolio and are fundamental policies of this
Portfolio, i.e., they may not be changed without a majority vote of the
outstanding shares of the Portfolio.
The Dreyfus Large Company Value Portfolio will not:
(1) invest more than 5% of its assets in the obligations of any
single issuer, except that up to 25% of the value of the Portfolio's total
assets may be invested, and securities issued or guaranteed by the U.S.
Government, or its agencies or instrumentalities may be purchased, without
regard to any such limitation;
(2) with respect to 75% of the Portfolio's total assets, hold more
than 10% of the outstanding voting securities of any single issuer;
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<PAGE> 49
(3) invest more than 25% of the value of its total assets in the
securities of issuers in any single industry, provided that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
(4) invest in commodities, except that the Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or induces;
(5) purchase, hold or deal in real estate, or oil, gas or other
mineral leases or exploration or development programs, but the Fund may
purchase and sell securities that are secured by real estate or issued by
companies that invest or deal in real estate or real estate investment trusts;
(6) borrow money, except to the extend permitted under the 1940 Act
(which currently limits borrowing to no more than 33-1/3% of the value of the
Portfolio's total assets), and except that the entry into options, forward
contracts, futures contracts, including those relating to indices, and options
on futures contracts or indices shall not constitute borrowing;
(7) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, the Portfolio
may lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange Commission
and the Company's Board;
(8) act as an underwriter of securities of other issuers, except to
the extent the Portfolio may be deemed an underwriter under the 1933 Act, by
virtue of disposing of portfolio securities;
(9) issue any senior security (as such term is defined in Section
18(f) of the 1940 Act), except to the extent that purchases and sales of
options, forward contracts, futures contracts, puts and calls may be deemed to
give rise to a senior security; or
(10) purchase securities on margin, but the Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indices, and options on futures
contracts or indices.
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
AMERICAN CENTURY INCOME & GROWTH PORTFOLIO
The investment restrictions set forth below apply to the American
Century Income & Growth Portfolio, and are
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<PAGE> 50
fundamental policies of this Portfolio; i.e., they may not be changed with
respect to the Portfolio without a majority of the outstanding shares of the
Portfolio.
The American Century Income & Growth Portfolio will not:
(1) lend any security or make any other loan if, as a result, more
than 33-1/3% of the fund's total assets would be lent to other parties, except
(a) through the purchase of debt securities in accordance with its investment
objective, policies and limitations, or (b) by engaging in repurchase
agreements with respect to portfolio securities;
(2) invest for purposes of exercising control over management;
(3) issue senior securities, except as permitted under the Investment
Company Act of 1940 (the "1940 Act");
(4) act as an underwriter of securities by others, except to the
extent that the fund may be considered an underwriter within the meaning of the
1933 Act in the disposition of restricted securities;
(5) borrow any money, except that the fund may borrow money for
temporary or emergency purposes (not for leveraging or investment) in an amount
not exceeding 33-1/3% of the portfolio's total assets (including the amount
borrowed) less liabilities (other than borrowings);
(6) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments; provided that this policy
shall not prohibit the fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities;
(7) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments provided that this policy shall
not prevent the Portfolio from investment in securities or other instruments
backed by real estate or securities of companies that deal in real estate or
are engaged in the real estate business; or
(8) concentrate its investments in securities of issues in a
particular industry (other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities).
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
LORD ABBETT DEVELOPING GROWTH PORTFOLIO
The investment restrictions set forth below apply to the
Lord Abbett Developing Growth Portfolio, and are fundamental
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<PAGE> 51
policies of this Portfolio; i.e., they may not be changed with respect to the
Portfolio without it majority of the outstanding shares of the Portfolio.
The Lord Abbett Developing Growth Portfolio will not:
(1) borrow money, except that (i) the Portfolio may borrow from banks
(as defined in the 1940 Act in amounts up to 33-1/3% of its total assets
(including the amount borrowed), (ii) the Portfolio may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Portfolio
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and, (iv) the Portfolio may
purchase securities on margin to the extent permitted by applicable law;
(2) pledge its assets (other than to secure such borrowings, or to
the extent permitted by the Fund's investment policies, as permitted by
applicable law);
(3) engage in the underwriting of securities, except pursuant to a
merger or acquisition or to the extent that, in connection with the disposition
of its portfolio securities, it may be deemed to be an underwriter under
federal securities laws;
(4) make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and investment in
government obligations, commercial papers, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or any
similar instruments shall not be subject to this limitation and except further
that the Portfolio may lend its portfolio securities, provided that the lending
of portfolio securities may be made only in accordance with applicable law;
(5) buy or sell real estate (except that the Portfolio may invest in
securities directly or indirectly secured by real estate or interests therein
or issued by companies that invest in real estate or interests therein)
commodities or commodity contracts (except to the extent the Portfolio may do
so in accordance with applicable law and without registering as a commodity
pool operator under the Commodity Exchange Act as, for example, with futures
contracts);
(6) with respect to 75% of the gross assets of the Portfolio, buy
securities of one issuer representing more than (i) 5% of the Fund's gross
assets, except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or (ii) 10% of the voting securities of such
issuer;
(7) invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding securities of the
U.S. Government, its agencies and instrumentalities); or
(8) issue senior securities to the extent such issuance would violate
applicable law.
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<PAGE> 52
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE
EAGLE GROWTH EQUITY PORTFOLIO
The investment restrictions set forth below apply to the Eagle Growth
Equity Portfolio; i.e., they may not be changed with respect to the Portfolio
without a majority of the outstanding shares of the Portfolio.
The Eagle Growth Equity Portfolio with not:
(1) invest with respect to 75% of each Fund's total assets, more than
5% of that Fund's assets in securities of any one issuer other than the U.S.
Government or its agencies and instrumentalities, or purchase more than 10% of
the voting securities of any one issuer;
(2) purchase securities if, as a result of such purchase, more than
25% of the value of each Fund's total assets would be invested in the
securities of any one industry (except securities issued by the U.S.
Government, its agencies and instrumentalities);
(3) borrow money except as a temporary measure for extraordinary or
emergency purposes. The Portfolio may enter into reverse repurchase agreements
in an amount up to 33 1/3% of the value of its total assets in order to meet
redemption requests without immediately selling portfolio securities. This
latter practice is not for investment leverage but solely to facilitate
management of the investment portfolio by enabling the Portfolio to meet
redemption requests when the liquidation of portfolio instruments would be
inconvenient or disadvantageous. However, a Portfolio may not purchase
additional portfolio investments once borrowed funds exceed 5% of total assets.
When effecting reverse repurchase agreements, Portfolio assets in an amount
sufficient to make payment for the obligations to be purchased will be
segregated by the Custodian and on the Portfolio's records upon execution of
the trade and maintained until the transaction has been settled. During the
period any reverse repurchase agreements are outstanding, to the extent
necessary to assure completion of the reverse repurchase agreements, a
Portfolio will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. Interest paid on borrowed funds will not be available for
investment. The Portfolio will liquidate any such borrowings as soon as
possible and may not purchase any portfolio instruments while any borrowings
are outstanding (except as described above);
(4) issue senior securities, except as permitted by the investment
objective and policies and investment limitations of the Portfolio;
(5) underwrite the securities of other issuers, except that the
Portfolio may underwrite to the extent that in connection with the disposition
of Portfolio securities, the Portfolio may be deemed to be an underwriter under
federal securities laws; or
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<PAGE> 53
(6) invest in commodities, commodity contracts or real estate
(including real estate limited partnerships), except that the Portfolio may
purchase securities issued by companies that invest in or sponsor such
interests.
ADDITIONAL NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
APPLICABLE TO CERTAIN PORTFOLIOS
In addition to the fundamental investment policies described above,
the Fund has also adopted the following investment policies for the Capital
Appreciation, Cash Management, Convertible, Government, High Yield Corporate
Bond, Total Return, Value and Indexed Equity Portfolios which, unlike those
described above, may be changed without shareholder approval.
None of the designated Portfolios will:
(1) enter into repurchase agreements or purchase any "illiquid
securities", illiquid securities being defined to include securities subject to
legal or contractual restrictions on resale (other than restricted securities
eligible for resale pursuant to Rule 144A under the 1933 Act) if, as a result
thereof, more than 15% of the total assets of a Portfolio (10% with respect to
the Cash Management, High Yield Corporate Bond and Value Portfolios) taken at
market value would be, in the aggregate, invested in repurchase agreements
maturing in more than seven days and illiquid securities or securities which
are not readily marketable, (including over-the-counter options considered by
the Board of Directors of the Fund not to be readily marketable);
(2) invest assets in securities of other open-end investment
companies (except in connection with a merger, consolidation, reorganization or
acquisition of assets), but, to the extent permitted by the 1940 Act, a
Portfolio may invest in shares of money market funds if double advisory fees
are not assessed, may invest up to 5% of its assets in closed-end investment
companies (which would cause a Portfolio to pay duplicate fees), and may
purchase or acquire up to 10% of the outstanding voting stock of a closed-end
investment company (foreign banks or their agencies or subsidiaries and foreign
insurance companies are not considered investment companies for the purposes of
this limitation);
(3) purchase securities of any issuer with a record of less than
three years' continuous operation, including predecessors, except obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities if such purchase would cause the investments of such
Portfolio in all such issuers to exceed 5% of the value of the total assets of
that Portfolio;
(4) purchase from or sell portfolio securities of such Portfolio to
any of the officers or Directors of the Fund, its Investment Advisers, its
principal underwriter or the officers, or directors of its Investment Advisers,
or principal underwriter;
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<PAGE> 54
(5) purchase warrants of any issuer, except on a limited basis when,
as a result of such purchases by a Portfolio, no more than 2% of the value of
the Portfolio's total assets would be invested in warrants which are not listed
on the New York Stock Exchange or the American Stock Exchange, and no more than
5% of the value of the total assets of a Portfolio may be invested in warrants
whether or not so listed, such warrants in each case to be valued at the lesser
of cost or market, but assigning no value to warrants acquired by a Portfolio
in units with or attached to debt securities;
(6) invest in other companies for the purpose of exercising control
or management;
(7) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Director of the Fund
or a member, officer, director or trustee of the investment advisers of the
Fund if one or more of such individuals owns beneficially more than one-half of
one percent (1/2 of 1%) of the securities (taken at market value) of such
issuer and such individuals owning more than one-half of one percent (1/2 of
1%) of such securities together own beneficially more than 5% of such
securities or both;
(8) purchase securities on margin or make short sales, (except short
sales against the box) except in connection with arbitrage transactions or
unless, by virtue of its ownership of other securities, it has the right to
obtain securities equivalent in kind and amount to the securities sold and, if
the right is conditional, the sale is made upon the same conditions, except
that a Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities and in connection with
transactions involving forward foreign currency exchange contracts; or
(9) purchase or sell any put or call options or any combination
thereof, except that a Portfolio may purchase and sell or write (i) options on
any futures contracts into which it may enter, (ii) put and call options on
currencies, securities indexes and covered put and call options on securities,
and (iii) may also engage in closing purchase transactions with respect to any
put and call option position it has entered into; provided, however, that the
Capital Appreciation, Convertible, High Yield Corporate Bond, Total Return and
Value Portfolios may not write any covered put options if, as a result, more
than 25% of a Portfolio's net assets (taken at current value) would be subject
to put options written by such Portfolio, and the Government Portfolio may not
write any covered put options on U.S. Government securities if as a result more
than 50% of its total assets (taken at current value) would be subject to put
options written by such Portfolio.
In addition, the International Equity Portfolio may not:
(1) purchase or retain securities of any issuer if, to the knowledge
of this Portfolio, any of the Directors or officers of the Fund, or any of the
directors or officers
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<PAGE> 55
of the Portfolio's Investment Adviser, individually own more than 1/2 of 1% of
the outstanding securities of the issuer and together own beneficially more
than 5% of such issuer's securities;
(2) invest more than 5% of the value of its total assets in
securities of issuers (other than issuers of Federal agency obligations) having
a record, together with predecessors or unconditional guarantors, of less than
three years;
(3) (i) purchase securities that may not be sold without first being
registered under the 1933 Act, other than Rule 144A securities determined to be
liquid pursuant to guidelines adopted by the Fund's Board of Directors, (ii)
enter into repurchase agreements having a duration of more than seven days,
(iii) purchase loan participation interests that are not subject to puts, (iv)
purchase instruments lacking readily available market quotations ("illiquid
instruments"), or (v) purchase or sell over-the-counter options, if as a result
of the purchase or sale, the Portfolio's aggregate holdings of restricted
securities, repurchase agreements having a duration of more than seven days,
loan participation interests that are not subject to puts, illiquid
instruments, and over-the-counter options purchased by the Portfolio and the
assets used as cover for over-the-counter options written by the Portfolio
exceed 15% of the Portfolio's net assets;
(4) purchase securities of an investment company, except (i) in
connection with a merger, consolidation, reorganization or acquisition of
assets, or (ii) to the extent permitted by the 1940 Act and then only
securities of money market funds (where the Portfolio's investment adviser
undertakes to forego the fees they would otherwise receive on the assets so
invested and where there is no commission or profit to a sponsor or dealer
other than the customary broker's commission that may result from such
purchase) or securities of a closed-end investment company (where there is no
commission or profit to a sponsor or dealer other than the customary broker's
commission that may result from such purchase); provided, however, that foreign
banks or their agencies or subsidiaries and foreign insurance companies are not
considered investment companies for the purposes of this limitation as
permitted by the 1940 Act;
(5) invest in other companies for the purpose of exercising control;
(6) sell securities short, except for covered short sales or unless
it owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in options, futures
and forward contracts are deemed not to constitute short sales of securities;
(7) purchase securities on margin, except that the Portfolio may
obtain such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute the purchase of
securities on margin;
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<PAGE> 56
(8) purchase warrants, valued at the lower of cost or market, in
excess of 5% of the Portfolio's net assets. Included within that amount, but
not to exceed 2% of net assets, are warrants whose underlying securities are
not traded on principal domestic or foreign exchanges (warrants acquired by the
Portfolio in units or attached to securities are not subject to these
restrictions); or
(9) acquire or retain the securities of any other investment company
if, as a result, more than 3% of such investment company's outstanding shares
would be held by the Portfolio, more than 5% of the value of the Portfolio's
total assets would be invested in shares of such investment company or more
than 10% of the value of the Portfolio's assets would be invested in shares of
investment companies in the aggregate, except in connection with a merger,
consolidation, acquisition, or reorganization.
The following non-fundamental investment restrictions apply to the
Dreyfus Large Company Value Portfolio. The Dreyfus Large Company Value
Portfolio may not:
(1) purchase securities of any company having less than three
years' continuous operations (including operations of any predecessor) if such
purchase would cause the value of the Portfolio's investments in all such
companies to exceed 5% of the value of its total assets;
(2) invest in the securities of a company for the purpose of
exercising management or control, but the Portfolio will vote the securities it
owns in its portfolio as a shareholder in accordance with its views;
(3) pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with
respect to options, forward contracts, futures contracts, including those
relating to indices, and options on futures contracts or indices;
(4) purchase, sell or write puts, calls or combinations thereof,
except as described in the Portfolio's Prospectus and this Statement of
Additional Information;
(5) enter into repurchase agreements providing for settlement in
more than seven days after notice or purchase securities which are illiquid if,
in the aggregate, more than 15% of the value of the Portfolio's net assets
would be so invested; or
(6) purchase securities of other investment companies, except to
the extent permitted under the 1940 Act.
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<PAGE> 57
The following non-fundamental investment restrictions apply with
respect to the Lord Abbett Developing Growth Portfolio. The Lord Abbett
Developing Growth Portfolio may not:
(1) borrow in excess of 5% of its gross assets taken at cost or market
value, whichever is lower at the time of borrowing, and then only as a
temporary measure for extraordinary or emergency purposes;
(2) make short sales of securities or maintain a short position except
to the extent permitted by applicable law;
(3) invest knowingly more than 15% of its net assets (at the time of
investment) in illiquid securities, except for securities qualifying for resale
under Rule 144A of the 1933 Act, deemed to be liquid by the Board of Directors;
(4) invest in securities of other investment companies as defined in
the 1940 Act, except as permitted by applicable law;
(5) invest in securities of issuers which, with their predecessors,
have a record of less than three years of continuous operation, if more than 5%
of the Portfolio's total assets would be invested in such securities (this
restriction shall not apply to mortgaged-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities);
(6) hold securities of any issuer when more than 1/2 of 1% of the
securities of such issuer are owned beneficially by one or more of the
Portfolio's officers or directors or by one or more partners of the Portfolio's
underwriter, Investment Adviser or Sub-Adviser if these owners in the aggregate
own beneficially more than 5% of such securities of such issuer;
(7) invest in warrants if, at the time of acquisition, its investment
in warrants, valued at the lower of cost or market, would exceed 5% of the
Portfolio's total assets (included within such limitation, but not to exceed 2%
of the Portfolio's total assets, are warrants which are not listed on the New
York or American Stock Exchange or a major foreign exchange);
(8) invest in real estate limited partnership interests or interests
in oil, gas or other mineral leases, or exploration or development programs,
except that the Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities; or
(9) write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Portfolio's
Prospectus and this Statement of Additional Information, as they may be amended
from time to time.
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<PAGE> 58
The Eagle Growth Equity Portfolio has adopted the following
non-fundamental investment restrictions. The Portfolio may not:
(1) invest more than 10% of the value of its net assets in securities
that are subject to restrictions on resale or are not readily marketable
without registration under the 1933 Act and in repurchase agreements maturing
in more than seven days;
(2) sell any securities short or purchase any securities on margin but
may obtain such short-term credits as may be necessary for clearance of
purchases and sales of securities, and may make short sales "against the box"
and make margin deposits in connection with its use of options, futures
contracts, forward currency contracts and other financial instruments; or
(3) invest in the securities of other investment companies, except by
purchase in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than the customary broker's commission,
or except when the purchase is part of a plan or merger, consolidation,
reorganization or acquisition.
OTHER INVESTMENT POLICIES OF THE HIGH YIELD CORPORATE
BOND PORTFOLIO
Corporate debt securities may bear fixed, contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer, participations based on revenues, sales or profits, or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit).
Under normal market conditions, not more than 25% of the value of the
Portfolio's total assets will be invested in equity securities, including
common stocks, preferred stocks, warrants and rights.
When and if available, debt securities may be purchased at a discount
from face value. However, the Portfolio does not intend to hold such securities
to maturity for the purpose of achieving potential capital gains, unless
current yields on these securities remain attractive. From time to time the
Portfolio may purchase securities not paying interest or dividends at the time
acquired if, in the opinion of MacKay-Shields, such securities have the
potential for future income (or capital appreciation, if any).
Since shares of the Portfolio represent an investment in securities
with fluctuating market prices, the value of shares of the Portfolio will vary
as the aggregate value of the Portfolio's portfolio securities increases or
decreases. Moreover, the value of the debt securities that the Portfolio
purchases may fluctuate more than the value of higher rated debt securities.
These lower rated fixed income securities generally tend to reflect short-term
corporate and market developments to a greater extent than higher rated
securities
- 20 -
<PAGE> 59
which react primarily to fluctuations in the general level of interest rates.
Changes in the value of securities subsequent to their acquisition will not
affect cash income or yields to maturity to the Portfolio but will be reflected
in the net asset value of the Portfolio's shares.
OTHER INVESTMENT POLICIES OF THE BOND AND GROWTH EQUITY
PORTFOLIOS
In addition to the fundamental investment policies described above,
the Fund has also adopted the following investment policies, which unlike those
described above, may be changed without shareholder approval.
Neither of the Portfolios will:
(1) write or purchase any call options;
(2) purchase the securities of other investment companies, unless it
acquires them as part of a merger, consolidation, acquisition of assets or
reorganization;
(3) pledge or mortgage assets, except that a Portfolio may pledge up
to 10% of the total value of its assets to secure permissible borrowings;
(4) purchase interests in oil, gas or other mineral exploration or
development programs, but the Portfolios may purchase securities of issuers who
deal or invest in such programs; or
(5) purchase securities of foreign issuers if the purchase would
cause more than 10% of the value of the Portfolio's total assets to be invested
in such securities.
The following is more detailed information regarding subjects
addressed in the Fund's current Prospectus.
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<PAGE> 60
OTHER INVESTMENT POLICIES OF THE GOVERNMENT PORTFOLIO
Mortgage-Backed Securities. Government National Mortgage Association
("GNMA") certificates are mortgage-backed securities representing part
ownership of a pool of mortgage loans. These loans, issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations, are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration. A "pool" or group of such mortgages is assembled,
and, after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal on
each mortgage is guaranteed by GNMA and backed by the full faith and credit of
the U.S. Government. GNMA certificates differ from bonds in that principal is
paid back monthly by the borrower over the term of the loan rather than
returned in a lump sum at maturity. GNMA certificates are called "pass-through"
securities because both interest and principal payments (including prepayments)
are passed through to the holder of the certificate. Upon receipt, principal
payments may be used for the purchase of additional GNMA certificates or other
securities permitted by the Portfolios' investment policies and restrictions.
In addition to GNMA certificates, the Portfolio may invest in
mortgage-backed securities issued by the Federal National Mortgage Association
("FNMA") and by the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA, a
federally chartered and privately-owned corporation, issues mortgage-backed
pass-through securities which are guaranteed as to timely payment of principal
and interest by FNMA. FHLMC, a corporate instrumentality of the U.S.
Government, issues participation certificates which represent an interest in
mortgages from FHLMC's portfolio. FHLMC guarantees the timely payment of
interest and the ultimate collection of principal. Securities guaranteed by
FNMA and FHLMC are not backed by the full faith and credit of the U.S.
Government.
If either fixed or variable rate pass-through securities issued by the
U.S. Government or its agencies or instrumentalities are developed in the
future, the Portfolios reserve the right to invest in them.
Privately Issued Mortgage-Related Securities. The Portfolio may also
invest in mortgage-related securities ("CMOs") which are issued by private
entities such as investment banking firms and companies related to the
construction industry. The mortgage-related securities in which the Portfolio
may invest may be: (i) privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. Government;
(ii) privately issued securities which are collateralized by pools of mortgages
in which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. Government securities; and (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed
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<PAGE> 61
securities and payment of the principal and interest is supported by the credit
of an agency or instrumentality of the U.S. Government. The Portfolio will not
invest in any privately issued CMOs that do not meet the requirements of Rule
3a-7 under the 1940 Act if, as a result of such investment, more than 5% of a
Portfolio's net assets would be invested in any one CMO, more than 10% of the
Portfolio's net assets would be invested in CMOs and other investment company
securities in the aggregate, or the Portfolio would hold more than 3% of any
outstanding issue of CMOs.
The Portfolio may also invest in securities collateralized by
mortgages or pools of mortgages the issuer of which has qualified to be treated
as a "real estate mortgage investment conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). CMOs and REMICs may offer a
higher yield than U.S. Government securities, but they may also be subject to
greater price fluctuation and credit risk. In addition, CMOs and REMICs
typically will be issued in a variety of classes or series, which have
different maturities and are retired in sequence. Privately issued CMOs and
REMICs are not government securities nor are they supported in any way by any
governmental agency or instrumentality. In the event of a default by an issuer
of a CMO or a REMIC, there is no assurance that the collateral securing such
CMO or REMIC will be sufficient to pay principal and interest. It is possible
that there will be limited opportunities for trading CMOs and REMICs in the
over-the-counter market, the depth and liquidity of which will vary from issue
to issue and from time to time.
OTHER INVESTMENT POLICIES OF THE CASH MANAGEMENT
PORTFOLIO
The Portfolio may invest its assets in U.S. dollar-denominated
securities of U.S. or foreign issuers and in securities of foreign branches of
U.S. banks, such as negotiable certificates of deposit (Eurodollars). Since the
Portfolio may contain such securities, an investment therein involves
investment risks that are different in some respects from an investment in a
fund which invests only in debt obligations of U.S. domestic issuers. Such
risks may include future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
securities held in the Portfolio, possible seizure or nationalization of
foreign deposits, the possible establishment of exchange controls or the
adoption of other foreign governmental restrictions which might adversely
affect the payment of the principal of and interest on securities in the
Portfolio.
All of the assets of the Portfolio will be invested in obligations
which mature in thirteen months or less and substantially all these investments
will be held to maturity; however, securities collateralizing repurchase
agreements may have maturities in excess of thirteen months. The Portfolio
will, to the extent feasible, make portfolio investments primarily in
anticipation of or in response to changing economic and money market conditions
and trends. The dollar-weighted average maturity of the Portfolio's portfolio
may not exceed 90 days. Consistent with the provisions of a rule of the SEC,
the
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Portfolio invests only in U.S. dollar-denominated money market instruments that
present minimal credit risk and, with respect to 95% of its total assets,
measured at the time of investment, that are of the highest quality.
MacKay-Shields shall determine whether a security presents minimal credit risk
under procedures adopted by the Fund's Board of Directors. A money market
instrument will be considered to be highest quality (1) if rated in the highest
rating category (i.e., Aaa or Prime-1 by Moody's Investors Service, Inc.
("Moody's"), AAA or A-1 by Standard & Poor's Corporation ("S&P")) by: (i) any
two nationally recognized statistical rating organizations ("NRSROs") or, (ii)
if rated by only one NRSRO, by that NRSRO, and whose acquisition is approved or
ratified by the Board of Directors; (2) if issued by an issuer that has
short-term debt obligations of comparable maturity, priority and security, and
that are rated in the highest rating category by (i) any two NRSROs or, (ii) if
rated by only one NRSRO, by that NRSRO, and whose acquisition is approved or
ratified by the Board of Directors; or (3) an unrated security that is of
comparable quality to a security in the highest rating category as determined
by MacKay-Shields and whose acquisition is approved or ratified by the Board of
Directors. With respect to 5% of its total assets, measured at the time of
investment, the Portfolio may also invest in money market instruments that are
in the second-highest rating category for short-term debt obligations (i.e.,
rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument
will be considered to be in the second-highest rating category under the
criteria described above with respect to instruments considered highest
quality, as applied to instruments in the second-highest rating category.
The Portfolio may not invest more than 5% of its total assets,
measured at the time of investment, in securities of any one issuer that are of
the highest quality, except that the Portfolio may exceed this 5% limitation
for up to three business days after the purchase of a security of any one
issuer and except that this limitation shall not apply to U.S. Government
securities. 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 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, MacKay-Shields, under
procedures approved by the Board of Directors (or the Board of Directors itself
if MacKay-Shields becomes aware an unrated security is downgraded below high
quality and MacKay-Shields does not dispose of the security within five
business days) shall promptly reassess whether such security presents minimal
credit risk and determine whether or not to retain the instrument.
Pursuant to the rule, the Portfolio uses the amortized cost method of
valuing its investments, which facilitates the maintenance of the Portfolio's
per share net asset value at $1.00. The amortized cost method, which is
normally used to value all of the Portfolio's portfolio securities, involves
initially valuing a security at its cost and thereafter amortizing to maturity
any discount or premium, regardless of the impact of fluctuating interest rates
on the market value of the instrument.
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The Directors have also established procedures designed to stabilize,
to the extent reasonably possible, the Portfolio's price per share as computed
for the purpose of sales and redemptions at $1.00. Such procedures include
review of the Portfolio's portfolio by the Directors, at such intervals as they
deem appropriate, to determine whether the Portfolio's net asset value
calculated by using available market quotations or market equivalents (the
determination of value by reference to interest rate levels, quotations of
comparable securities and other factors) deviates from $1.00 per share based on
amortized cost.
The extent of deviation between the Portfolio's net asset value based
upon available market quotations or market equivalents and $1.00 per share
based on amortized cost will be periodically examined by the Directors. If such
deviation exceeds 1/2 of 1%, the Directors will promptly consider what action,
if any, will be initiated. In the event the Directors determine that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, they will take such corrective action as
they regard to be necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations
or equivalents. In addition, in order to stabilize the net asset value per
share at $1.00, the Directors have the authority (1) to reduce or increase the
number of shares outstanding on a pro rata basis, and (2) to offset each
shareholder's pro rata portion of the deviation between the net asset value per
share and $1.00 from the shareholder's accrued dividend account or from future
dividends.
The Portfolio may hold cash for the purpose of stabilizing its net
asset value per share. Holdings of cash, on which no return is earned, would
tend to lower the yield on the Portfolio's shares.
The Portfolio may also, consistent with the provisions of the rule,
invest in securities with a face maturity of more than thirteen months,
provided that the security is either a variable or floating rate U.S.
Government security, or a floating or variable rate security with certain
demand or interest rate reset features.
OTHER INVESTMENT POLICIES OF THE DREYFUS LARGE COMPANY
VALUE PORTFOLIO
The Portfolio may invest in convertible securities. Convertible
securities may be converted at either a stated price or stated rate into
underlying shares of common stock convertible securities have characteristics
similar to both fixed-income and equity securities. Convertible securities
generally are subordinated to other similar but non-convertible securities of
the same issuer, although convertible bonds, as corporate debt obligations,
enjoy seniority right of payment to all equity securities, and convertible
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<PAGE> 64
preferred stock is senior to common stock, of the same issuer. Because of the
subordination feature, however, convertible securities typically have lower
ratings than similar non-convertible securities.
The Portfolio may invest in the securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and other forms of depositary receipts. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a United States
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. EDRs, which are sometimes referred to as Continental
Depositary Receipts ("CDRs"), are receipts issued in Europe typically by
non-United States bank and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs in registered form are
designed for use in the United States securities markets and EDRs and CDRs in
bearer form are designed for use in Europe.
A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time. The Portfolio may
invest up to 5% of its net assets in warrants, except that this limitation does
not apply to warrants purchased by the Portfolio that are soled in units with,
or attached to, other securities. Included in such amount, but not limited to
exceed 2% of the value of the Portfolio's net assets, may be warrants which are
not listed on the New York or American Stock Exchange.
The Portfolio may invest in securities issued by closed-end investment
companies. The Portfolio's investment in such securities, subject to certain
exceptions, currently is limited to: (i) 3% of the total voting stock of any
one investment company, (ii) 5% of the Portfolio's total assets with respect to
any one investment company and (iii) 10% of the Portfolio's total assets in the
aggregate. Investments in the securities of other investment companies may
involve duplication of advisory fees and certain other expenses.
The Portfolio may invest in obligations issued or guaranteed by one or
more foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Sub-Adviser to be of comparable
quality to the other obligations in which the Portfolio may invest. Such
securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
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<PAGE> 65
The Portfolio may purchase certificates of deposit, time deposits,
bankers acceptances and other short-term obligations issued by domestic banks,
foreign subsidiaries or foreign branches of domestic banks, domestic and
foreign branches of foreign banks, domestic savings and loan associations and
other banking institutions. With respect to such securities issued by foreign
subsidiaries or foreign branches of domestic banks, and domestic and foreign
branches of foreign banks, the Portfolio may be subject to additional
investment risks that are different in some respect from those incurred by a
fund which invests only in debt obligations of U.S. domestic issuers.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven days)
at a stated interest rate.
Bankers' acceptances are credit instruments evidencing the obligation
of a bank to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
The Portfolio may invest in commercial paper. Commercial paper
consists of short-term, unsecured promissory notes issued to finance
short-term credit needs. The commercial paper purchased by the Portfolio will
consist only of direct obligations which, at the time of their purchase, are
(a) rated not lower than Prime-1 by Moody's Investors Service, Inc. ("Moodys"),
A-1 by Standard & Poor's Ratings Group ("S&P"), F-1 by Fitch Investors Service,
L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), (b)
issued by companies having an outstanding unsecured debt issue currently rated
at least Aa3 by Moody's or AA by S&P, Fitch or Duff, or (c) if unrated,
determined by the Sub-adviser to be a of comparable quality to those rated
obligations which may be purchased by the Portfolio.
The Portfolio may invest up to 15% of the value of its net assets in
securities as to which a liquid trading market does not exist, provided such
investments are consistent with the Portfolio's investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, repurchase agreements providing for settlement in more than seven days
after notice, and certain privately negotiated, non-exchange traded options and
securities used to cover such options. As to these securities, the Portfolio
is subject to a risk that should the Portfolio desire to sell them when a ready
buyer is not available at a price the Portfolio deems representative of their
value, the value of the Portfolio's net assets could be adversely affected.
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<PAGE> 66
OTHER INVESTMENT POLICIES OF THE EAGLE GROWTH EQUITY
PORTFOLIO
The Portfolio may invest in sponsored and unsponsored American
Depository Receipts ("ADRs"). ADRs are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying securities of
foreign issuers. Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. Thus, these
securities are not denominated in the same currency as the securities into
which they may be converted. ADRs are subject to many of the risks inherent in
investing in foreign securities, including confiscatory taxation or
nationalization, and less comprehensive disclosure requirements for the
underlying security. In addition, the issuers of the securities underlying
unsponsored ADRs 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 ADRs. ADRs are considered to be foreign securities by
the Portfolio for purposes of certain investment limitation calculations.
The Portfolio also may invest in sponsored or unsponsored European
Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs"),
International Depository Receipts ("IDRs") or other similar securities
representing interests in or convertible into securities of foreign issuers
("Depository Receipts"). EDRs and IDRs are receipts typically issued by a
European bank or trust company evidencing ownership of the underlying foreign
securities. GDRs are issued globally for trading in non-U.S. securities
markets and evidence a similar ownership arrangement. Depository Receipts may
not necessarily be denominated in the same currency as the underlying
securities into which they may be converted. As with ADRs, the issuers of the
securities underlying unsponsored Depository 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 Depository
Receipts. Depository Receipts also involve the risks of other investments in
foreign securities, as discussed below.
The Portfolio may invest in bankers' acceptances, which are short-term
credit instruments used to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay
the face value of the instrument on its maturity date. The acceptance may then
be held by the accepting bank as an asset, or it may be sold in the secondary
market at the going rate of interest for a specified maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
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The Portfolio may invest in bank certificates of deposit ("CDs"). The
Federal Deposit Insurance Corporation is an agency of the U.S. Government that
insures the deposits of certain banks and savings and loan associations up to
$100,000 per deposit. The interest on such deposits may not be insured if this
limit is exceeded. Current federal regulations also permit such institutions
to issue insured negotiable CDs in amounts of $100,000 or more, without regard
to the interest rate ceilings on other deposits. To remain fully insured,
these investments currently must be limited to $100,000 per insured bank or
savings and loan association. Investments in CDs are made only with domestic
institutions with assets in excess of $1 billion.
The Portfolio may invest in commercial paper that is limited to
obligations rated Prime-1 or Prime-2 by Moody's Investors Services, Inc.
("Moody's") or A-1 or A-2 by Standard & Poor's Ratings Services (S&P).
Commercial paper includes notes, drafts or similar instruments payable on
demand or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof.
The Portfolio may not purchase or otherwise acquire any illiquid
security if, as a result, more than 10% of its net assets (taken at current
value) would be invested in securities that are illiquid by virtue of the
absence of a readily available market or legal or contractual restrictions on
resale. Over-the-Counter ("OTC") options and their underlying collateral are
currently considered to be illiquid investments. The Portfolio may sell OTC
options and, in connection therewith, segregate assets or cover its obligations
with respect to OTC options that it writes. The assets used as cover for OTC
options written by the Portfolio will be considered illiquid unless OTC options
are sold to qualified dealers who agree that the Portfolio may repurchase any
OTC option it writes at a maximum price to be calculated by a formula set forth
in the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
The Portfolio may invest in preferred stock. A preferred stock is a
blend of the characteristics of a bond and common stock. It can offer the
higher yield of a bond and has priority over common stock in equity ownership,
but does not have the seniority of a bond and its participation in the issuer's
growth may be limited. Preferred stock has preference over common stock in the
receipt of dividends and in any residual assets after payment to creditors
should the issuer be dissolved. Although the dividend is set at a fixed annual
rate, in some circumstances it can be changed or omitted by the issuer.
The Portfolio may invest in Standard and Poor's Depository Receipts
("SPDRs") and other similar index securities ("Index Securities"). Index
Securities represent interests in a fixed portfolio of common stocks designed
to track the price and dividend yield performance of a broad-based securities
index, such as the Standard & Poor's 500 Composite Stock Price Index.
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The Portfolio may purchase rights and warrants, which are instruments
that permit the Portfolio to acquire, by subscription, the capital stock of a
corporation at a set price, regardless of the market price for such stock.
Warrants may be either perpetual or of limited duration. There is a greater
risk that warrants might drop in value at a faster rate than the underlying
stock. The Portfolio currently does not intend to invest more than 5% of its
net assets in warrants.
CERTAIN INVESTMENT PRACTICES COMMON TO TWO OR MORE
PORTFOLIOS
Except as otherwise noted below, the following description of
investment practices is applicable to all of the Portfolios.
ARBITRAGE
Each Portfolio may sell in one market a security which it owns and
simultaneously purchase the same security in another market or it may buy a
security in one market and simultaneously sell it in another market, in order
to take advantage of differences between the prices of the security in the
different markets. Although the Portfolios do not actively engage in arbitrage,
such transactions may be entered into only with respect to debt securities and
will occur only in a dealer's market where the buying and selling dealers
involved confirm their prices to the Portfolio at the time of the transaction,
thus eliminating any risk to the assets of a Portfolio. Such transactions,
which involve costs to a Portfolio, may be limited by the policy of each
Portfolio to qualify as a "regulated investment company" under the Code.
FLOATERS AND INVERSE FLOATERS
Each Portfolio, other than the Capital Appreciation, Value, Growth
Equity and Indexed Equity Portfolios, may, to the extent permitted by law,
invest in floating rate debt instruments ("floaters"). The interest rate on a
floater is a variable rate which is tied to another interest rate, such as a
money-market index or Treasury bill rate. The interest rate on a floater resets
periodically, typically every six months. While, because of the interest rate
reset feature, floaters provide a Portfolio with a certain degree of protection
against rises in interest rates, a Portfolio will participate in any declines
in interest rates as well.
Each Portfolio, other than the Capital Appreciation, Cash Management,
Government, Value, Growth Equity and Indexed Equity Portfolios may, to the
extent permitted by law, invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an inverse floater
resets in the opposite direction from the market rate of interest to which the
inverse floater is indexed. An inverse floater may be considered to be
leveraged if, as interest rates change, interest payments on the floater change
by a greater proportion. The higher degree of leverage inherent in inverse
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<PAGE> 69
floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Duration is the sensitivity of the price of a security to changes in
interest rates. Certain inverse floaters may be deemed to be illiquid
securities for purposes of the Portfolios' limitation on investments in such
securities.
HIGH YIELD SECURITIES
Securities rated lower than Baa by Moody's or lower than BBB by S&P
or, if not rated, of equivalent quality, are sometimes referred to as "high
yield" (or "junk") bonds. In addition, securities rated Baa are considered by
Moody's to have some speculative characteristics. Owners should consider the
following risks associated with high yield bonds before investing in the
Convertible, High Yield Corporate Bond, Total Return and Bond Portfolios.
Investment in high yield bonds involves special risks in addition to
the risks associated with investments in higher rated debt securities. High
yield bonds may be regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Analysis
of the creditworthiness of issuers of high yield bonds may be more complex than
for issuers of higher quality debt securities, and the ability of a Portfolio
to achieve its investment objective may, to the extent of its 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.
Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on a Portfolio's NAV and
investment practices. In addition, there may be special tax considerations
associated with investing in high yield bonds structured as zero coupon or
payment-in-kind securities. A Portfolio records the interest on these
securities annually as income even though it receives no cash interest until
the security's maturity or payment date.
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade bonds. The
prices of high yield bonds have been found to be less sensitive to
interest-rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection
of an economic downturn or of a period of rising interest rates, for example,
could cause a decline in high yield bond prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of high
yield bonds defaults, a Portfolio may incur additional expenses to seek
recovery. In the case of high yield bonds structured as zero coupon or
payment-in-kind securities, the market prices of such securities 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.
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The secondary market on which high yield bonds are traded may be less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a 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.
The use of credit ratings as the sole method for evaluating high yield
bonds also involves certain risks. 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 timely to change credit
ratings to reflect subsequent events. If a credit rating agency changes the
rating of a portfolio security held by a Portfolio, the Portfolio may retain
the portfolio security if MacKay-Shields or New York Life deems it in the best
interest of the Portfolio's shareholders.
ZERO COUPON BONDS
The Portfolios may purchase zero coupon bonds, which are debt
obligations issued without any requirement for the periodic payment of
interest. Zero coupon bonds are issued at a significant discount from face
value. The discount approximates the total amount of interest the bonds would
accrue and compound over the period until maturity at a rate of interest
reflecting market rate at the time of issuance. Because interest on zero coupon
bonds is not distributed on a current basis but is, in effect, compounded, zero
coupon bonds tend to be subject to greater market risk than interest paying
securities of similar maturities. The discount represents income, a portion of
which a Portfolio must accrue and distribute every year even though the
Portfolio receives no payment on the investment in that year. Zero coupon bonds
tend to be more volatile than conventional debt securities.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which the Portfolio sells a security
it does not own in anticipation of a possible decline in market price. A short
sale "against the box" is a short sale where, at the time of the short sale,
the Portfolio owns or has the right to obtain securities equivalent in kind and
amount. The Capital Appreciation, Convertible, Developing Growth, Eagle Growth
Equity, Government, High-Yield Corporate Bond, International Equity, Dreyfus
Large Company Value, Total Return, Value, and Indexed Equity Portfolios may
only enter into short sales against the box for, among other reasons, to hedge
against a market decline in the value of the security owned or to defer
recognition of a gain or loss for Federal income tax purposes on the security
owned by the Portfolio. Short sales "against the box" will be limited to no
more than 5% of the Portfolio's net assets (25% with respect to the Convertible
and the Dreyfus Large Company Value Portfolios).
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If the value of a security sold short against the box increases, the
Portfolio would suffer a loss when it purchases or delivers to the selling
broker the security sold short. If a broker, with which the Portfolio has open
short sales, were to become bankrupt, a Portfolio could experience losses or
delays in recovering gains on short sales. The Portfolios will only enter into
short sales against the box with brokers they believe are creditworthy.
REPURCHASE AGREEMENTS
The Portfolios may enter into repurchase agreements, including foreign
repurchase agreements, with any member bank of the Federal Reserve System or a
member firm of the National Association of Securities Dealers, Inc. As a matter
of operating policy, the Lord Abbett Developing Growth Portfolio will not
invest more than 10% of the value of its assets in repurchase agreements
maturing in more than seven days. A repurchase agreement, which provides a
means for a Portfolio to earn income on uninvested cash for periods as short as
overnight, is an arrangement under which the purchaser (i.e., a Portfolio)
purchases a U.S. Government or other high quality short-term debt obligation
(the "Obligation") and the seller agrees, at the time of sale, to repurchase
the Obligation at a specified time and price. A repurchase agreement with
foreign banks may be available with respect to government securities of the
particular foreign jurisdiction. The custody of the Obligation will be
maintained by a Portfolio's Custodian. The repurchase price may be higher than
the purchase price, the difference being income to a Portfolio, or the purchase
and repurchase prices may be the same, with interest at a stated rate due to a
Portfolio together with the repurchase price upon repurchase. In either case,
the income to a Portfolio is unrelated to the interest rate on the Obligation
subject to the repurchase agreement.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Portfolio to the seller of the Obligation. It is not clear whether
a court would consider the Obligation purchased by a Portfolio subject to a
repurchase agreement as being owned by a Portfolio or as being collateral for a
loan by a Portfolio to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the seller of the
Obligation before repurchase of the Obligation under a repurchase agreement, a
Portfolio may encounter delays and incur costs before being able to sell the
security. Delays may involve loss of interest or decline in price of the
Obligation. If the court characterizes the transaction as a loan and a
Portfolio has not perfected a security interest in the Obligation, a Portfolio
may be required to return the Obligation to the seller's estate and be treated
as an unsecured creditor of the seller. As an unsecured creditor, a Portfolio
would be at the risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt instrument purchased for the
Portfolios, each Portfolio's Adviser seeks to minimize the risk of loss from
repurchase agreements by analyzing the creditworthiness of the obligor, in this
case the seller of the Obligation. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the security. However, if the
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<PAGE> 72
market value of the Obligation subject to the repurchase agreement becomes less
than the repurchase price (including accrued interest), a Portfolio will direct
the seller of the Obligation to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price.
In addition, the American Century Income & Growth Portfolio has
received permission from the Securities and Exchange Commission to participate
in pooled repurchase agreements collateralized by U.S. government securities
with other mutual funds advised by the Sub-Adviser. Pooled repurchase
agreements are expected to increase the income the fund can earn from
repurchase transactions without increasing the risks associated with these
transactions.
REVERSE REPURCHASE AGREEMENTS
Each Portfolio may enter into reverse repurchase agreements, including
foreign reverse repurchase agreements. These agreements involve the sale of
debt securities (obligations) held by a Portfolio, with an agreement to
repurchase the obligations at an agreed upon price, date and interest payment.
The proceeds will be used to purchase other debt securities either maturing, or
under an agreement to resell, at a date simultaneous with or prior to the
expiration of the reverse repurchase agreement. Reverse repurchase agreements
will be utilized, when permitted by law, only when the interest income to be
earned from the investment of the proceeds from the transaction is greater than
the interest expense of the reverse repurchase transaction. When a Portfolio
enters into such an agreement, it will establish a segregated account with the
Fund's Custodian in which it will maintain cash or cash equivalents or other
liquid high grade debt obligations equal in value to the repurchase price
(which price will already include interest charges).
LENDING OF PORTFOLIO SECURITIES
Each Portfolio, except the Cash Management Portfolio, may seek to
increase its income by lending portfolio securities. A Portfolio would have the
right to call a loan and obtain the securities loaned at any time generally on
less than five days' notice. For the duration of a loan, a Portfolio would
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned and would also receive compensation from the
investment of the collateral. A Portfolio would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
a Portfolio would call the loan in anticipation of an important vote to be
taken among holders of the securities or of the giving or withholding of their
consent on a material matter affecting the investment.
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BORROWING
A Portfolio may borrow from a bank, but only for temporary or
emergency purposes. This borrowing may be unsecured. The 1940 Act requires a
Portfolio to maintain continuous asset coverage (that is, total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, a Portfolio may be required to sell some
of its portfolio holdings within three days to reduce the debt and restore the
300% asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time and could cause the Portfolio to be
unable to meet certain requirements for qualification as a regulated investment
company for Federal tax purposes. To avoid the potential leveraging effects of
a Portfolio's borrowings, a Portfolio will repay any money borrowed in excess
of 5% of its total assets prior to purchasing additional securities. Borrowing
may exaggerate the effect on a Portfolio's net asset value of any increase or
decrease in the market value of the Portfolio's portfolio securities. Money
borrowed will be subject to interest costs which may or may not be recovered by
appreciation of the securities purchased. 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.
FOREIGN SECURITIES
Except for the Government Portfolio, each Portfolio may invest,
without limit, (with respect to a maximum of 25% of the net assets of the Eagle
Growth Equity Portfolio) subject to the other investment policies applicable to
the Portfolio, in U.S. dollar-denominated and non-dollar denominated foreign
debt securities (including those issued by the Dominion of Canada and its
provinces and other securities which meet the criteria applicable to that
Portfolio's domestic investments), and in certificates of deposit issued by
foreign banks and foreign branches of United States banks, to any extent deemed
appropriate by the Adviser or Sub-Adviser. Based on the investment policies of
the Indexed Equity Portfolio, it most likely will not purchase any foreign
securities. Under current SEC rules relating to the use of the amortized cost
method of portfolio securities valuation, the Cash Management Portfolio is
restricted to purchasing U.S. dollar-denominated securities, but it is not
otherwise precluded from purchasing securities of foreign issuers.
Investments in foreign securities may involve considerations different
from investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and lower
liquidity, the possible imposition of withholding or confiscatory taxes, the
possible adoption of foreign governmental restrictions affecting the payment of
principal and interest, changes in currency exchange rates and currency
exchange control regulations, expropriation, or
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other adverse political or economic developments. In addition, it may be more
difficult to obtain and enforce a judgment against a foreign issuer or a
foreign branch of a domestic bank. Further, to the extent investments in
foreign securities are denominated in currencies of foreign countries, a
Portfolio may be affected favorably or unfavorably by changes in currency
exchange rates and in exchange control regulations and may incur costs in
connection with conversion between currencies.
FOREIGN CURRENCY TRANSACTIONS
Each Portfolio, except the Cash Management Portfolio and the
Government Portfolio, may, to the extent it invests in foreign securities,
enter into forward foreign currency exchange contracts in order to protect
against uncertainty in the level of future foreign currency exchange rates. It
is not expected that the Indexed Equity Portfolio will engage in any foreign
currency transactions. A Portfolio will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward
contracts to purchase or sell foreign currencies. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days (usually less
than one year) from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between 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. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the spread) between the price at which they are
buying and selling various currencies.
Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, each of the current Advisers and
Sub-Advisers believes that it is important to have the flexibility to enter
into such forward contracts when each determines that the best interest of a
Portfolio will be served. Generally, the Advisers and Sub-Advisers believe that
the best interest of a Portfolio will be served if a Portfolio is permitted to
enter into forward contracts under specified circumstances. First, when a
Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of foreign currency
involved in the underlying security transaction, a Portfolio will be able to
insulate itself from a possible loss resulting from a change in the
relationship between the U.S. dollar and the subject 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, although a Portfolio would also
forego any gain it might have realized had rates moved in the opposite
direction. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge."
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Second, when the Adviser or Sub-Adviser 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 to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of a Portfolio's portfolio securities denominated in such foreign currency.
Such a hedge (sometimes referred to as a "position hedge") will tend to offset
both positive and negative currency fluctuations, but will not offset changes
in security values caused by other factors. A Portfolio also may hedge the same
position by using another currency (or a basket of currencies) expected to
perform similarly to the hedged currency, when exchange rates between the two
currencies are sufficiently correlated ("proxy hedge"). 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 such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. With respect to positions that constitute "transaction" or
"position hedges" (including "proxy hedges"), a Portfolio will not enter into
forward contracts to sell currency or maintain a net exposure to such contracts
if the consummation of such contracts would obligate a Portfolio to deliver an
amount of foreign currency in excess of the value of a Portfolio's portfolio
securities or other assets denominated in that currency (or the related
currency, in the case of a proxy hedge).
Finally, a Portfolio may enter into forward contracts to shift its
investment exposure from one currency into another currency that is expected to
perform better relative to the U.S. dollar. This type of strategy, sometimes
known as a "cross-hedge," will tend to reduce or eliminate exposure to the
currency that is sold, and increase exposure to the currency that is purchased,
much as if a Portfolio had sold a security denominated in one currency and
purchased an equivalent security denominated in another. Cross-hedges protect
against losses resulting from a decline in the hedged currency, but will cause
a Portfolio to assume the risk of fluctuations in the value of the currency it
purchases.
At the consummation of the forward contract, a Portfolio may either
make delivery of the foreign currency or terminate its contractual obligation
to deliver the foreign currency by purchasing an offsetting contract obligating
it to purchase at the same maturity date the same amount of such foreign
currency. If a Portfolio chooses to make delivery of the foreign currency, it
may be required to obtain such currency for delivery through the sale of
portfolio securities denominated in such currency or through conversion of
other assets of a Portfolio into such currency. If a Portfolio engages in an
offsetting transaction, a Portfolio will realize a gain or a loss to the extent
that there has been a change in forward contract prices. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract.
A Portfolio's dealing in forward contracts will be limited to the
transactions described above. Of course, a Portfolio is not required to enter
into such transactions
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with regard to its foreign currency-denominated securities and will not do so
unless deemed appropriate by the Adviser. A Portfolio generally will not enter
into a forward contract with a term of greater than one year.
In cases other than transactions which constitute "transaction hedges"
or "position hedges" (including "proxy hedges"), a Portfolio will place cash
not available for investment or liquid debt securities (denominated in the
foreign currency subject to the forward contract) in a segregated account in an
amount equal to the value of a Portfolio's total assets committed to the
consummation of forward currency exchange contracts entered into as a hedge
against a substantial decline in the value of a particular foreign currency. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account by a Portfolio on a
daily basis so that the value of the account will equal the amount of a
Portfolio's commitments with respect to such contracts.
It should be realized that this method of protecting the value of a
Portfolio's portfolio securities against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which can be achieved at some future
point in time. It also reduces any potential gain which may have otherwise
occurred had the currency value increased above the settlement price of the
contract.
A Portfolio's foreign currency transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company.
The Advisers and Sub-Advisers believe active currency management can
be employed as an overall portfolio risk management tool. For example, in their
view, foreign currency management can provide overall portfolio risk
diversification when combined with a portfolio of foreign securities, and the
market risks of investing in specific foreign markets can at times be reduced
by currency strategies which may not involve the currency in which the foreign
security is denominated.
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BRADY BONDS
The Convertible, High Yield Corporate Bond and Total Return Portfolios
may each invest a portion of its assets in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to sovereign
entities for new obligations in connection with debt restructurings under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings have been
implemented in several countries, including Mexico, Uruguay, Venezuela,
Argentina, Costa Rica, Nigeria, the Philippines, Bulgaria, the Dominican
Republic, Bolivia, Ecuador, Niger, Poland and Jordan (collectively, the "Brady
Countries"). In addition, Brazil has concluded a Brady-like plan. It is
expected that other countries will undertake a Brady Plan debt restructuring in
the future, including Peru and Panama.
Brady Bonds have been issued only recently and, accordingly, do not
have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and 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
having 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 that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Brady Bonds are often
viewed as having three or four valuation components: (i) the collateralized
repayment of principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero coupon bonds
( or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for
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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 a 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.
Brady Bonds are not considered U.S. Government securities. In light of
factors, including the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
WHEN-ISSUED SECURITIES
Each Portfolio may from time to time purchase securities on a
"when-issued" basis. Debt securities are often issued in this manner. The price
of such securities, which may be expressed in yield terms, is fixed at the time
a commitment to purchase is made, but delivery of and payment for the
when-issued securities take place at a later date. Normally, the settlement
date occurs within one month of the purchase. During the period between
purchase and settlement, no payment is made by the Portfolio and no interest
accrues to the Portfolio. To the extent that assets of a Portfolio are held in
cash pending the settlement of a purchase of securities, that Portfolio would
earn no income; however, it is the Fund's intention that each Portfolio will be
fully invested to the extent practicable and subject to the policies stated
herein. Although when-issued securities may be sold prior to the settlement
date, each Portfolio intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time the Fund makes the commitment on behalf of a Portfolio to
purchase a security on a when-issued basis, it will record the transaction and
reflect the amount due and the value of the security in determining the
Portfolio's net asset value. The market value of the when-issued securities may
be more or less than the purchase price payable at the settlement date. The
Directors do not believe that a Portfolio's net asset value or income will be
exposed to additional risk by the purchase of securities on a when-issued
basis. Each Portfolio will establish a segregated account in which it will
maintain liquid assets at least equal in value to commitments for when-issued
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date.
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MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related securities are interests in pools of mortgage loans
made to residential home buyers, including mortgage loans made by savings and
loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations (see "Mortgage
Backed Securities," below). The Portfolios may also invest in debt securities
which are secured with collateral consisting of mortgage-related securities
(see "Collateralized Mortgage Obligations," at page 40), and in other types of
mortgage-related securities. The International Equity Portfolio will not
purchase mortgage-related securities or any other assets which in the opinion
of MacKay-Shields are illiquid, if, as a result, more than 15% of the value of
this Portfolio's assets will be illiquid.
MORTGAGE-BACKED SECURITIES. Interests in pools of mortgage-related
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 monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their 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. Some mortgage-related securities (such as securities issued by
the Government National Mortgage Association) 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.
Payment of principal and interest on some mortgage backed 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 agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage backed securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development.
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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
Veterans Administration-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved sellers/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the U.S. Government.
FHLMC was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. 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, but PCS are not backed by the
full faith and credit of the U.S. Government.
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. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental insurers 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. However, 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 and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
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. The Portfolios may buy
mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the originator/servicers
and poolers, each Portfolio's investment adviser determines that the
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securities meet the 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. No Portfolio will
purchase mortgage-related securities or any other assets which in the opinion
of the Portfolio's Adviser or Sub-Adviser are illiquid if, as a result, more
than 15% of the value of the Portfolio's total assets (10% with respect to the
Cash Management Portfolio, Growth Equity Portfolio and Bond Portfolio) will be
illiquid.
Early repayment of principal on mortgage backed securities (arising
from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Portfolio to a lower rate of return upon reinvestment of principal.
Also, if a security subject to prepayment has been purchased at a premium, the
value of the premium would be lost in the event of prepayment. Like other
fixed-income securities, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
are declining, the value of mortgage-related securities with prepayment
features may not increase as much as other fixed-income securities.
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 is paid on a CMO, 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 mortgages, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity class receive principal only
after the first call has been retired. An investor is partially guarded against
a sooner than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B,
or C Bonds currently being paid off. When the Series A, B, and C Bonds are paid
in full, interest and principal on the Series Z Bond begins to be paid
currently. With some
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CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCS, payments of principal and interest on the
FHLMC CMOs are made semiannually, as opposed to monthly. The amount of
principal payable on each semiannual payment date is determined in accordance
with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to
approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool
in excess of the amount of FHLMC's minimum sinking fund obligation for any
payment date are paid to the holders of the CMOs as additional sinking fund
payments. Because of the "pass-through" nature of all principal payments
received on the collateral pool in excess of FHLMC's minimum sinking fund
requirement, the rate at which principal of the CMOs is actually repaid is
likely to be such that each class of bonds will be retired in advance of its
scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCS. FHLMC has the right to substitute collateral
in the event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO RESIDUALS. CMO residuals are derivative mortgage securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
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The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on
the CMOs and second to pay the related administrative expenses of the issuer.
The residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making the foregoing payments. Each payment of such
excess cash flow to a holder of the related CMO residual represents income
and/or a return of capital. The amount of residual cash flow resulting from a
CMO will depend on, among other things, the characteristics of the mortgage
assets, the coupon rate of each class of CMO, prevailing interest rates, the
amount of administrative expenses and the prepayment experience on the mortgage
assets. In particular, the yield to maturity on CMO residuals is extremely
sensitive to prepayments on the related underlying mortgage assets, in the same
manner as an interest-only ("IO") class of stripped mortgage-backed securities.
See "Stripped Mortgage-Backed Securities." In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to
changes in the level of the index upon which interest rate adjustments are
based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances a Portfolio may fail to recoup fully its initial
investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or
dealers. The CMO residual market has only very recently developed and CMO
residuals currently may not have the liquidity of other more established
securities trading in other markets. Transactions in CMO residuals are
generally completed only after careful review of the characteristics of the
securities in question. In addition, CMO residuals may or, pursuant to an
exemption therefrom, may not have been registered under the 1933 Act, as
amended. CMO residuals, whether or not registered under such Act, may be
subject to certain restrictions on transferability, and may be deemed
"illiquid" and subject to a Portfolio's limitations on investment in illiquid
securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed
Securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying
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mortgage assets, and a rapid rate of principal payments may have a material
adverse effect on a Portfolio's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Portfolio may fail to fully recoup its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, these securities may be deemed
"illiquid" and subject to a Portfolio's limitations on investment in illiquid
securities.
OTHER ASSET-BACKED SECURITIES. Similarly, the Advisers and
Sub-Advisers expect that other asset-backed securities (unrelated to mortgage
loans) will be offered to investors in the future. Several types of
asset-backed securities have already been offered to investors, including
Certificates for Automobile Receivables (SM) ("CARS(SM)"). CARS(SM) represent
undivided fractional interests in a trust ("trust") whose assets consist of a
pool of motor vehicles 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 and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARS(SM) may be affected by
early prepayment of principal on the underlying vehicles' sales contracts. If
the letter of credit is exhausted, the trust may be prevented from realizing
the full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of Federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Consistent with a Portfolio's investment objective and policies, the
Adviser or Sub-Adviser also may invest in other types of asset-backed
securities.
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OPTIONS ON SECURITIES
Each Portfolio, except the Cash Management, Bond or Growth Equity
Portfolios, may purchase put or call options which are traded on an Exchange or
in the over-the-counter market. In addition, the Capital Appreciation,
Convertible, Government, High Yield Corporate Bond, American Century Income &
Growth, Dreyfus Large Company Value, Total Return, and Value Portfolios may
purchase puts and calls, other than "protective puts" in which the security to
be sold is identical or substantially identical to a security already held by
the Portfolios or to a security which the Portfolios have a right to purchase,
with a value of up to 5% of such Portfolios' respective net assets. The Capital
Appreciation, Convertible, High Yield Corporate Bond, Total Return, and Value
Portfolios may each purchase protective puts (in which the security to be sold
is identical or substantially identical to a security already held by the
Portfolio or to a security which the Portfolio has the right to purchase) with
a value of up to 25% of such Portfolios' respective net assets. The American
Century Income & Growth and Dreyfus Large Company Value Portfolios may each
purchase protective puts with a value of up to 20% of its net assets. The
Eagle Growth Equity Portfolio may also purchase protective puts. Options
traded in the over-the-counter market may not be as actively traded as those
listed on an Exchange. Accordingly, it may be more difficult to value such
options and to be assured that they can be closed out at any time. The
Portfolios will engage in such transactions only with firms of sufficient
creditworthiness so as to minimize these risks.
The Portfolios may purchase put options on securities to protect their
holdings in an underlying or related security against a substantial decline in
market value. Securities are considered related if their price movements
generally correlate with one another. The purchase of put options on securities
held in the portfolio or related to such securities will enable a Portfolio to
preserve, at least partially, unrealized gains occurring prior to the purchase
of the option on a portfolio security without actually selling the security. In
addition, a Portfolio will continue to receive interest or dividend income on
the security.
The Portfolios may also purchase call options on securities the
Portfolios intend to purchase to protect against substantial increases in
prices of such securities pending their ability to invest in an orderly manner
in such securities. In order to terminate an option position, the Portfolios
may sell put or call options identical to those previously purchased, which
could result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid on
the put or call option when it was purchased.
WRITING CALL OPTIONS. Any Portfolio, except the Cash Management, Bond
or Growth Equity Portfolios, may sell ("write") covered call options on the
portfolio securities of such Portfolio in an attempt to enhance investment
performance; however the Capital Appreciation, Convertible, Government, High
Yield Corporate Bond, Total Return, and Value Portfolios may write covered call
options with respect to no more than 25% of the value of their respective net
assets. The American Century Income & Growth and the Dreyfus Large Company
Value Portfolios may write covered call options
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with respect to no more than 20% of the value of their respective net assets.
A call option sold by a Portfolio is a short-term contract, having a duration
of nine months or less, which gives the purchaser of the option the right to
buy, and the writer of the option (in return for a premium received) the
obligation to sell, the underlying security at the exercise price upon the
exercise of the option at any time prior to the expiration date, regardless of
the market price of the security during the option period. The Portfolio covers
options it has sold by holding a position in the underlying securities (the
usual practice in the case of a call) or by other means which would permit
timely satisfaction of the Portfolio's obligations as writer of the option,
such as by depositing in a segregated account liquid assets equal in value to
the exercise price of the option (the usual practice in the case of a put). A
Portfolio's purpose in selling covered options is to realize greater income
than would be realized on portfolio securities transactions alone. Even a
Portfolio that is not designed to generate income might benefit from selling
covered options when the Adviser or Sub-Adviser believes that little risk is
involved. However, a Portfolio may forego the benefits of appreciation on
securities sold pursuant to call options, or pay a higher price for securities
acquired pursuant to put options written by the Portfolio.
A call option may be covered by, among other things, the writer's
owning the underlying security throughout the option period, or by holding, on
a share-for-share basis, a call on the same security as the call written, where
the exercise price of the call held is equal to or less than the price of the
call written, or greater than the exercise price of a call written if the
difference is maintained by a Portfolio in liquid assets in a segregated
account with its custodian.
A Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, a
Portfolio will give up the opportunity to profit from an increase in the market
price of the underlying security above the exercise price so long as its
obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the call option, the Portfolio will
retain the risk of loss should the price of the security decline, which loss
the premium is intended to offset in whole or in part. A Portfolio, in writing
call options, must assume that the call may be exercised at any time prior to
the expiration of its obligations as a writer, and that in such circumstances
the net proceeds realized from the sale of the underlying securities pursuant
to the call may be substantially below the prevailing market price. Covered
call options and the securities underlying such options will be listed on
national securities exchanges, except for certain transactions in options on
debt securities and foreign securities.
A Portfolio may protect itself from further losses due to a decline in
value of the underlying security or from the loss of ability to profit from
appreciation by buying an identical option, in which case the purchase cost may
offset the premium. In order to do this, a Portfolio makes a "closing purchase
transaction"--the purchase of a call option on
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the same security with the same exercise price and expiration date as the
covered call option which it has previously written on any particular security.
A Portfolio will realize a gain or loss from a closing purchase transaction if
the amount paid to purchase a call option in a closing transaction is less or
more than the amount received from the sale of the covered call option. Also,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the closing out of a call option is likely to be offset in whole or in
part by unrealized appreciation of the underlying security owned by a
Portfolio. When a security is to be sold from a Portfolio's portfolio, a
Portfolio will first effect a closing purchase transaction so as to close out
any existing covered call option on that security.
A closing purchase transaction may be made only on a national or
foreign securities exchange (an "Exchange") which provides a secondary market
for an option with the same exercise price and expiration date. There is no
assurance that a liquid secondary market on an Exchange or otherwise will exist
for any particular option, or at any particular time, and for some options no
secondary market on an Exchange or otherwise may exist. If a Portfolio is
unable to effect a closing purchase transaction involving an exchange-traded
option, a Portfolio will not sell the underlying security until the option
expires or a Portfolio delivers the underlying security upon exercise. A
closing purchase transaction for an over-the-counter option may be made only
with the other party to the option.
Each Portfolio pays brokerage commissions and dealer spreads in
connection with writing covered call options and effecting closing purchase
transactions, as well as for purchases and sales of underlying securities. The
writing of covered call options could result in significant increases in a
Portfolio's portfolio turnover rate, especially during periods when market
prices of the underlying securities appreciate. Subject to the limitation that
all call and put option writing transactions be covered, the Portfolios may, to
the extent determined appropriate by the Advisers, engage without limitation in
the writing of options on U.S. Government securities.
PURCHASING CALL OPTIONS. Each Portfolio, except the Cash Management,
Bond and Growth Equity Portfolios, may purchase call options on any securities
in which it may invest in anticipation of an increase in the market value of
such securities. The purchase of a call option would entitle the Portfolio, in
exchange for the premium paid, to purchase a security at a specified price upon
exercise of the option during the option period. The Portfolio would ordinarily
realize a gain if the value of the securities increased during the option
period above the exercise price sufficiently to cover the premium. The
Portfolio would have a loss if the value of the securities remained below the
sum of the premium and the exercise price during the option period.
WRITING PUT OPTIONS. Each Portfolio, except the Cash Management, Bond
and Growth Equity Portfolios, may also write covered put options. A put option
written by a Portfolio is "covered" if a Portfolio maintains liquid assets with
a value equal to the exercise price in a segregated account with its custodian;
however, the Capital
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Appreciation, Convertible, High Yield Corporate Bond, Total Return and Value
Portfolios may not write any covered put options, if, as a result, more than
25% of a Portfolio's total assets (taken at current value) would be subject to
put options written by such Portfolio. The American Century Income & Growth
and Dreyfus Large Company Value Portfolios may not write covered put options
if, as a result, more than 20% of their total assets (taken at current value)
would be subject to put options written by such Portfolio. The Government
Portfolio may not write any covered put options on U.S. Government securities
if, as a result, more than 50% of its total assets (taken at current value)
would be subject to put options written by such Portfolio. A put option is also
"covered" if a Portfolio holds on a share-for-share basis a put on the same
security as the put written, where the exercise price of the put held is equal
to or greater than the exercise price of the put written, or less than the
exercise price of the put written if the difference is maintained by a
Portfolio in liquid assets in a segregated account with its custodian.
The premium that a Portfolio receives from writing a put option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the
historical price volatility of the underlying security, the option period,
supply and demand and interest rates.
The Portfolios may effect a closing purchase transaction to realize a
profit on an outstanding put option or to prevent an outstanding put option
from being exercised. The Portfolios also may effect a closing purchase
transaction, in the case of a put option, to permit the Portfolios to maintain
their holdings of the deposited U.S. Treasury obligations, to write another put
option to the extent that the exercise price thereof is secured by the
deposited U.S. Treasury obligations, or to utilize the proceeds from the sale
of such obligations to make other investments.
If a Portfolio is able to enter into a closing purchase transaction, a
Portfolio will realize a profit or loss from such transaction if the cost of
such transaction is less or more than the premium received from the writing of
the option. After writing a put option, a Portfolio may incur a loss equal to
the difference between the exercise price of the option and the sum of the
market value of the underlying security plus the premium received from the sale
of the option.
In addition, the Portfolios may also write straddles (combinations of
covered puts and calls on the same underlying security). The extent to which
the Portfolios may write covered call options and enter into so-called
"straddle" transactions involving put or call options may be limited by the
requirements of the Code for qualification as a regulated investment company
and the Fund's intention that each Portfolio qualify as such. Subject to the
limitation that all call and put option writing transactions be covered, the
Portfolios may, to the extent determined appropriate by the Advisers or
Sub-Advisers, engage without limitation in the writing of options on U.S.
Government securities.
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PURCHASING PUT OPTIONS. Each Portfolio, except the Cash Management,
Bond and Growth Equity Portfolios, may purchase put options on any securities
in which it may invest in anticipation of a decline in the market value of such
securities. The purchase of a put option would entitle the Portfolio, in
exchange for the premium paid, to sell a security at a specified price upon
exercise of the option during the option period. The put options purchased by
the Portfolio may include, but are not limited to, "protective puts" in which
the security to be sold is identical or substantially identical to a security
already held by the Portfolio or to a security which the Portfolio has the
right to purchase. The Portfolio would ordinarily recognize a gain if the value
of the securities decreased during the option period below the exercise price
sufficiently to cover the premium. The Portfolio would recognize a loss if the
value of the securities remained above the difference between the premium and
the exercise price.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES. Exchange markets
in U.S. Government securities options are a relatively new and untested
concept, and it is impossible to predict the amount of trading interest that
may exist in such options. The same types of risk apply to over-the-counter
trading in options. There can be no assurance that viable markets will develop
or continue in the United States or abroad.
If a put or call option purchased by a 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, a Portfolio
will not be able to exercise profitably the option and will lose its entire
investment in the option. Also, the price of a put or call option purchased to
hedge against price movements in a related security may move more or less than
the price of the related security. A Portfolio will not purchase a put or call
option if, as a result, the amount of premiums paid for all put and call
options then outstanding would exceed 10% of the value of the Portfolio's total
assets.
OPTIONS ON FOREIGN CURRENCIES. Each Portfolio, except the Cash
Management, Government, Bond and Growth Equity Portfolios may, to the extent
that it invests in foreign securities, purchase and write options on foreign
currencies for hedging purposes in a manner similar to that of a Portfolio's
transactions in currency futures contracts or forward contracts. For example, a
decline in the dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against
such diminutions in the value of portfolio securities, a Portfolio may purchase
put options on the foreign currency. If the value of the currency does decline,
that Portfolio will have the right to sell such currency for a fixed amount of
dollars which exceeds the market value of such currency, resulting in a gain
that may offset, in whole or in part, the negative effect of currency
depreciation on the value of a Portfolio's securities denominated in that
currency.
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Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may purchase call options on such
currency. If the value of such currency does increase, the purchase of such
call options would enable a Portfolio to purchase currency for a fixed amount
of dollars which is less than the market value of such currency, resulting in a
gain that may offset, at least partially, the effect of any currency-related
increase in the price of securities a Portfolio intends to acquire. As in the
case of other types of options transactions, however, the benefit a Portfolio
derives from purchasing foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, if currency exchange
rates do not move in the direction or to the extent anticipated, a Portfolio
could sustain losses on transactions in foreign currency options which would
deprive it of a portion or all of the benefits of advantageous changes in such
rates.
A Portfolio may also write options on foreign currencies for hedging
purposes. For example, if a Portfolio anticipates a decline in the dollar value
of foreign currency-denominated securities due to declining exchange rates, it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset
by the amount of the premium received by a Portfolio.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a
Portfolio could write a put option on the relevant currency. If rates move in
the manner projected, the put option will expire unexercised and allow a
Portfolio to offset such increased cost up to the amount of the premium. As in
the case of other types of options transactions, however, the writing of a
foreign currency option will constitute only a partial hedge up to the amount
of the premium, and only if rates move in the expected direction. If
unanticipated exchange rate fluctuations occur, the option may be exercised and
a Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be fully offset by the amount of the premium. As a result of
writing options on foreign currencies, a Portfolio also may be required to
forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in currency exchange rates.
A call option written on foreign currency by a Portfolio is "covered"
if that Portfolio owns the underlying foreign currency subject to the call or
securities denominated in that currency or has an absolute and immediate right
to acquire that foreign currency without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if a Portfolio holds a call on the same foreign
currency for the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the
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amount of the difference is maintained by a Portfolio in liquid assets in a
segregated account with its Custodian.
As with other kinds of options transactions, however, the writing of
an option on foreign currency will constitute only a partial hedge up to the
amount of the premium received and a Portfolio could be required to purchase or
sell foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may constitute an
effective hedge against exchange rate fluctuations, although, in the event of
rate movements adverse to a Portfolio's position, a Portfolio may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by a Portfolio will be traded on U.S. and
foreign exchanges or over-the-counter. A Portfolio also may use foreign
currency options to protect against potential losses in positions denominated
in one foreign currency against another foreign currency in which the
Portfolio's assets are or may be denominated. 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.
Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Portfolio to reduce foreign
currency risk using such options. Over-the-counter options differ from traded
options in that they are two-party contracts with price and other terms
negotiated between buyer and seller and generally do not have as much market
liquidity as exchange-traded options. Foreign currency exchange-traded options
generally settle in cash, whereas options traded over-the-counter may settle in
cash or result in delivery of the underlying currency upon exercise of the
option.
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FUTURES TRANSACTIONS
The Convertible, Lord Abbett Developing Growth, Eagle Growth Equity,
Government, High Yield Corporate Bond, American Century Income & Growth,
International Equity, Dreyfus Large Company Value and Total Return Portfolios
may purchase and sell futures contracts on debt securities and on indexes of
debt securities to hedge against anticipated changes in interest rates that
might otherwise have an adverse effect upon the value of a Portfolio's
portfolio securities. Each of such Portfolios may also enter into such futures
contracts in order to lengthen or shorten the average maturity or duration of
the Portfolio's portfolio. For example, a Portfolio may purchase futures
contracts as a substitute for the purchase of longer-term debt securities to
lengthen the average duration of a Portfolio's portfolio of fixed-income
securities. The Capital Appreciation, Convertible, Lord Abbett Developing
Growth, Eagle Growth Equity, High Yield Corporate Bond, American Century Income
& Growth, International Equity, Dreyfus Large Company Value, Total Return,
Value, and Indexed Equity Portfolios may purchase and sell futures contracts on
stock index futures to hedge the equity portion of those Portfolios' securities
portfolios with regard to market (systematic) risk (involving the market's
assessment of overall economic prospects), as distinguished from stock-specific
risk (involving the market's evaluation of the merits of the issuer of a
particular security). These Portfolios may also purchase and sell other futures
when deemed appropriate, in order to hedge the equity or non-equity portions of
their portfolios. In addition, each Portfolio except the Cash Management,
Government, Bond and Growth Equity Portfolios may, to the extent it invests in
foreign securities, enter into contracts for the future delivery of foreign
currencies to hedge against changes in currency exchange rates. Each of the
Portfolios, except the Cash Management, Bond and Growth Equity Portfolios, may
also purchase and write put and call options on futures contracts of the type
into which such Portfolio is authorized to enter and may engage in related
closing transactions. In the United States, all such futures on debt
securities, debt index futures, stock index futures, foreign currency futures
and related options will be traded on exchanges that are regulated by the
Commodity Futures Trading Commission ("CFTC"). Subject to applicable CFTC
rules, the Portfolios also may enter into futures contracts traded on the
following foreign futures exchanges: Frankfurt, Tokyo, London and Paris, as
long as trading on the aforesaid foreign futures exchanges does not subject a
Portfolio to risks that are materially greater than the risks associated with
trading on U.S. exchanges.
A futures contract is an agreement to buy or sell a security or
currency (or to deliver a final cash settlement price in the case of a contract
relating to an index or otherwise not calling for physical delivery at the end
of trading in the contract), for a set price in a future month. In the United
States, futures contracts are traded on boards of trade which have been
designated "contract markets" by the CFTC. Futures contracts trade on these
markets through an "open outcry" auction on the exchange floor. Currently,
there are futures contracts based on long-term U.S. Treasury bonds, Treasury
notes, GNMA certificates, three-month U.S. Treasury bills, three-month
domestic bank
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certificates of deposit, major foreign currencies, a municipal bond index and
various stock indexes. When interest rates are changing and portfolio values
are falling, the sale of futures contracts can offset a decline in the value of
a Portfolio's current portfolio securities. When interest rates are changing
and portfolio values are rising, the purchase of futures contracts can secure
better effective rates or prices for the Portfolio than might later be
available in the market when the Portfolio makes anticipated purchases. The
purchase of futures contracts can also be used as a substitute for the purchase
of longer-term securities to lengthen the average maturity or duration of a
Portfolio's portfolio. Similarly, a Portfolio can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A
Portfolio can purchase futures contracts on foreign currency to fix the price
in U.S. dollars of a security denominated in such currency that a Portfolio has
acquired or expects to acquire.
When a purchase or sale of a futures contract is made by a Portfolio,
a Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange 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 a Portfolio upon
termination of the contract assuming all contractual obligations have been
satisfied. Each 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 a
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." Variation margin does not represent a borrowing or loan by a Portfolio
but is instead a settlement between a 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. If
the price of a futures contract changes more than the price of the securities
or currencies, the Portfolio will experience either a loss or gain on the
futures contracts which will not be completely offset by changes in the price
of the securities or currencies which are the subject of the hedge. In
addition, it is not possible to hedge fully or perfectly against currency
fluctuations affecting the value of securities denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
A Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by a Portfolio.
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Positions taken in the futures markets are not normally held until
delivery or final cash settlement is required, but are instead liquidated
through offsetting transactions which may result in a gain or a loss. While
futures positions taken by a Portfolio will usually be liquidated in this
manner, a Portfolio may instead make or take delivery of underlying securities
or currencies whenever it appears economically advantageous to a Portfolio to
do so. A clearing organization associated with the exchange on which futures
are traded assumes responsibility for closing-out transactions and guarantees
that as between the clearing members of an exchange, the sale and purchase
obligations will be performed with regard to all positions that remain open at
the termination of the contract.
FUTURES ON DEBT SECURITIES. A futures contract on a debt security is
a binding contractual commitment which, if held to maturity, will result in an
obligation to make or accept delivery, during a particular future month, of
securities having a standardized face value and rate of return. By purchasing
futures on debt securities--assuming a "long" position--a Portfolio will
legally obligate itself to accept the future delivery of the underlying
security and pay the agreed-upon price. By selling futures on debt
securities--assuming a "short" position--it will legally obligate itself to
make the future delivery of the security against payment of the agreed-upon
price. Open futures positions on debt securities will be valued at the most
recent settlement price, unless such price does not appear to the Directors to
reflect the fair value of the contract, in which case the positions will be
valued by or under the direction of the Directors.
Hedging by use of futures on debt securities seeks to establish, more
certainly than would otherwise be possible, the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short" position in
the futures market by selling contracts for the future delivery of debt
securities held by a Portfolio (or securities having characteristics similar to
those held by a Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of a Portfolio's portfolio
securities. When hedging of this character is successful, any depreciation in
the value of portfolio securities will be substantially offset by appreciation
in the value of the futures position.
On other occasions, a Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when a
Portfolio intends to purchase particular securities and it has the necessary
cash, but expects the rate of return available in the securities markets at
that time to be less favorable than rates currently available in the futures
markets. If the anticipated rise in the price of the securities should occur
(with its concomitant reduction in yield), the increased cost to a Portfolio of
purchasing the securities will be offset, at least to some extent, by the rise
in the value of the futures position taken in anticipation of the subsequent
securities purchase. A Portfolio may also purchase futures contracts as a
substitute for the purchase of longer-term securities to lengthen the average
duration of the Portfolio's portfolio.
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A Portfolio could accomplish similar results by selling securities
with long maturities and investing in securities with short maturities when
interest rates are expected to increase or by buying securities with long
maturities and selling securities with short maturities when interest rates are
expected to decline. However, by using futures contracts as a risk management
technique, given the greater liquidity in the futures market than in the cash
market, it may be possible to accomplish the same result more easily and more
quickly.
SECURITIES INDEX FUTURES. A securities 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 and the futures positions are simply closed out.
Changes in the market value of a particular stock index futures contract
reflect changes in the specified index of equity securities on which the
contract is based. A stock index is designed to reflect overall price trends in
the market for equity securities.
Stock index futures may be used to hedge the equity portion of a
Portfolio's securities portfolio with regard to market (systematic) risk, as
distinguished from stock-specific risk. The Portfolios may enter into stock
index futures to the extent that they have equity securities in their
portfolios. Similarly, the Portfolios may enter into futures on debt securities
indexes to the extent they have debt securities in their portfolios. By
establishing an appropriate "short" position in securities index futures, a
Portfolio may seek to protect the value of its portfolio against an overall
decline in the market for securities. Alternatively, in anticipation of a
generally rising market, a Portfolio can seek to avoid losing the benefit of
apparently low current prices by establishing a "long" position in securities
index futures and later liquidating that position as particular securities are
in fact acquired. To the extent that these hedging strategies are successful, a
Portfolio will be affected to a lesser degree by adverse overall market price
movements, unrelated to the merits of specific portfolio securities, than would
otherwise be the case. A Portfolio may also purchase futures on debt securities
or indexes as a substitute for the purchase of longer-term debt securities to
lengthen the average duration of a Portfolio's debt portfolio.
CURRENCY FUTURES. A sale of a currency futures contract creates an
obligation by a Portfolio, as seller, to deliver the amount of currency called
for in the contract at a specified future time for a specified price. A
purchase of a currency futures contract creates an obligation by a Portfolio,
as purchaser, to take delivery of an amount of currency at a specified future
time at a specified price. A Portfolio may sell a currency futures contract, if
the Adviser or Sub-Adviser anticipates that exchange rates for a particular
currency will fall, as a hedge against a decline in the value of a Portfolio's
securities denominated in such currency. If the Adviser anticipates that
exchange rates will rise, a Portfolio may purchase a currency futures contract
to protect against an increase in the price of
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securities denominated in a particular currency a Portfolio intends to
purchase. Although the terms of currency futures contracts specify actual
delivery or receipt, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the currency.
Closing out of a currency futures contract is effected by entering into an
offsetting purchase or sale transaction. To offset a currency futures contract
sold by a Portfolio, a Portfolio purchases a currency futures contract for the
same aggregate amount of currency and delivery date. If the price in the sale
exceeds the price in the offsetting purchase, a Portfolio is immediately paid
the difference. Similarly, to close out a currency futures contract purchased
by a Portfolio, a Portfolio sells a currency futures contract. If the
offsetting sale price exceeds the purchase price, a Portfolio realizes a gain,
and if the offsetting sale price is less than the purchase price, a Portfolio
realizes a loss.
A risk in employing currency futures contracts to protect against the
price volatility of portfolio securities denominated in a particular currency
is that changes in currency exchange rates or in the value of the futures
position may correlate imperfectly with changes in the cash prices of a
Portfolio's securities. The degree of correlation may be distorted by the fact
that the currency futures market may be dominated by short-term traders seeking
to profit from changes in exchange rates. This would reduce the value of such
contracts for hedging purposes over a short-term period. Such distortions are
generally minor and would diminish as the contract approached maturity. Another
risk is that the Adviser could be incorrect in its expectation as to the
direction or extent of various exchange rate movements or the time span within
which the movements take place.
OPTIONS ON FUTURES. For bona fide hedging and other appropriate risk
management purposes, the Portfolios, except the Cash Management, Bond and
Growth Equity Portfolios, also may purchase and write call and put options on
futures contracts which are traded on exchanges that are licensed and regulated
by the CFTC for the purpose of options trading, or, subject to applicable CFTC
rules, on foreign exchanges. A "call" option on a futures contract gives the
purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a "long" position) at a specified exercise price at any time
before the option expires. A "put" option gives the purchaser the right, in
return for the premium paid, to sell a futures contract (assume a "short"
position), for a specified exercise price at any time before the option
expires.
Upon the exercise of a "call," the writer of the option is obligated
to sell the futures contract (to deliver a "long" position to the option
holder) at the option exercise price, which will presumably be lower than the
current market price of the contract in the futures market. Upon exercise of a
"put," the writer of the option is obligated to purchase the futures contract
(deliver a "short" position to the option holder) at the option exercise price,
which will presumably be higher than the current market price of the contract
in the futures market. When an entity exercises an option and assumes a long
futures position, in the case of a "call," or a short futures position, in the
case of a
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"put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However,
as with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect
an increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Portfolio to hedge
substantially the same risks and for the same duration and risk management
purposes as might be addressed or served by the direct purchase or sale of the
underlying futures contracts. If a Portfolio purchases an option on a futures
contract, it may obtain benefits similar to those that would result if it held
the futures position itself.
The purchase of put options on futures contracts is a means of hedging
a Portfolio's portfolio against the risk of rising interest rates, declining
securities prices or declining exchange rates for a particular currency. The
purchase of a call option on a futures contract represents a means of hedging
against a market advance affecting securities prices or currency exchange rates
when a Portfolio is not fully invested or of lengthening the average maturity
or duration of a Portfolio's portfolio. Depending on the pricing of the option
compared to either the futures contract upon which it is based or upon the
price of the underlying securities or currencies, it may or may not be less
risky than ownership of the futures contract or underlying securities or
currencies.
In contrast to a futures transaction, in which only transaction costs
are involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, a Portfolio will not be subject to a risk of
loss on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in
the value of its portfolio securities or the currencies in which such
securities are denominated that would have been more completely offset if the
hedge had been effected through the use of futures.
If a Portfolio writes options on futures contracts, a Portfolio will
receive a premium but will assume a risk of adverse movement in the price of
the underlying futures contract comparable to that involved in holding a
futures position. If the option is not exercised, a Portfolio will realize a
gain in the amount of the premium, which may partially offset unfavorable
changes in the value of securities held by or to be acquired for a Portfolio.
If the option is exercised, a Portfolio will incur a loss in the option
transaction, which will be reduced by the amount of the premium it has
received, but which may partially offset favorable changes in the value of its
portfolio securities or the currencies in which such securities are
denominated.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the underlying securities or the
currencies in which such securities are denominated. If the futures price at
expiration is below the exercise price, a
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Portfolio will retain the full amount of the option premium, which provides a
partial hedge against any decline that may have occurred in a Portfolio's
holdings of securities or the currencies in which such securities are
denominated.
The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if a Portfolio writes a put option
on a futures contract on debt securities related to securities that a Portfolio
expects to acquire and the market price of such securities increases, the net
cost to a Portfolio of the debt securities acquired by it will be reduced by
the amount of the option premium received. Of course, if market prices have
declined, a Portfolio's purchase price upon exercise may be greater than the
price at which the debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option
of the same series, a Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the maintenance of a
liquid market. The Portfolios will not purchase or write options on futures
contracts unless the market for such options has sufficient liquidity such that
the risks associated with such options transactions are not at unacceptable
levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS. The Portfolios which engage in transactions in futures
contracts and related options do so only for bona fide hedging and other
appropriate risk management purposes, and not for speculation. A Portfolio will
not enter into a futures contract or futures option contract if, immediately
thereafter, the aggregate initial margin deposits relating to such positions
plus premiums paid by it for open futures option positions, less the amount by
which any such options are "in-the-money," would exceed 5% of a Portfolio's
total assets. 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 put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, a Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are
equal to the market value of the futures contract. Alternatively, a Portfolio
may "cover" its position by purchasing a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held by a Portfolio.
When selling a futures contract, a Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
a Portfolio may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the
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futures contract is based), or by holding a call option permitting a Portfolio
to purchase the same futures contract at a price no higher than the price of
the contract written by a Portfolio (or at a higher price if the difference is
maintained in liquid assets with a Portfolio's custodian).
When selling a call option on a futures contract, a Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash, U.S.
Government securities, or other highly liquid debt securities that, when added
to the amounts deposited with a futures commission merchant as margin, equal
the total market value of the futures contract underlying the call option.
Alternatively, a Portfolio may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike
price of the call option, by owning the instruments underlying the futures
contract, or by holding a separate call option permitting a Portfolio to
purchase the same futures contract at a price not higher than the strike price
of the call option sold by a Portfolio.
When selling a put option on a futures contract, a Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash, U.S.
Government securities, or other highly liquid debt securities that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, a Portfolio may cover the position either by entering into a
short position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by a Portfolio.
In order to comply with applicable regulations of the CFTC pursuant to
which the Portfolios avoid being deemed a "commodity pool," the Portfolios are
limited in their futures trading activities to positions which constitute "bona
fide hedging" positions within the meanings and intent of applicable CFTC
rules, or to positions which qualify under an alternative test. Under this
alternative test, the "underlying commodity value" of each long position in a
commodity contract in which a Portfolio invests may not at any time exceed the
sum of: (1) the value of short-term U.S. debt obligations or other U.S.
dollar-denominated high quality short-term money market instruments and cash
set aside in an identifiable manner, plus any funds deposited as margin on the
contract; (2) unrealized appreciation on the contract held by the broker; and
(3) cash proceeds from existing investments due in not more than 30 days.
"Underlying commodity value" means the size of the contract multiplied by the
daily settlement price of the contract.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Portfolio may enter into futures, futures
options or forward contracts. See Tax Status.
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several
risks associated with the use of futures contracts and futures options as
hedging techniques. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. There can be
no guarantee that there will
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be a correlation between price movements in the hedging vehicle and in the
Portfolio's securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. 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.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. 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.
There can be no assurance that a liquid market will exist at a time
when a Portfolio seeks to close out a futures or a futures option position, and
that Portfolio would remain obligated to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
It is also possible that, when a Portfolio has sold stock index
futures to hedge its portfolio against a decline in the market, the market may
advance while the value of the particular securities held in the Portfolio's
portfolio may decline. If this occurred, the Portfolio would incur a loss on
the futures contracts and also experience a decline in the value of its
portfolio securities. The Portfolios do not intend to use U.S. stock index
futures to hedge positions in securities of non-U.S. companies. In the case of
a futures contract on an index, the amount of cash is equal to a specific
dollar amount times the difference between the price at which the agreement is
made and the value of an index at the close of the last trading day of the
contract. No physical delivery of the underlying securities in the index is
made.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out
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positions in such options will be subject to the development and maintenance of
a liquid market in the options. It is not certain that such a market will
develop. Although the Portfolios generally will purchase only those options for
which there appears to be an active market, there is no assurance that a liquid
market on an exchange will exist for any particular option or at any particular
time. In the event no such market exists for particular options, it might not
be possible to effect closing transactions in such options with the result that
a Portfolio would have to exercise options it has purchased in order to realize
any profit and would be less able to limit its exposure to losses on options it
has written.
SECURITIES INDEX OPTIONS
The Portfolios, except the Bond and Growth Equity Portfolios, may
purchase call and put options on securities indexes, including European and
American options, for the purpose of hedging against the risk of unfavorable
price movements adversely affecting the value of a Portfolio's securities.
Unlike a securities option, which gives the holder the right to purchase or
sell specified securities at a specified price, an option on a securities index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the difference between the exercise price of the option and the value of
the underlying securities index on the exercise date, multiplied by (ii) a
fixed "index multiplier."
A securities index fluctuates with changes in the market values of the
securities so included. For example, some securities index options are based on
a broad market index such as the S&P Index of 500 Common Stocks or the N.Y.S.E.
Composite Index, or a narrower market index such as the S&P 100 Index. Indexes
may also be based on an industry or market segment such as the AMEX Oil and Gas
Index or the Computer and Business Equipment Index. Options on stock indexes
are currently traded on the following exchanges, among others: The Chicago
Board Options Exchange, New York Stock Exchange, and American Stock Exchange.
Options on other types of securities indexes, which do not currently exist,
including indexes on debt securities, may be introduced and traded on exchanges
in the future. If such options are introduced, the Portfolios will not purchase
them until they have appropriately amended or supplemented the Prospectus or
Statement of Additional Information, or both.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by a Portfolio will not exactly match the
securities represented in the securities indexes on which options are based. In
addition, the purchase of securities index options involves essentially the
same risks as the purchase of options on futures contracts. The principal risk
is that the premium and transaction costs paid by a Portfolio in purchasing an
option will be lost as a result of unanticipated movements in prices of the
securities comprising the securities index on which the option is based.
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A Portfolio may sell securities index options prior to expiration in
order to close out its positions in securities index options which it has
purchased. A Portfolio may also allow options to expire unexercised.
ADDITIONAL INVESTMENT POLICIES APPLICABLE TO THE
INTERNATIONAL EQUITY PORTFOLIO
In addition to the investment policies set forth above, the
International Equity Portfolio may enter the following transactions described
below:
SWAP AGREEMENTS
The International Equity Portfolio may enter into interest rate, index
and currency exchange rate swap agreements for purposes of attempting to obtain
a particular desired return at a lower cost to the Portfolio than if the
Portfolio had invested directly in an instrument that yielded that desired
return or for other portfolio management purposes. 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 differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are 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, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Commonly used swap agreements include (i)
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap", (ii) interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor" and (iii) interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels. The "notional amount" of the swap agreement is only
a fictive basis on which to calculate the obligations which the parties to a
swap agreement have agreed to exchange. The Portfolio's obligations (or rights)
under a swap agreement will generally be equal only to the net amount to be
paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the "net amount"). The
Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of liquid assets to avoid any potential
leveraging of the Portfolio's portfolio. The Portfolio will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Portfolio's
assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective will depend on the Adviser's ability
correctly to predict whether
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certain types of investments are likely to produce greater returns than other
investments. Because they are two party contracts and because they may have
terms of greater than seven days, swap agreements may be considered to be
illiquid. 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. The Adviser will cause the Portfolio to enter
into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Portfolio's
repurchase agreement guidelines. Certain restrictions imposed on the Portfolios
by the Internal Revenue Code may limit the Portfolio's ability to use swap
agreements. 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.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved
by the Commodity Futures Trading Commission ("CFTC") effective February 22,
1993. To qualify for this exemption, a swap agreement must be entered into by
"eligible participants," which includes the following, provided the
participants' total assets exceed established levels: a bank or trust company,
savings association or credit union, insurance company, investment company
subject to regulation under the 1940 Act, commodity pool, corporation,
partnership, proprietorship, organization, trust or other entity, employee
benefit plan, governmental entity, broker-dealer, futures commission merchant,
natural person, or regulated foreign person. To be eligible, natural persons
and most other entities must have total assets exceeding $10 million; commodity
pools and employee benefit plans must have assets exceeding $5 million. In
addition, an eligible swap transaction must meet three conditions. First, the
swap agreement may not be part of a fungible class of agreements that are
standardized as to their material economic terms. Second, the creditworthiness
of parties with actual or potential obligations under the swap agreement must
be a material consideration in entering into or determining the terms of the
swap agreement, including pricing, cost or credit enhancement terms. Third,
swap agreements may not be entered into and traded on or through a multilateral
transaction execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with
a line of business, and (4) are not marketed to the public.
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STATE INSURANCE LAW REQUIREMENTS
Applicable state insurance laws and regulations permit NYLIAC to
invest the assets allocated to NYLIAC's variable annuity and variable life
insurance separate accounts in mutual funds, which are the investments
contractually permitted by the Policies. As a Delaware insurance company doing
business in New York, NYLIAC is required by section 4240 of the New York
Insurance Law to invest such assets prudently. Subject to the direction of the
Directors, the Advisers will make investments satisfying this requirement for
each Portfolio. In addition, the Fund will comply with restrictions contained
in any other insurance laws in order that the assets of NYLIAC's separate
accounts may be invested in Portfolio shares.
PORTFOLIO TURNOVER
Each Portfolio has a different expected annual portfolio turnover
rate, which is calculated by dividing the lesser of purchases or sales of
portfolio securities during the fiscal year by the monthly average of the value
of the Portfolio's securities (excluding from the computation all securities,
including options, with maturities or expiration dates at the time of
acquisition of one year or less). A high portfolio turnover rate generally
involves correspondingly greater brokerage commission expenses, which must be
borne directly by the Portfolios. Turnover rates may vary greatly from year to
year as well as within a particular year and may also be affected by cash
requirements for redemptions of each Portfolio's shares and by requirements
which enable the Fund to receive certain favorable tax treatments.
For the years ending December 31, 1997, December 31, 1996 and December
31, 1995, the portfolio turnover rate for each of the following Portfolios was
as follows: Capital Appreciation Portfolio, _____ %, 15.64%, and 34.83%,
respectively; Government Portfolio, _____ , 303.83%, and 591.59%,
respectively; Total Return Portfolio, _____%, 174.77%, and 253.00%,
respectively; Bond Portfolio, ____ %, 103.02%, and 80.86%, respectively; Growth
Equity Portfolio, _____ %, 104.13%, and 104.07%, respectively; and Indexed
Equity, _____%, 3.11%, and 4.99%, respectively. With respect to the Cash
Management Portfolio, the portfolio turnover rate for the years ended December
31, 1997, December 31, 1996, and December 31, 1995 as calculated in accordance
with applicable SEC regulations, was _____% and 0%. For the years ended
December 31, 1997, and December 31,1996, the turnover rate for each of the
following Portfolios was as follows: High Yield Corporate Bond Portfolio,
____% and 148.74%, respectively; International Equity, _____% and 40.79%,
respectively. For the period May 1, 1995 (commencement of operations) through
December 31, 1995 the unannualized portfolio turnover rate for the Portfolios
was as follows: High Yield Corporate Bond, 94.98%; International Equity,
13.65%; and Value Portfolio, 19.75%. For the period ending December 31, 1997
the portfolio turnover rate for Convertible Portfolio was _____%. For the
period October 1, 1996 (Commencement of Operations) through December 31, 1996,
the unannualized portfolio turnover rate for the Convertible Portfolio was
15.09%.
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As the Lord Abbett Developing Growth, Eagle Growth Equity, American
Century Income & Growth, and Dreyfus Large Company Value Portfolios were
established after the effective date of this Statement of Additional
Information, portfolio turnover rates are not available for these Portfolios.
The turnover rates for these Portfolios [are/are not] expected to exceed 100%.
A turnover rate in excess of 100% is likely to result in a Portfolio's bearing
higher brokerage costs.
MANAGEMENT OF THE FUND
The directors and executive officers of the Fund and their principal
occupations for the past five years are set forth below. Each director of the
Fund is also a director of the New York Life Fund, Inc.
<TABLE>
<S> <C> <C> <C>
Name and Address** Age Position(s) Held Principal Occupation(s) During Past Five Years
With Registrant
Michael J. Drabb 63 Director Executive Vice President and Director of O'Brien
Asset Management, Inc., from August 1993 to
date, Executive Vice President of The Mutual
Life Insurance Company of New York ("MONY") from
May 1989 to April 1992. Mr. Drabb is also a
Director of the following Corporations: New York
Life Settlement Corporation, MONY Series Fund,
J.P. Food Services, Inc., and United States
Leather.
Jill Feinberg 42 Director Consultant, Jill Feinberg & Company from 1989 to
date. Ms. Feinberg is also a Director of New
York Life Settlement Corporation.
Daniel Herrick 76 Director Treasurer and Senior Executive, National Gallery
of Art, Washington, D.C. from December 1985 to
June 1995.
Richard M. Kernan, Jr.* 56 Chairman of the Executive Vice President and Chief Investment
Board, Chief Officer of New York Life Insurance Company from
Executive Officer September 1995 to date; Executive Vice President
and Director prior thereto.
Anne F. Pollack* 41 President, Chief Senior Vice President of New York Life Insurance
Administrative Company from March 1992 to date.
Officer and
Director
Robert D. Rock* 42 Vice President and Senior Vice President in charge of the
Director Individual Annuity Department of New York Life
Insurance Company March 1991 to date.
Roman L. Weil 56 Director Professor of Accounting and Sigmund E. Edelstone
Professor of Accounting, Graduate School of
Business, University of Chicago, from September
1976 to present, Visiting Professor of Law,
Stanford University Law School, from September
1990 to August 1996.
</TABLE>
- 67 -
<PAGE> 106
OFFICERS (OTHER THAN DIRECTORS)
<TABLE>
<S> <C> <C> <C>
Name and Address** Age Position(s) Held Principal Occupation(s) During Past Five Years
With Registrant
Anthony W. Polis 52 Treasurer Vice President of New York Life Insurance
Company from 1988 to date.
Marc J. Chalfin 50 Controller Senior Vice President and Controller of New York
Life Insurance Company from March 1995 to date;
Vice President and Controller from February 1994
to date; Vice President and Deputy Controller
from March 1991 to February 1994.
John Weisser __ Director __________________
</TABLE>
- ------------------------
* Directors identified with an asterisk are considered to be interested
persons of the Fund within the meaning of the 1940 Act because of
their affiliation with New York Life. None of the directors and
executive officers of the Fund owns any stock of the Fund.
** The address of each director and executive officer is 51 Madison
Avenue, New York, New York 10010.
For services rendered to the Fund during the fiscal year ended
December 31, 1997, the directors received an aggregate of $______ from the Fund
as directors' fees. Each director of the Fund who is not an interested person
of the Fund currently receives a fee of $16,000 per year plus $750 for each
meeting attended, and is reimbursed for out-of-pocket expenses incurred in
connection with attending meetings. No director or officer of the Fund who is
also a director, officer or employee of New York Life is entitled to any
compensation from the Fund for services to the Fund. The following
Compensation Table reflects all compensation paid by the Fund for the year
ended December 31, 1997, for each of the following persons:
- 68 -
<PAGE> 107
COMPENSATION TABLE
<TABLE>
<CAPTION>
Name of Person, Position Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Registrant and
From Registrant Benefits Retirement Fund Complex Paid
Accrued as to Directors
Part
of Fund
Expenses
<S> <C> <C> <C> <C>
Michael J. Drabb, _______ $ 0 $ 0 _______
Director
Jill Feinberg , Director _______ 0 0 _______
Daniel Herrick, Director _______ 0 0 _______
Richard M. Kernan, Jr., 0 0
Director 0 0
Anne F. Pollack, Director 0 0 0 0
Robert D. Rock, Director 0 0 0 0
Roman L. Weil, Director _______ 0 0 _______
John Weisser
------ --- --- -------
TOTAL _______
=======
</TABLE>
INVESTMENT ADVISERS
Pursuant to the Investment Advisory Agreements for the Capital
Appreciation, Cash Management, Government, High Yield Corporate Bond,
International Equity, Total Return Value and Indexed Equity Portfolios, dated
December 15, 1996 and the Investment Advisory Agreement for the Convertible
Portfolio dated August 22, 1996, MacKay-Shields or Monitor, each subject to the
supervision of the Directors of the Fund and in conformity with the stated
policies of each Portfolio of the Fund, manages the investment operations of
the respective portfolios that it advises and the composition of each such
Portfolio's portfolio, including the purchase, retention, disposition and loan
of securities. New York Life will perform these services for the Bond and
Growth Equity Portfolios pursuant to an Investment Advisory Agreement dated
December 15, 1996.
Each Investment Advisory Agreement will remain in effect for two years
following its effective date, and will continue in effect thereafter only if
such continuance is specifically approved at least annually by the Directors or
by vote of a majority of the outstanding voting securities of the particular
Portfolio (as defined in the 1940 Act and in a rule under the Act) and, in
either case, by a majority of the Directors who are not parties to the
Investment Advisory Agreements or interested persons of any such party.
- 69 -
<PAGE> 108
The Advisers have each authorized any of their directors, officers and
employees who have been elected or appointed as directors or officers of the
Fund to serve in the capacities in which they have been elected or appointed.
In connection with the services it renders, MacKay-Shields, New York Life or
Monitor bears the salaries and expenses of all of its personnel.
Other than as imposed by law, the Investment Advisory Agreements provide that
MacKay-Shields, New York Life or Monitor shall not be liable to the Portfolios
for any error of judgment by MacKay-Shields, New York Life or Monitor or for
any loss sustained by the Funds or NYLIFE Securities, Inc. except in the case
of willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. Each Agreement also provides that it shall terminate automatically if
assigned and that it may be terminated without penalty by either party upon no
more than 60 days nor less than 30 days written notice.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's
500", and "500" are trademarks of Standard & Poor's Corporation and have been
licensed for use by Monitor. The Indexed Equity Portfolio is not sponsored,
endorsed, sold or promoted by S&P and S&P makes no representation regarding the
advisability of investing in the Indexed Equity Portfolio.
New York Life will serve as Investment Adviser to the Dreyfus Large
Company Value, American Century Income & Growth, Lord Abbett Developing Growth
and Eagle Growth Equity Portfolios pursuant to an Investment Advisory
Agreement, subject to the supervision of the Directors of the Fund and in
conformity with the stated policies of the Portfolios, and will administer the
Portfolios' business affairs and has investment advisory responsibilities. As
described more fully below, the Investment Adviser has delegated day to day
Portfolio management responsibilities to certain Sub-Advisers.
The Investment Advisory Agreement will remain in effect for two years
following its effective date, and will continue in effect thereafter only if
such continuance is specifically approved at least annually by the Directors or
by vote of a majority of the outstanding voting securities of each of the
Portfolios (as defined in the 1940 Act and in a rule under the Act) and, in
either case, by a majority of the Directors who are not "interested persons" of
the Fund or the Investment Adviser (as the term is defined in the 1940 Act).
New York Life has authorized any of its directors, officers and
employees who have been elected or appointed as Directors or officers of the
Fund to serve in the capacities in which they have been elected or appointed.
The Investment Advisory Agreement provides that New York Life shall
not be liable to a Portfolio for any error in judgment by New York Life or for
any loss sustained by a Portfolio except in the case of New York Life's willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Investment Advisory Agreement also
- 70 -
<PAGE> 109
provides that it shall terminate automatically if assigned and that it may be
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
Pursuant to Sub-Advisory Agreements between New York Life and each of
American Century Investment Management, on behalf of the American Century
Income & Growth Portfolio; the Dreyfus Corporation, on behalf of the Dreyfus
Large Company Value Portfolio; Eagle Asset Management, on behalf of the Eagle
Growth Equity Portfolio; and Lord Abbett, on behalf of the Lord Abbett
Developing Growth Portfolio (each a "Sub-Adviser" and collectively, the
"Sub-Advisers"). The Sub-Advisers have been delegated day-to-day
responsibility for the investment decisions of the Portfolios. The
Sub-Advisers, subject to the supervision of the Directors of the Fund and New
York Life and in conformity with the stated policies of each of the Portfolios
and the Fund, manage their respective Portfolios, including the purchase,
retention, disposition and loan of securities.
The Sub-Advisory Agreements will remain in effect for two years
following their effective date, and will continue in effect thereafter only if
such continuance is specifically approved at least annually by the Director or
by a vote of the majority of the outstanding voting securities of each of the
Portfolios (as defined in the 1940 Act in a rule under the Act) and, in either
case, by a majority of the Directors who are not "interested persons" of the
Fund, the Investment Adviser or any Sub-Adviser (as the term is defined in the
1940 Act).
ADMINISTRATION AGREEMENTS
NYLIAC ("Administrator") acts as administrator for the Portfolios
pursuant to Administration Agreements dated December 15, 1995. NYLIAC has
entered into an Administration Agreement Supplement for the Convertible
Portfolio dated August 22, 1996, and Administration Agreement Supplements each
dated ________, 1998 for each of the American Century Income & Growth
Portfolio, the Dreyfus Large Company Value Portfolio, the Eagle Growth Equity
Portfolio, and the Lord Abbett Developing Growth Portfolio. The Administrator
has authorized any of its directors, officers and employees who have been
elected or appointed as directors or officers of the Fund to serve in the
capacities in which they have been elected or appointed. In connection with its
administration of the business affairs of the Portfolios, and except as
indicated in the Prospectus, the Administrator bears the following expenses:
(a) the salaries and expenses of all personnel of the Fund and
the Administrator, except the fees and expenses of Directors not
affiliated with the Administrator or the Advisers; and
(b) all expenses incurred by the Administrator in connection
with administering the ordinary course of the Portfolios' business,
other than those assumed by the Fund.
- 71 -
<PAGE> 110
NYLIAC has agreed to limit the "Other Expenses" of each of the
Convertible, High Yield Corporate Bond, International Equity and Value
Portfolios to .17% annually through December 31, 1997.
Under a separate agreement, New York Life has granted the Fund the
right to use the "New York Life" name and service marks and has reserved the
right to withdraw its consent to the use of such name and marks by the Fund at
any time, and to grant the use of such name and marks to other users.
PORTFOLIO BROKERAGE
The Advisers or, with respect to their Dreyfus Large Company Value
Portfolio, American Century Income & Growth Portfolio, Lord Abbett Developing
Growth Portfolio, and Eagle Growth Equity Portfolio, Sub-Advisers, determine
which securities to buy and sell for the Fund, select brokers and dealers to
effect the transactions, and negotiate commissions. Transactions in equity
securities will usually be executed through brokers that will receive a
commission paid by the Portfolio for which the transaction is executed. Fixed
income securities are generally traded with dealers acting as principals for
their own account without a stated commission. The dealer's margin is
reflected in the price of the security. Money market instruments may be traded
directly with the issuer. Underwritten offerings of stock and intermediate and
long term debt securities may be purchased at a fixed price including an amount
of compensation to the underwriter. From time to time, NYLIFE Securities, Inc.
may execute transactions in equity securities on behalf of the Portfolios. Such
commissions may be charged against all Portfolios, with the exception of the
Cash Management Portfolio.
In placing orders for securities transactions, each Adviser's or
Sub-Adviser's policy is to obtain the most favorable price and efficient
execution available. In order to obtain the brokerage and research services
described below, higher commissions may sometimes be paid.
When selecting broker-dealers to execute portfolio transactions, each
Adviser or Sub-Adviser considers many factors including the rate of commission
or size of the broker-dealer's "spread," the size and difficulty of the order,
the nature of the market for the security, the willingness of the broker-dealer
to position, the reliability, financial condition, general execution and
operational capabilities of the broker-dealer, and the research, statistical
and economic data furnished by the broker-dealer to the Adviser or Sub-Adviser.
The Advisers or Sub-Advisers use these services in connection with all their
investment activities, including other investment accounts they advise.
Conversely, brokers or dealers which supply research may be selected for
execution of transactions for such other accounts, while the data may be used
by the Advisers or Sub-Advisers in providing investment advisory services to
the Fund.
- 72 -
<PAGE> 111
For the years ending December 31, 1997, December 31, 1996 and December
31, 1995, the Fund paid total brokerage commissions of ____________, and
$2,121,056, $1,506,976, respectively.
DETERMINATION OF NET ASSET VALUE
The Fund determines the net asset value per share of each Portfolio on
each day the New York Stock Exchange is open for trading. Net asset value per
share is calculated as of the first close of the New York Stock Exchange
(normally 4:00 p.m. Eastern Time) for each Portfolio for purchases and
redemptions of shares of each Portfolio by dividing the current market value
(amortized cost in the case of the Cash Management Portfolio) of total
Portfolio assets, less liabilities, by the total number of shares of that
Portfolio outstanding.
HOW PORTFOLIO SECURITIES WILL BE VALUED
Portfolio securities of the Cash Management Portfolio are valued at
their amortized cost, which does not take into account unrealized securities
gains or losses. This method involves initially valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any premium
paid or discount received.
Portfolio securities of each other Portfolio are valued (a) by
appraising other common and preferred stocks which are traded on the New York
Stock Exchange at the last sale price on that Exchange on the day as of which
assets are valued or, if no sale occurs, at the mean between the closing bid
price and asked price, (b) by appraising other common and preferred stocks as
nearly as possible in the manner described in clause (a) if traded on any other
exchange, including the National Association of Securities Dealers National
Market System and foreign securities exchanges, (c) by appraising
over-the-counter common and preferred stocks quoted on the National Association
of Securities Dealers (NASDAQ) system (but not listed on the National Market
System) at the bid price supplied through such system, (d) by appraising
over-the-counter common and preferred stocks not quoted on the NASDAQ system
and securities listed or traded on certain foreign exchanges whose operations
are similar to the U.S. over-the-counter market at prices supplied by a pricing
agent selected by the Adviser to be representative of market values at the
first close of business of the New York Stock Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Adviser, which
prices reflect broker-dealer-supplied valuations and electronic data processing
techniques if those prices are deemed by the Adviser to be representative of
market values at the close of business of the New York Stock Exchange, (f) by
appraising options and futures contracts at the last sale price on the market
where any such option or futures contract is principally traded and (g) by
appraising all other securities and other assets including over-the-counter
common and preferred stocks not quoted on the NASDAQ system, securities listed
or traded on certain foreign exchanges whose operations are similar to the U.S.
over-the-counter market and debt securities for which prices are supplied by a
pricing agent but are not
- 73 -
<PAGE> 112
deemed by the Adviser or Sub-Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of 60 days
or less and including restricted securities and securities for which no market
quotation is available, at fair value in accordance with procedures approved by
the Directors. Money market instruments held by the Portfolios with a remaining
maturity of 60 days or less will be valued by the amortized cost method unless
such method does not represent fair value. Forward foreign currency exchange
contracts held by the Portfolios are valued at their fair market values
determined on the basis of the mean between the last current bid and asked
prices based on dealer or exchange quotations.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on
the business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of
all assets and liabilities expressed in foreign currencies will be converted
into U.S. dollar values at the mean between the buying and selling rates of
such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Board of Directors. The Fund
recognizes dividend income and other distributions on the ex-dividend date,
except that certain dividends from foreign securities are recognized as soon as
the Fund is informed after the ex-dividend date.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the New York
Stock Exchange is open for trading). In addition, European or Far Eastern
securities trading generally in a particular country or countries may not take
place on all business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not business days in New York and on which the Portfolios' net asset
values are not calculated. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. Events affecting the values of
portfolio securities that occur between the time their prices are determined
and the close of the New York Stock Exchange will not be reflected in the
Portfolios' calculation of net asset values unless the Adviser or Sub-Adviser
deems that the particular event would materially affect net asset value, in
which case an adjustment will be made.
- 74 -
<PAGE> 113
INVESTMENT PERFORMANCE CALCULATIONS
CASH MANAGEMENT PORTFOLIO YIELD
In accordance with regulations adopted by the SEC, the Fund is
required to compute the Cash Management Portfolio's current annualized yield
for a seven-day period in a manner which does not take into consideration any
realized or unrealized gains or losses on its portfolio securities. This
current annualized yield is computed by determining the net change (exclusive
of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) in the value of a hypothetical account having a
balance of one share of the Cash Management Portfolio at the beginning of such
seven-day period, dividing such net change in account value by the value of the
account at the beginning of the period to determine the base period return and
annualizing this quotient on a 365-day basis.
The SEC also permits the Fund to disclose the effective yield of the
Cash Management Portfolio for the same seven-day period, determined on a
compounded basis. The effective yield is calculated by compounding the
unannualized base period return by adding one to the base period return,
raising the sum to a power equal to 365 divided by 7, and subtracting one from
the result.
The Cash Management Portfolio intends to maintain a constant net asset
value of $1.00 per share, but there can be no assurance that it will be able to
do so. The yield on amounts held in the Cash Management Portfolio normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Cash Management Portfolio's actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the
Cash Management Portfolio, the types and quality of portfolio securities held
by the Cash Management Portfolio, and its operating expenses. Therefore, the
yield for any period should not be considered representative of the yield for
any future period.
For the seven-day period ending December 31, 1997, the Cash Management
Portfolio yield was _____%, and the effective yield was _____%.
- 75 -
<PAGE> 114
CONVERTIBLE, GOVERNMENT, HIGH YIELD CORPORATE BOND AND
BOND PORTFOLIOS YIELD
The Fund may from time to time disclose the current annualized yield
of the Convertible, Government, High Yield Corporate Bond and Bond Portfolios
for 30-day periods. The annualized yield of these Portfolios refers to the
income generated by the Portfolio over a specified 30-day period. Because the
yield is annualized, the yield generated by the Portfolio during the 30-day
period is assumed to be generated each 30-day period. The yield is computed by
dividing the net investment income per share earned during the period by the
price share on the last day of the period, according to the following formula:
2[(a - b +1)6 - 1]
-----
YIELD = cd
Where: a = dividends and interest earned during the period by the Portfolio.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period.
d = the maximum offering price per share on the last day of the
period.
Net investment income will be determined in accordance with rules
established by the SEC. Accrued expenses will include all recurring fees that
are charged to all shareholder accounts.
The yield calculations do not reflect the effect of any charges that
may be applicable to a particular Policy or separate account. Because of the
charges and deductions imposed by the Separate Accounts, the yield realized by
Owners in the Investment Divisions of the Separate Accounts will be lower than
the yield for the corresponding Portfolio of the Fund. The yield on amounts
held in any Portfolio normally will fluctuate over time. Therefore, the
disclosed yield for any given past period is not an indication or
representation of future yields or rates of return. Each of the Convertible,
Government, High Yield Corporate Bond and Bond Portfolios' actual yield will be
affected by the types and quality of portfolio securities held by the
respective Portfolio, and its operating expenses.
TOTAL RETURN CALCULATIONS
The Fund may from time to time also disclose average annual total
returns for the Capital Appreciation, Convertible, Lord Abbett Developing
Growth, Government, High Yield Corporate Bond, American Century Income &
Growth, International Equity, Dreyfus Large Company Value, Total Return, Value,
Bond, Growth Equity, and Indexed Equity Portfolios for various periods of time.
Average annual total return quotations are computed by finding the average
annual compounded rates of return over one, five and ten year periods that
would equate a hypothetical initial amount invested to the ending redeemable
value, according to the following formula:
- 76 -
<PAGE> 115
P(1 + T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
one, five, or ten-year at the end of the one,
five, or ten-year period (or fractional
portion thereof).
All recurring fees that are charged by the Fund to all shareholder
accounts are recognized in the ending redeemable value. The average annual
total return calculations for the Portfolio will not reflect the effect of
charges that may be applicable to a particular Policy.
For the one, five and ten-year periods ending December 31, 1997, the
average annual total returns for the Bond Portfolio were _____%, _____% and
_____%, respectively.
For the one, five and ten year periods ending December 31, 1996, the
average annual total returns for the Growth Equity Portfolio were _____%,
_____% and _____%, respectively. For the one-year period ending December 31,
1997, the average annual total returns for the Capital Appreciation, Cash
Management, Government, Total Return and Indexed Equity Portfolios were _____%,
_____%, _____%, _____% and _____%, respectively. For the period beginning
January 29, 1993 (inception date) through December 31, 1997, the average annual
total returns for the Capital Appreciation, Cash Management, Government, Total
Return and Indexed Equity Portfolios were _____%, _____%, _____%, _____% and
_____%, respectively. For the one year period ending December 31, 1997, the
annual total returns for the High Yield Corporate Bond, International Equity
and Value Portfolios were _____%, _____% and _____%, respectively. For the
period beginning May 1, 1995 (inception date) through December 31, 1997, the
average annual total returns for the High Yield Corporate Bond, International
Equity and Value Portfolios were _____%, _____% and _____%, respectively.
The Lord Abbett Developing Growth, Eagle Growth Equity, American
Century Income & Growth, and Dreyfus Large Company Value Portfolios were added
as series of the Fund on _______, 1998. Consequently, performance information
is not yet available for those Portfolios. Each Portfolio has investment
policies and objectives substantially similar to an established mutual fund for
which performance information is currently available. Moreover, each Portfolio
is managed by a Sub-Adviser that also serves as Portfolio Manager to the
substantially similar mutual fund for which performance information is
available. Historical performance of a substantially similar mutual fund is
not, however, indicative of the future performance of a particular portfolio.
Certain
- 77 -
<PAGE> 116
performance information for mutual funds that are substantially similar to the
Lord Abbett Developing Growth, Eagle Growth Equity, American Century Income &
Growth, and Dreyfus Large Company Value, Portfolios is provided below.
The Lord Abbett Developing Growth Portfolio has investment objectives,
policies, limitations and strategies substantially similar, and the same
Sub-Adviser as the portfolio manager to another mutual fund managed by Lord
Abbett -- Lord Abbett Developing Growth Fund, Inc.
The following table shows a comparison of the average annual total
returns of the Lord Abbett Developing Growth Fund for the one, five and
ten-year periods ending January 31, 1998 and the average annual total return of
the S&P 500 Index for the same periods.
<TABLE>
<CAPTION>
1-Year 5-Year 10-Year
<S> <C> <C> <C>
Lord Abbett Developing Growth Fund
S&P 500 Index
</TABLE>
The following table shows a comparison between the average annual
total return of the S&P 500 Index and a composite of the average annual total
return of other funds with investment objectives, policies, limitations and
strategies that are substantially similar to the Lord Abbett Developing Growth
Portfolio and for which the Sub-Adviser to the Lord Abbett Developing Growth
Portfolio was responsible for day-to-day portfolio management.
<TABLE>
<CAPTION>
------ ------ -------
<S> <C> <C> <C>
Other Funds
S&P 500 Index
</TABLE>
The figures for the other mutual funds depicted above reflect each
fund's expense ratios and do not reflect any sales charges imposed in
connection with investment in those funds. The figures for the Lord Abbett
Developing Growth Fund reflect expense ratios for that fund as well as a
maximum sales charge of 5.75% deducted from the initial investment. Although
the objectives, policies, limitations and strategies of the Lord Abbett
Developing Growth Portfolio are substantially similar to the Lord Abbett
Developing Growth Fund, the Lord Abbett Developing Growth Portfolio is distinct
from the Lord Abbett Developing Growth Fund, and may have different fees,
expenses, investment returns, portfolio holdings, and risk/return
characteristics than that fund. Historical performance of substantially similar
mutual funds is not indicative of future performance of the Lord Abbett
Developing Growth Portfolio.
The Eagle Growth Equity Portfolio has investment objectives, policies,
limitations and strategies similar to, and a Sub-Adviser (Eagle Asset
Management, Inc.) that is the portfolio manager to, the Heritage Growth Equity
Fund.
The following table shows a comparison of the average (unannualized)
total returns of the Heritage Growth Equity Fund for the period November 16,
1995 (date of inception) through October 31, 1996, and for the year ended
October 31, 1997 and the average annual total returns for the S&P 500 Index for
the same periods.
<TABLE>
<CAPTION>
11/16/95 through 1-Year ended
10/31/96 10/31/97
<S> <C> <C>
Heritage Growth Equity Fund
S&P 500 Index
</TABLE>
The following table shows a comparison between the average annual
total return of the S&P 500 Index and a composite of the average annual total
return of other funds with investment objectives, policies, limitations and
strategies that are substantially similar to the Heritage Growth Equity Fund
and for which the Sub-Adviser to the Heritage Growth Equity Fund was responsible
for day-to-day portfolio management.
<TABLE>
<CAPTION>
------ ------ -------
<S> <C> <C> <C>
Other Funds
S&P 500 Index
</TABLE>
The figures for the other mutual funds depicted above reflect each
fund's expense ratios and do not reflect any sales charges imposed in connection
with investment in those funds. The figures for the Heritage Growth Equity Fund
reflect expense ratios for that fund as well as a maximum sales charge of 4.75%
deducted from the initial investment. Although the objectives, policies,
limitations and strategies of the Heritage Growth Equity Fund are substantially
similar to the Eagle Growth Equity Portfolio, the Eagle Growth Equity Portfolio
is distinct from the Heritage Growth Equity Fund, and may have different fees,
expenses, investment returns, portfolio holdings, and risk/return
characteristics than that fund. Historical performance of substantially similar
mutual funds is not indicative of future performance of the Eagle Growth Equity
Portfolio.
The American Century Income & Growth Portfolio has investment
objectives, policies, limitations and strategies similar to, and a Sub-Adviser
(American Century Investment Management) that serves as portfolio manager, to
the American Century Portfolios, Inc. Income & Growth Fund ("Income & Growth
Fund").
The following table shows a comparison of the average annual total
returns of the American Century Income & Growth Fund (the "Income & Growth
Fund") for the one, five, and since inception (December 17, 1990) periods ending
June 30, 1997 and the average annual total return of the S&P 500 Index for the
same periods.
<TABLE>
<CAPTION>
1-Year 5-Year Since Inception
(12/17/90)
<S> <C> <C> <C>
American Century Income & Growth Fund
S&P 500 Index
</TABLE>
The following table shows a comparison between the average annual
total return of the S&P 500 Index and a composite of the average annual total
return of other funds with investment objectives, policies, limitations and
strategies that are substantially similar to the Income & Growth Fund and for
which the Sub-Adviser to the American Century Income & Growth Portfolio was
responsible for the day-to-day management.
<TABLE>
<CAPTION>
------ ------ -------
<S> <C> <C> <C>
Other Funds
S&P 500 Index
</TABLE>
The figures for the other mutual funds depicted above reflect each
fund's expense ratios and do not reflect any sales charges imposed in connection
with investment in those funds. The figures for the Income & Growth Fund.
Although the objectives, policies, limitations and strategies of the American
Century Income & Growth Portfolio are substantially similar to the Income &
Growth Fund, American Century Income & Growth Portfolio is distinct from the
Income & Growth Fund, and may have different fees, expenses, investment returns,
portfolio holdings, and risk/return characteristics than that fund. Historical
performance of substantially similar mutual funds is not indicative of future
performance of the American Century Income & Growth Portfolio.
- 78 -
<PAGE> 117
The Dreyfus Large Company Value Portfolio has investment objectives,
limitations and strategies similar to, and a Sub-Adviser (Dreyfus Corporation)
that is the portfolio manager to, the Dreyfus Large Company Value Fund.
The following table shows a comparison of the average annual total
returns of the Dreyfus Large Company Value Fund for the one-year and
since-commencement (December 29, 1993) periods through October 31, 1997 and the
average total returns for the S&P 500 Index for the same periods.
<TABLE>
<CAPTION>
1-Year Since Inception
12/29/93
<S> <C> <C>
Dreyfus Large Company Value Fund
S&P 500 Index
</TABLE>
The following table shows a comparison between the average annual
total return of the S&P 500 Index and a composite of the average annual total
return of other funds with investment objectives, policies, limitations and
strategies that are substantially similar to the Dreyfus Large Company Value
Fund and for which the Sub-Adviser to the Dreyfus Large Company Value Portfolio
was responsible for day-to-day management.
<TABLE>
<CAPTION>
------ ------ -------
<S> <C> <C> <C>
Other Funds
S&P 500 Index
</TABLE>
The figures for the other mutual funds depicted above reflect each
fund's expense ratios and do not reflect any sales charges imposed in connection
with investment in those funds. The figures for the Dreyfus Large Company Value
Fund reflect expense ratios for that fund. Although the objectives, policies,
limitations and strategies of the Dreyfus Large Company Value Fund are
substantially similar to the Dreyfus Large Company Value Portfolio, the Dreyfus
Large Company Value Portfolio is distinct from the Dreyfus Large Company Value
Fund, and may have different fees, expenses, investment returns, portfolio
holdings, and risk/return characteristics than that fund. Historical
performance of substantially similar mutual funds is not indicative of future
performance of the Dreyfus Large Company Value Portfolio.
Historical performance of substantially similar mutual funds is not
necessarily indicative of future performance. In addition, if the size of the
comparable mutual fund varies from that Portfolio to which it is compared,
performance of the Portfolio may vary from that of the comparable mutual fund.
Moreover, a Portfolio's current and future investments are not an will not
necessarily be identical to those of comparable funds.
The yield and total return calculations of the Portfolios do not
reflect the effect of the charges that may be applicable to a particular Policy
or Separate Account. Such charges will reduce the net yield and total return of
that Policy. Performance figures for a Portfolio will only be advertised if the
comparable figures for the Policy are included in the advertisement.
- 79 -
<PAGE> 118
PURCHASE AND REDEMPTION OF SHARES
The Portfolios currently offer their shares to NYLIAC for allocation
to NYLIAC's Separate Accounts. The Separate Accounts are used to fund
multi-funded retirement annuity policies and variable life insurance policies
issued by NYLIAC. Shares of the Portfolios may be sold to NYLIAC separate
accounts funding both variable annuity contracts and variable life insurance
policies and may be sold to affiliated life insurance companies of NYLIAC,
including New York Life. The Fund currently does not foresee any disadvantages
to Owners arising from offering the Fund's shares to separate accounts funding
both life insurance policies and variable annuity contracts. Due, however, to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of various contracts participating in the
Fund might at some time be in conflict. However, the Board of Directors and
insurance companies whose separate accounts invest in the Fund are required to
monitor events in order to identify any material conflicts between variable
annuity contract owners and variable life policy owners. The Board of Directors
will determine what action, if any, should be taken in the event of such a
conflict. If such a conflict were to occur, one or more insurance company
separate accounts might withdraw their investment in the Fund. This might force
the Fund to sell securities at disadvantageous prices. The Portfolios do not
presently intend to offer their shares directly to the public.
The Fund is required to redeem all full and fractional shares of the
Fund for cash. The redemption price is the net asset value per share next
determined after the receipt of proper notice of redemption.
The right to redeem shares or to receive payment with respect to any
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the SEC or when such
Exchange is closed (other than customary weekend and holiday closings) for any
period during which an emergency exists, as defined by the SEC, which makes
disposal of a Portfolio's securities or determination of the net asset value of
each Portfolio not reasonably practicable, and for any other periods as the SEC
may by order permit for the protection of shareholders of each Portfolio.
Investment decisions for each Portfolio are made independently from
those of the other Portfolios and investment companies advised by the respective
Advisers or Sub-Advisers. However, if such other Portfolios or investment
companies are prepared to invest in, or desire to dispose of, securities of the
type in which the Portfolio invests at the same time as a Portfolio, available
investments or opportunities for sales will be allocated equitably to each. In
some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by a Portfolio or the price paid or received by a
Portfolio.
- 80 -
<PAGE> 119
TAXES
Each Portfolio of the Fund intends to elect to qualify as a "regulated
investment company" under the provisions of Subchapter M of the Internal
Revenue Code of 1986 (the "Code"). If each Portfolio qualifies as a "regulated
investment company" and complies with the appropriate provisions of the Code,
each Portfolio will be relieved of federal income tax on the amounts
distributed.
In order to qualify as a regulated investment company, in each taxable
year each Portfolio must, among other requirements, (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
securities and gains (without deduction for losses) from the sale or other
disposition of securities or foreign currencies (subject to the authority of
the Secretary of the Treasury to exclude certain foreign currency gains) or
other income derived with regard to its investing in such securities or
currencies and (b) derive less than 30% of its gross income from gains (without
deduction for losses) realized on the sale or other disposition of securities
held for less than three months. In order to meet this 30% requirement, a
Portfolio may defer selling certain investments beyond the time when it might
otherwise do so.
The discussion of "Taxes" in the Prospectus, in conjunction with the
foregoing, is a general summary of applicable provisions of the Code and U.S.
Treasury Regulations now in effect as currently interpreted by the courts and
the Internal Revenue Service. The Code and these Regulations, as well as the
current interpretations thereof, may be changed at any time.
GENERAL INFORMATION
The Fund was incorporated under Maryland law on June 3, 1983. The Fund was
formerly known as the New York Life MFA Series Fund, Inc. On August 22, 1996,
the Fund's name was changed to its present form. The authorized capital stock
of the Fund consists of 5,000,000,000 shares of common stock, par value $0.01
per share. The shares of common stock are divided into fifteen classes as set
forth below:
- 81 -
<PAGE> 120
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NAME SHARES
- ----------------------------------------------------------------------------------------
<S> <C>
Capital Appreciation Portfolio 50,000,000
- ----------------------------------------------------------------------------------------
Cash Management Portfolio 600,000,000
- ----------------------------------------------------------------------------------------
Convertible Portfolio 100,000,000
- ----------------------------------------------------------------------------------------
Government Portfolio 50,000,000
- ----------------------------------------------------------------------------------------
High Yield Corporate Bond Portfolio 100,000,000
- ----------------------------------------------------------------------------------------
International Equity Portfolio 100,000,000
- ----------------------------------------------------------------------------------------
Total Return Portfolio 50,000,000
- ----------------------------------------------------------------------------------------
Value Portfolio 100,000,000
- ----------------------------------------------------------------------------------------
Bond Portfolio 100,000,000
- ----------------------------------------------------------------------------------------
Growth Equity Portfolio 100,000,000
- ----------------------------------------------------------------------------------------
Indexed Equity Portfolio 50,000,000
- ----------------------------------------------------------------------------------------
Dreyfus Large Company Value 100,000,000
Portfolio
- ----------------------------------------------------------------------------------------
Lord Abbett Developing Growth 100,000,000
Portfolio
- ----------------------------------------------------------------------------------------
American Century Income & Growth 100,000,000
Portfolio
- ----------------------------------------------------------------------------------------
Eagle Growth Equity Portfolio 100,000,000
- ----------------------------------------------------------------------------------------
</TABLE>
The shares of the Portfolios are eligible for investment by the
Separate Accounts. There exist 3,200,000,000 unclassified shares which may be
issued as an addition to one or more of the above classes or to any new class
or classes of shares as determined by the Fund's Board of Directors. The Fund
has no present plans to issue shares of any additional classes. The shares of
each Portfolio, when issued, will be fully paid and nonassessable, will have no
preference, conversion, exchange or similar rights, and will be freely
transferable.
Each issued and outstanding share in a Portfolio is entitled to
participate equally in dividends and distributions declared by such Portfolio.
Each class of stock will have a pro rata interest in the assets of the
Portfolio to which the stock of that class relates and will have no interest in
the assets of any other
- 82 -
<PAGE> 121
Portfolio. If any assets, liabilities, revenue or expenses are not clearly
allocable to a particular Portfolio (such as fees for non-interested Directors
or extraordinary legal fees), they will be allocated as determined by the
Directors.
In the unlikely event that any Portfolio incurs liabilities in excess
of its assets, the other Portfolios could be held liable for such excess.
All shares of common stock, of whatever class, are entitled to one
vote, and votes are generally on an aggregate basis. However, on matters where
the interests of the Portfolios differ, the voting is on a
Portfolio-by-Portfolio basis. Approval or disapproval by the shares in one
Portfolio on such a matter would not generally be a prerequisite to approval or
disapproval by shares in another Portfolio; and shares in a Portfolio not
affected by a matter generally would not be entitled to vote on that matter.
Examples of matters which would require a Portfolio-by-Portfolio vote are
changes in fundamental investment policies of a particular Portfolio and
approval of the investment advisory agreement.
The vote of a majority of the Fund shares (or of the shares of any
Portfolio) means the vote, at any special meeting, of the lesser of (i) 67% or
more of the outstanding shares present at such meeting, if the holders of more
than 50% of the outstanding shares are present or represented by proxy, or (ii)
more than 50% of the outstanding shares of the Fund (or of any Portfolio).
The Board of Directors has decided not to hold routine annual
stockholders' meetings. Special stockholders' meetings will be called whenever
one or more of the following is required to be acted on by stockholders
pursuant to the 1940 Act: (i) election of directors; (ii) approval of
investment advisory agreement; or (iii) ratification of selection of
independent accountants. Not holding routine annual meetings results in Policy
Owners having a lesser role in governing the business of the Fund.
The initial capital for the Portfolios was provided by NYLIAC separate
accounts. The equity of NYLIAC in the separate accounts is represented by its
ownership of accumulation units in the separate accounts. Such accumulation
units were acquired for investment and can be disposed of only by redemption.
NYLIAC has agreed not to redeem its accumulation units of any separate account
until such time as this can be done without any significant impact upon the
separate account.
The Fund has adopted a Code of Ethics governing personal trading
activities of all Directors, officers of the Fund and persons who, in
connection with their regular functions, play a role in the recommendation of
any purchase or sale of a security by the Fund or who obtain information
pertaining to such purchase or sale or who have the power to influence the
management or policies of the Fund or an investment adviser, unless such power
is the result of their position with the Fund or investment adviser. Such
persons are generally required to preclear all security transactions with the
Fund's
- 83 -
<PAGE> 122
Compliance Officer or such officer's designee and to report all transactions on
a regular basis. The Fund has developed procedures for administration of the
Code.
LEGAL COUNSEL
Legal advice regarding certain matters relating to the Federal
securities laws has been provided by Dechert, Price & Rhoads, Washington, D.C.
FINANCIAL STATEMENTS
The financial statements of the Fund for the year ended December 31,
1997, including the financial highlights for each of the periods presented
appearing in the 1997 Annual Report to shareholders and the report thereon of
Price Waterhouse LLP, independent accountants, appearing therein, are
incorporated by reference in the statement of additional information.
- 84 -
<PAGE> 123
PART C. OTHER INFORMATION
ITEM 24......................................FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements:
All required financial statements are included in Part B of this
Registration Statement or are incorporated by reference.
b. Exhibits:
<TABLE>
<S> <C>
1(a) -- Articles of Incorporation of Registrant -- Previously filed as Exhibit No. 1 to
Post-Effective Amendment No. 9.
1(b) -- Articles Supplementary*
1(c) -- Articles of Amendment -- Previously filed as Exhibit No. 1(c) to Post-Effective
Amendment No. 21.
2 -- By-laws of Registrant -- Previously filed as Exhibit No. 2 to Post-Effective
Amendment No. 9.
3 -- None.
4 -- Form of Specimen certificate for shares of common stock of newly created
Portfolios -- Previously filed as Exhibit No. 4 to Post-Effective Amendment No. 9
5(a) -- Form of Investment Advisory Agreement with MacKay-Shields Financial Corporation --
Previously filed as Exhibit 5 to Post-Effective Amendment No. 16 of
The Mainstay Funds (File No. 33-2610).
5(b) -- Form of Investment Advisory Agreement with Monitor Capital Advisors, Inc. --
Previously filed as Exhibit 5 to Post-Effective Amendment No. 4 of
New York Life Institutional Funds Inc. (File No. 33-36962).
5(c) -- Form of Investment Advisory Agreement with New York Life Insurance Company --
Previously filed as Exhibit 5(c) to Post-Effective Amendment No. 15.
5(d) -- Form of Sub-Advisory Agreement between New York Life and American Century Investment
Management, Inc.
5(e) -- Form of Sub-Advisory Agreement between New York Life and the Dreyfus Corporation
5(f) -- Form of Sub-Advisory Agreement between New York Life and Eagle Asset Management
5(g) -- Form of Sub-Advisory Agreement between New York Life and Lord, Abbett & Co.
6 -- None.
7 -- None.
8 -- Form of Custodian Agreement -- Previously filed as Exhibit 8 to Pre-Effective
Amendment No. 1.
9(a) -- Form of Stock Sale Agreement -- Previously filed as Exhibit 9(a) to Pre-Effective
Amendment No. 1.
9(b) -- Form of Stock License Agreement relating to the use of the New York Life name and
service marks -- Previously filed as Exhibit 9(b) to Post-Effective
Amendment No. 1.
10(a) -- Opinion and Consent of Counsel.*
11 -- Consent of Price Waterhouse LLP, Independent Public Accountants*
11(b) -- Power of Attorney
12 -- None.
13(a) -- Form of Initial Stock Subscription Letter -- Previously filed as Exhibit 13(a) to
Pre-Effective Amendment No. 1.
13(b) -- Form of Investment Undertaking -- Previously filed as Exhibit 13(b) to
Pre-Effective Amendment No. 1.
14 -- None.
15 -- None.
16 -- None.
17 -- Financial Data Schedules.*
18 -- None.
</TABLE>
* To be filed by amendment
<PAGE> 124
ITEM 25.PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Shares of the Registrant are currently offered only to separate accounts
of New York Life Insurance and Annuity Corporation ("NYLIAC"), a wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), for allocation
to, among others, NYLIAC's Variable Annuity Separate Account-I and Variable
Annuity Separate Account-II (the "Separate Accounts"); NYLIAC MFA Separate
Account I and NYLIAC MFA Separate Account II and VLI Separate Account and NYLIAC
LifeStages Annuity Separate Account (the "Variable Accounts"); and NYLIAC
Variable Universal Life Separate Account-I and NYLIAC Variable Universal Life
Separate Account-II (the "VUL Accounts," collectively with the Separate Accounts
and the Variable Accounts, the "Accounts"). The Accounts are segregated asset
accounts of NYLIAC. NYLIAC has provided the initial investment in the Accounts,
and affiliates, New York Life, MacKay-Shields and Monitor, serves as investment
advisers to the Portfolios.
The following chart indicates the persons presumed to be controlled by
New York Life:
The following chart indicates the persons controlled by New York Life:
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ----- ------------ ----------------
<S> <C> <C>
Eagle Strategies Corporation Arizona 100%
Greystone Realty Corporation which owns 100% Delaware 100%
of the shares of:
Greystone Realty Management, Inc. Delaware
NYLIFE Administration Corp. Texas 100%
(doing business as NYLACOR)
MacKay-Shields Financial Corporation Delaware 100%
MSC Holding, Inc. (formerly Magnus Software Georgia 85.43%
Corporation, Inc.)
MainStay Institutional Funds Inc. Maryland ***
Monitor Capital Advisors, Inc. Delaware 100%
NYLIFE SFD Holding, Inc. Delaware 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas
New York Life Capital Corporation Delaware 100%
New York Life Fund, Inc. New York *
New York Life Insurance and Annuity Delaware 100%
Corporation
New York Life International Investment Inc. Delaware 100%
which owns 100% of the shares of:
Monetary Research Ltd. Bermuda
and 100% of the shares of:
NYL Management Limited which owns United Kingdom
33.345% of the shares of:
Japan Gamma Asset Management Limited Japan
The MainStay Funds Massachussetts *
New York Life Worldwide Holding, Inc., which owns Delaware 100%
100% of the shares of:
New York Life Worldwide Capital, Inc. Delaware
New York Life Worldwide Development, Inc. Delaware
New York Life Worldwide (Bermuda) Ltd.
New York Life Insurance Worldwide Ltd. Bermuda
and owns 99.97% of the shares of Bermuda
New York Life (U.K.) Ltd., which owns United Kingdom
100% of the shares of:
Windsor Construction Company Limited England
</TABLE>
<PAGE> 125
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ----- ------------ ----------------
<S> <C> <C>
and owns 51% of the shares of: South Korea
KOHAP New York Life Insurance Ltd.
and owns 50.2% of the shares of: Indonesia
P.T. Asuransi Jiwa Sewu-New York Life and owns
49% of the shares of: Mexico
GEO New York Life, S.A. and owns
31.25% of the shares of: United Kingdom
Life Assurance Holding Corporation Limited,
which owns 100% of the shares of: England
Windsor Life Assurance Company Limited England
Gresham Life Assurance Society Limited
NYLCO, Inc. New York 100%
NYLIFE Depositary Corporation which owns 16.67% Delaware 100%
of NYLIFE Structured Asset Management Company Texas
Ltd.
New York Life Benefit Services, Inc. which owns Massachusetts 100%
100% of ADQ Insurance Agency Inc. Massachusetts
New York Life Trust Company New York 100%
NYLICO, Inc. New York 100%
(formerly New York Life Capital Corp.)
NYLIFE Distributors Inc. Delaware 100%
NYLIFE Equity Inc. Delaware 100%
NYLIFE Funding Inc. Delaware 100%
NYLIFE Healthcare Management Inc., which owns Delaware
46.3% of total combined stock and 89.6% of the
voting rights of:
Express Scripts, Inc., which owns 100% of the shares of: Delaware
Great Plains Reinsurance Company
Practice Patterns Science, Inc. Canada
ESI Canada Holdings, Inc., which owns 100% of
the shares of: Canada
ESI Canada, Inc.
IVTx of Houston, Inc. Canada
IVTx of Dallas, Inc. Texas
PhyNet, Inc. Texas
Express Scripts Vision Corporation Delaware
NYLCare Health Plans, Inc. Delaware
(formerly Sanus Corp. Health Systems), Delaware
which owns 100% of the shares of:
New York Life and Health Insurance Company
Avanti Corporate Health Systems Inc. Delaware
Avanti Health Systems, Inc., which owns 100% of Delaware
the shares of: Texas
Avanti of the District, Inc.
Avanti of Illinois, Inc. Maryland
Avanti of New York, Inc. Illinois
Avanti of New Jersey, Inc. New York
and owns 80% of the shares of: New Jersey
NYLCare Health Plans of the Mid-Atlantic, Inc.,
which owns 100% of the shares of: Maryland
Physicians Health Services Foundation, Inc.
Maryland
Lonestar Holding Co., which owns 90% of the shares
of: Delaware
Lone Star Health Plan, Inc., which owns 100% of
the shares of: New York
NYLCare Health Plans of the Gulf Coast,
Inc. Texas
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ----- ------------ ----------------
<S> <C> <C>
Prime Provider Corp., which owns 100% of the shares of: New York
Prime Provider Corp. of Texas
NYLCare of Connecticut, Inc. Texas
Sanus Dental Plan of New Jersey, Inc. Connecticut
NYLCare Dental Plans of the Southwest, Inc. New Jersey
NYLCare Health Plans of New York, Inc. Texas
NYLCare Health Plans of Connecticut, Inc. New York
NYLCare Health Plans of the Midwest, Inc. Connecticut
Illinois
NYLCare Health Plans of New Jersey, Inc. New Jersey
NYLCare of Texas, Inc., which owns 100% of the shares Texas
of:
NYLCare Passport PPO of the Southwest, Inc. Texas
Sanus Preferred Providers West, Inc. California
Sanus Preferred Services, Inc. Maryland
Sanus Preferred Services of Illinois, Inc. Illinois
NYLCare Health Plans of the Southwest, Inc. Texas
WellPath of Arizona Reinsurance Company Arizona
NYLCare Health Plans of Louisiana, Inc. Louisiana
NYLCare of New England, Inc. Delaware
Sanus - Northeast, Inc. Delaware
NYLCare Health Plans of Maine, Inc. Maine
NYLCare NC Holdings, Inc. Delaware
WellPath Community Health Plan Holdings, L.L.C. North Carolina
which owns 100% of WPCHP Holdings, Inc. and 99%
of: Delaware
WellPath Preferred Services, L.L.C. North Carolina
and
WellPath Select Holdings, L.L.C. North Carolina
WellPath of Carolina, Inc. North Carolina
WellPath Select, Inc. North Carolina
Sanus of New York and New Jersey, Inc. New York
NYLCare Health Plans of Pennsylvania, Inc. Pennsylvania
Docservo, Inc. New York
The ETHIX Corporation, which owns 100% of the shares Delaware
of:
ETHIX Great Lakes, Inc. Michigan
ETHIX Mid-Atlantic, Inc., which owns 100% of Pennsylvania
the shares of:
PriMed, Inc. New Jersey
ETHIX Midlands, Inc. Delaware
ETHIX Mid-Rivers, Inc. Missouri
ETHIX Northwest Public Services, Inc. Washington
ETHIX Northwest, Inc., Washington
which owns 100% of:
NYLCare Health Plans Northwest, Inc. Washington
ETHIX Pacific, Inc. Oregon
ETHIX Risk Management, Inc. Oregon
ETHIX Southeast, Inc. North Carolina
ETHIX Southwest, Inc. Texas
Benefit Panel Services which owns 100% of the shares California
of VivaHealth, Incorporated California
One Liberty Plaza Holdings, Inc. Delaware
NYLIFE Inc. New York 100%
NYLIFE Insurance Company of Arizona Arizona 100%
NYLIFE Realty Inc. which owns 100% of the Delaware 100%
shares of: CNP Realty Investments, Inc. Delaware
NYLIFE Refinery, Inc. Delaware 100%
NYLIFE Resources Inc. Delaware 100%
NYLIFE Securities Inc. New York 100%
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ----- ------------ ----------------
<S> <C> <C>
NYLINK Insurance Agency Incorporated Delaware 100%
which owns 100% of the shares of:
NYLINK Insurance Agency of Alabama Alabama
NYLINK Insurance Agency of New Mexico New Mexico
NYLTEMPS Inc. Delaware 100%
</TABLE>
- ---------------------
+ By including the indicated corporations in this list, New York Life
is not stating or admitting that said corporations are under its
actual control; rather, these corporations are listed here to ensure
full compliance with the requirements of this Form N-1A.
* New York Life serves as investment adviser to these entities, the
shares of which are held of record by separate accounts of New York
Life (for the New York Life Fund, Inc.) and NYLIAC (for the MainStay
VP Series Fund, Inc.). New York Life disclaims any beneficial
ownership and control of these entities.
** New York Life Foundation does not issue voting securities.
*** MacKay-Shields Financial Corporation and Monitor Capital Advisors,
Inc. serve as investment advisers to this entity.
<PAGE> 128
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS ________, 1998
<S> <C>
Growth Equity Portfolio, par value $0.01 per share....................... 8
Bond Portfolio, par value $0.01 per share................................ 8
Cash Management Portfolio, par value $0.01 per share..................... 8
Government Portfolio, par value $0.01 per share.......................... 5
Capital Appreciation Portfolio, par value $0.01 per share................ 5
Indexed Equity Portfolio, par value $0.01 per share...................... 5
Total Return Portfolio, par value $0.01 per share........................ 5
High Yield Corporate Bond Portfolio, par value $0.01 per share........... 5
Value Portfolio, par value $0.01 per share............................... 5
International Equity Portfolio, par value $0.01 per share................ 5
Convertible Portfolio, par value $0.01 per share......................... 5
</TABLE>
ITEM 27. INDEMNIFICATION
(a) Maryland Law and By-Laws.
Under Maryland law and Registrant's By-Laws, the Registrant is required to
indemnify its directors (and former directors) and hold them harmless from
damages and expenses in connection with legal proceedings or threatened legal
proceedings by reason of their service to the Registrant. The Registrant,
however, is not required or hold harmless directors as a result of certain forms
of serious misconduct. The Registrant also may (and in limited circumstances is
required to) indemnify and hold harmless officers from damages and expenses in
connection with legal proceedings or threatened legal proceedings by reasons of
their services to Registrant.
Notwithstanding the foregoing, in no event will any payment be made to
indemnify or hold harmless any director or officer (or former director or
officer) for amounts incurred as a result of such director's or officer's
willful misfeasance, bad faith, gross negligence or reckless disregard of duties
in the conduct of his or her office.
The applicable Maryland statute provides that an officer or director (or
former officer of director) shall be indemnified to such further extent as a
court may deem fair and reasonable under the circumstances; provided that, the
indemnification shall be limited to expenses, if the proceeding is by or in the
right of the Registrant or if the officer or director has been adjudged liable
on the basis of improper receipt of personal benefit.
(b) Insurance.
Under an endorsement to a directors and officers liability/corporation
reimbursement (D&O) insurance policy issued to New York Life by National Union
Fire Insurance Company of Pittsburgh, Pa., directors and officers of the
Registrant, New York Life and its subsidiaries are insured on a claims-made
basis for certain liabilities, which they may incur in such capacity.
Directors and officers of the Registrant, New York Life and its
subsidiaries are also insured on a claims made basis for certain liabilities
which they may incur in such capacity, under D&O insurance policies issued to
New York Life by Sargasso Mutual Insurance Company Ltd., and off-shore insurer
owned by U.S. Life Insurance Companies.
(c) Undertaking.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in said Act and is,
therefore, 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 a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities 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 said Act and will be governed by the final adjudication
of such issue.
<PAGE> 129
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The business of Mackay-Shields, Monitor and New York Life is summarized
under "Investment Advisers" in the Prospectus constituting Part A of this
Registration Statement, which summary is incorporated herein by reference.
The business or other connections of each director and officer of
MacKay-Shields, Monitor and New York Life active in investment management is
currently listed in the investment adviser registration on Form ADV for
MacKay-Shields (File No. 801-5594), Monitor (File No. 801-34412) and New York
Life (File No. 80119525), respectively, and are hereby incorporated herein by
reference.
ITEM 29. PRINCIPAL UNDERWRITERS
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31 (a) of the 1940 Act and the rules thereunder are maintained at the
offices of the Registrant and of New York Life. The address of each,
respectively, is 51 Madison Avenue, New York, New York 10010 and at Cokesbury
Road, Lebanon, New Jersey 08833.
ITEM 31. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKINGS
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this post-effective amendment to its
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this amendment to be signed on its behalf by the
undersigned, thereto duly authorized in the City of New York, and State of New
York, on the 13th day of February, 1998.
MainStay VP Series Fund, Inc.
(Registrant)
By * /s/ ANNE F. POLLACK
-----------------------------
ANNE F. POLLACK, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendmento
the Registration Statement has been duly signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- ------------------------------ ---------------
<S> <C> <C>
MICHAEL J. DRABB* Director February 13, 1998
- --------------------------------------------
MICHAEL J. DRABB
JILL FEINBERG* Director February 13, 1998
- --------------------------------------------
JILL FEINBERG
DANIEL HERRICK* Director February 13, 1998
- --------------------------------------------
DANIEL HERRICK
RICHARD M. KERNAN, JR.* Chairman of the Board February 13, 1998
- -------------------------------------------- (Chief Executive Officer)
RICHARD M. KERNAN, JR.
ANNE F. POLLACK* President and Director February 13, 1998
- -------------------------------------------- (Chief Administrative Officer)
ANNE F. POLLACK
ROBERT D. ROCK* Director February 13, 1998
- --------------------------------------------
ROBERT D. ROCK
ROMAN L. WEIL* Director February 13, 1998
- --------------------------------------------
ROMAN L. WEIL
JOHN D. WEISSER* Director February 13, 1998
- --------------------------------------------
JOHN D. WEISSER
ANTHONY W. POLIS* Treasurer February 13, 1998
- -------------------------------------------- (Principal Financial Officer)
ANTHONY W. POLIS
*By /s/ ANNE F. POLLACK
- ------------------------------------------------
ANNE F. POLLACK, PRESIDENT
</TABLE>
<PAGE> 131
EXHIBITS
1(b) -- Articles Supplementary*
5(d) -- Form of Sub-Advisory Agreement between New York Life and American
Century Investment Management, Inc.
5(e) -- Form of Sub-Advisory Agreement between New York Life and the
Dreyfus Corporation
5(f) -- Form of Sub-Advisory Agreement between New York Life and Eagle
Asset Management
5(g) -- Form of Sub-Advisory Agreement between New York Life and Lord,
Abbett & Co.
10(a) -- Opinion and Consent of Counsel*
11 -- Consent of Price Waterhouse LLP, Independent Public Accountants*
11(a) -- Power of Attorney
17 -- Financial Data Schedules*
* To be filed by amendment
<PAGE> 1
SUB-ADVISORY AGREEMENT
AGREEMENT made this ____ day of ______, 199__ among MainStay VP Series
Fund, Inc. (the "Company"), New York Life Insurance Company (the "Adviser") and
American Century Investment Management, Inc. (the "Sub-Adviser").
WHEREAS, the Company is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end, management investment
company;
WHEREAS, the Company is authorized to issue separate series, each of
which will offer a separate class of shares, each series having its own
investment objective or objectives, policies, and limitations;
WHEREAS, the Company 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 Investment Advisory Agreement, effective as of
December 15, 1996, a copy of which has been provided to the Sub-Adviser, the
Company has retained the Adviser to render advisory, management, and
administrative services to many of the Company's series;
WHEREAS, the Company and the Adviser wish to retain the Sub-Adviser to
furnish investment advisory services to one or more of the series of the
Company, and the Sub-Adviser is willing to furnish such services to the Company
and the Adviser;
NOW THEREFORE, in consideration of the premises and the promises and
mutual covenants herein contained, it is agreed between the Company, the
Adviser, and the Sub-Adviser as follows:
I. Appointment. The Company and the Adviser hereby appoint
American Century Investment Management, Inc. to act as Sub-Adviser to the Series
designated on Schedule A of this Agreement (the "Series") for the periods and on
the terms set forth in this Agreement. The Sub-Adviser accepts such appointment
and agrees to furnish the services herein set forth for the compensation herein
provided.
In the event the Company designates one or more series other
than the Series with respect to which the Company and the Adviser wish to retain
the Sub-Adviser to render investment advisory services hereunder, they shall
notify the Sub-Adviser in writing. If the Sub-Adviser is willing to render such
services, it shall notify the Company and Adviser in writing, whereupon such
series shall become a Series hereunder, and be subject to this Agreement.
2. Sub-Advisory Duties. Subject to the supervision of the
Company's Board of Directors and the Adviser, the Sub-Adviser will provide a
continuous investment program for the Series' portfolio and determine the
composition of the assets of the Series' portfolio, including determination of
the purchase, retention, or sale of the securities, cash, and other investments
contained in the portfolio. The Sub-Adviser will provide investment research and
conduct a
<PAGE> 2
continuous program of evaluation, investment, sales, and reinvestment of the
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 the Series
should be held in the various securities and other investments in which it may
invest, and the Sub-Adviser is hereby authorized to execute and perform such
services on behalf of the Series. To the extent permitted by the investment
policies of the Series, the Sub-Adviser 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
Sub-Adviser will provide the services under this Agreement in accordance with
the Series' investment objective or objectives, policies, and restrictions as
stated in the Company's Registration Statement filed with the Securities and
Exchange Commission ("SEC"), as amended, copies of which shall be sent to the
Sub-Adviser by the Adviser. The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will (1) take all steps necessary to
manage the Series so that it will qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code, (2) take all steps necessary to
manage the Series so as to ensure compliance by the Series 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 as to ensure compliance by the Series with any other rules and
regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies. The Adviser or the Company will notify the
Sub-Adviser of any pertinent changes, modifications to, or interpretations of
Section 817(h) of the Internal Revenue Code and regulations issued thereunder.
(b) The Sub-Adviser will conform with 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 Company's Board
of Directors of which the Sub-Adviser has been sent a copy, and the provisions
of the Registration Statement of the Company under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as supplemented or amended, of which the
Sub-Adviser has received a copy. The Adviser or the Company will notify the
Sub-Adviser of pertinent provisions of applicable state insurance law with which
the Sub-Adviser must comply under this Paragraph 2(b).
(c) On occasions when the Sub-Adviser deems the purchase or
sale of a security to be in the best interest of the Series as well as of other
investment advisory clients of the Sub-Adviser or any of its affiliates, the
Sub-Adviser 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 Sub-Adviser in a manner that is fair and
equitable in the judgment of the Sub-Adviser in the exercise of its fiduciary
obligations to the Company and to such other clients, subject to review by the
Adviser and the Board of Directors.
- 2-
<PAGE> 3
(d) In connection with the purchase and sale of securities for
the Series, the Sub-Adviser 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 Sub-Adviser will arrange for the automatic
transmission of the confirmation of such trades to the Company's custodian and
portfolio accounting agent.
(e) The Sub-Adviser will monitor on a daily basis the
determination by the portfolio accounting agent for the Company of the valuation
of portfolio securities and other investments of the Series. The Sub-Adviser
will assist the custodian and portfolio accounting agent for the Company in
determining or confirming, consistent with the procedures and policies stated in
the Registration Statement for the Company, the value of any portfolio
securities or other assets of the Series for which the custodian and portfolio
accounting agent seeks assistance from or identifies for review by the
Sub-Adviser.
(f) The Sub-Adviser will make available to the Company and the
Adviser, promptly upon request, all of the Series' investment records and
ledgers maintained by the Sub-Adviser (which shall not include the records and
ledgers maintained by the custodian or portfolio accounting agent for the
Company) as are necessary to assist the Company and the Adviser 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 Sub-Adviser 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 Company are being conducted in a manner
consistent with applicable laws and regulations.
(g) The Sub-Adviser will provide reports to the Company's
Board of Directors 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 Company's Board of Directors with respect to the
Series such periodic and special reports as the Directors and the Adviser may
reasonably request.
(h) In rendering the services required under this Agreement,
the Sub-Adviser 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 Sub-Adviser 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 Company's Board of Directors and a majority of
Directors 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 Company,
the Adviser, or the Sub-Adviser, or any such company that is retained as
subadviser, and is approved by the vote of a majority of the outstanding voting
- 3-
<PAGE> 4
securities of the applicable Series of the Company to the extent required by the
1940 Act. The Sub-Adviser shall be responsible for making reasonable inquiries
and for reasonably ensuring that any employee of the Sub-Adviser, any subadviser
that the Sub-Adviser has employed or with which it has associated with respect
to the Series, or any employee thereof has not, to the best of the Sub-Adviser's
knowledge, in any material connection with the handling of Company 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 Sub-Adviser is responsible for
decisions to buy and sell securities and other investments for the Series'
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates. The Sub-Adviser'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 Company, 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 firm 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 Sub-Adviser in the
exercise of its fiduciary obligations to the Company, by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Directors may determine and consistent with Section 28(e) of the Securities
Exchange Act of 1934, the Sub-Adviser 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 Sub-Adviser 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 Sub-Adviser's or its affiliate's
overall responsibilities with respect to the Series and to their
- 4 -
<PAGE> 5
other clients as to which they exercise investment discretion. To the extent
consistent with these standards, the Sub-Adviser is further authorized to
allocate the orders placed by it on behalf of the Series to the Sub-Adviser 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 Sub-Adviser, or an
affiliate of the Sub-Adviser. Such allocation shall be in such amounts and
proportions as the Sub-Adviser shall determine consistent with the above
standards, and the Sub-Adviser will report on said allocation regularly to the
Board of Directors of the Company indicating the broker-dealers to which such
allocations have been made and the basis therefor.
4.Disclosure about Sub-Adviser. The Sub-Adviser has reviewed
the post-effective amendment to the Registration Statement for the Company filed
with the Securities and Exchange Commission that contains disclosure about the
Sub-Adviser, and represents and warrants that, with respect to the disclosure
about the Sub-Adviser or information relating, directly or indirectly, to the
Sub-Adviser, 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 Sub-Adviser further represents
and warrants that it is a duly registered investment adviser under the Advisers
Act and a duly registered investment adviser in all states in which the
Sub-Adviser is required to be registered.
5. Expenses. During the term of this Agreement, the
Sub-Adviser will pay all expenses incurred by it and its staff and for their
activities in connection with its Sub-Advisory duties under this Agreement. The
Adviser or the Company shall be responsible for all the expenses of the
Company's operations including, but not limited to:
(a) Expenses of all audits by the Company'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 the Series' net assets;
(e) Expenses of obtaining Portfolio Activity Reports and
Analyses of International Management Reports (as appropriate) for the Series;
(f) Expenses of maintaining the Company's tax records;
- 5-
<PAGE> 6
(g) Salaries and other compensation of any of the Company's
executive officers and employees, if any, who are not officers, directors,
stockholders, or employees of the Sub-Adviser or an affiliate of the
Sub-Adviser;
(h) Taxes levied against the Company;
(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 Company's
shareholders, the preparation and mailings of prospectuses and reports of the
Company to its shareholders, the filing of reports with regulatory bodies, the
maintenance of the Company's existence, and the regulation of shares with
federal and state securities or insurance authorities;
(l) The Company's legal fees, including the legal fees related
to the registration and continued qualification of the Company's shares for
sale;
(m) Costs of printing stock certificates representing shares
of the Company;
(n) Directors' fees and expenses to Directors who are not
officers, employees, or stockholders of the Sub-Adviser or any affiliate
thereof;
(o) The Company'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 Company as may arise
including expenses incurred in connection with litigation, proceedings, and
other claims (unless the Sub-Adviser is responsible for such expenses under
Section 14 of this Agreement), and the legal obligations of the Company to
indemnify its Directors, officers, employees, shareholders, distributors, and
agents with respect thereto; and
(r) Organizational and offering expenses.
6. Compensation. For the services provided, the Adviser will
pay the Sub- Adviser a fee, payable monthly, as described on Schedule B.
7. Seed Money. The Adviser agrees that the Sub-Adviser shall
not be responsible for providing money for the initial capitalization of the
Series.
8. Compliance.
- 6 -
<PAGE> 7
(a) The Sub-Adviser agrees that it shall immediately notify
the Adviser and the Company (1) in the event that the SEC has censured the
Sub-Adviser; placed limitations upon its activities, functions or operations;
suspended or revoked its 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. The Sub-Adviser further agrees to notify the Adviser and the Company
immediately of any material fact known to the Sub-Adviser respecting or relating
to the Sub-Adviser that is not contained in the Registration Statement or
prospectus for the Company, or any amendment or supplement thereto, or of any
statement contained therein that becomes untrue in any material respect.
(b) The Adviser agrees that it shall immediately notify the
Sub-Adviser (1) in the event that the SEC has censured the Adviser or the
Company; placed limitations upon either of their activities, functions, or
operations; suspended or revoked the Adviser'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 Sub-Adviser hereby agrees that all records
which it maintains for the Series are the property of the Company and further
agrees to surrender promptly to the Company any of such records upon the
Company's or the Adviser's request, although the Sub-Adviser may, at its own
expense, make and retain a copy of such records. The Sub-Adviser 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 Securities and Exchange Commission and state insurance regulators) in
connection with any investigation or inquiry relating to this Agreement or the
Company.
11. Representations Respecting Sub-Adviser. The Adviser and
the Company agree that neither the Company, the Adviser, nor affiliated persons
of the Company or the Adviser shall give any information or make any
representations or statements in connection with the sale of shares of the
Series concerning the Sub-Adviser or the Series other than the information or
- 7 -
<PAGE> 8
representations contained in the Registration Statement, prospectus, or
statement of additional information for the Company shares, as they may be
amended or supplemented from time to time, or in reports or proxy statements for
the Company, or in sales literature or other promotional material approved in
advance by the Sub-Adviser, except with the prior permission of the Sub-
Adviser. The parties agree that in the event that the Adviser or an affiliated
person of the Adviser sends sales literature or other promotional material to
the Sub-Adviser for its approval and the Sub-Adviser has not commented within 30
days, the Adviser and its affiliated persons may use and distribute such sales
literature or other promotional material, although, in such event, the Sub-
Adviser shall not be deemed to have approved of the contents of such sales
literature or other promotional material.
12. Control. Notwithstanding any other provision of the
Agreement, it is understood and agreed that the Company 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 Sub-Adviser.
13. Services Not Exclusive. It is understood that the services
of the Sub-Adviser are not exclusive, and nothing in this Agreement shall
prevent the Sub-Adviser (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 Company and the Adviser
agree that the Sub-Adviser, any affiliated person of the Sub-Adviser, and each
person, if any, who, within the meaning of Section 15 of the 1933 Act controls
the Sub-Adviser 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
Sub-Adviser's duties, or by reason of reckless disregard of the Sub-Adviser's
obligations and duties under this Agreement.
- 8 -
<PAGE> 9
15. Indemnification.
(a) The Adviser agrees to indemnify and hold harmless the
Sub-Adviser, any affiliated person of the Sub-Adviser, and each person, if any,
who, within the meaning of Section 15 of the 1933 Act controls ("controlling
person") the Sub-Adviser (all of such persons being referred to as "Sub-Adviser
Indemnified Persons") against any and all losses, claims, damages, liabilities,
or litigation (including legal and other expenses) to which a Sub-Adviser
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 Adviser's responsibilities to the Company which
(1) may be based upon any misfeasance, malfeasance, or nonfeasance by the
Adviser, any of its employees or representatives or any affiliate of or any
person acting on behalf of the Adviser 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 Adviser and contained in the Registration
Statement or prospectus covering shares of the Company 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
Adviser 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 Adviser or the Company or to any
affiliated person of the Adviser by a Sub-Adviser Indemnified Person; provided
however, that in no case shall the indemnity in favor of the Sub-Adviser
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
Sub-Adviser agrees to indemnify and hold harmless the Adviser, any affiliated
person of the Adviser, and each person, if any, who, within the meaning of
Section 15 of the 1933 Act, controls ("controlling person") the Adviser (all of
such persons being referred to as "Adviser Indemnified Persons") against any and
all losses, claims, damages, liabilities, or litigation (including legal and
other expenses) to which a Adviser 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 Sub-Adviser's
responsibilities as Sub-Adviser of the Series which (1) may be based upon any
misfeasance, malfeasance, or nonfeasance by the Sub-Adviser, any of its
employees or representatives, or any affiliate of or any person acting on behalf
of the Sub-Adviser, (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 Company 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 Sub-Adviser
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 Adviser, the Company, or any affiliated person
of the Adviser or Company by the Sub-Adviser or any affiliated person of the
- 9 -
<PAGE> 10
Sub-Adviser; provided, however, that in no case shall the indemnity in favor of
a Adviser 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 Adviser shall not be liable under Paragraph (a) of
this Section 15 with respect to any claim made against a Sub-Adviser Indemnified
Person unless such Sub-Adviser Indemnified Person shall have notified the
Adviser 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 Sub-Adviser Indemnified Person (or after such
Sub-Adviser Indemnified Person shall have received notice of such service on
any designated agent), but failure to notify the Adviser of any such claim shall
not relieve the Adviser from any liability which it may have to the Sub-Adviser
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 Sub-Adviser
Indemnified Person, the Adviser will be entitled to participate, at its own
expense, in the defense thereof or, after notice to the Sub-Adviser Indemnified
Person, to assume the defense thereof, with counsel satisfactory to the
Sub-Adviser Indemnified Person. If the Adviser assumes the defense of any such
action and the selection of counsel by the Adviser to represent both the Adviser
and the Sub-Adviser Indemnified Person would result in a conflict of interests
and therefore, would not, in the reasonable judgment of the Sub-Adviser
Indemnified Person, adequately represent the interests of the Sub-Adviser
Indemnified Person, the Adviser will, at its own expense, assume the defense
with counsel to the Adviser and, also at its own expense, with separate counsel
to the Sub-Adviser Indemnified Person, which counsel shall be satisfactory to
the Adviser and to the Sub-Adviser Indemnified Person. The Sub-Adviser
Indemnified Person shall bear the fees and expenses of any additional counsel
retained by it, and the Adviser shall not be liable to the Sub-Adviser
Indemnified Person under this Agreement for any legal or other expenses
subsequently incurred by the Sub-Adviser Indemnified Person independently in
connection with the defense thereof other than reasonable costs of
investigation. The Adviser shall not have the right to compromise on or settle
the litigation without the prior written consent of the Sub-Adviser Indemnified
Person if the compromise or settlement results, or may result in a finding of
wrongdoing on the part of the Sub-Adviser Indemnified Person.
(d) The Sub-Adviser shall not be liable under Paragraph (b) of
this Section 15 with respect to any claim made against a Adviser Indemnified
Person unless such Adviser Indemnified Person shall have notified the
Sub-Adviser 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 Adviser Indemnified Person (or after such
Adviser Indemnified Person shall have received notice of such service on any
designated agent), but failure to notify the Sub-Adviser of any such claim shall
not relieve the Sub-Adviser from any liability which it may have to the Adviser
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 Adviser
Indemnified Person, the Sub-Adviser will be entitled to participate, at its own
expense, in
- 10 -
<PAGE> 11
the defense thereof or, after notice to the Adviser Indemnified Person, to
assume the defense thereof, with counsel satisfactory to the Adviser Indemnified
Person. If the Sub-Adviser assumes the defense of any such action and the
selection of counsel by the Sub-Adviser to represent both the Sub-Adviser and
the Adviser Indemnified Person would result in a conflict of interests and
therefore, would not, in the reasonable judgment of the Adviser Indemnified
Person, adequately represent the interests of the Adviser Indemnified Person,
the Sub-Adviser will, at its own expense, assume the defense with counsel to the
Sub-Adviser and, also at its own expense, with separate counsel to the Adviser
Indemnified Person which counsel shall be satisfactory to the Sub-Adviser and
to the Adviser Indemnified Person. The Adviser Indemnified Person shall bear the
fees and expenses of any additional counsel retained by it, and the Sub-Adviser
shall not be liable to the Adviser Indemnified Person under this Agreement for
any legal or other expenses subsequently incurred by the Adviser Indemnified
Person independently in connection with the defense thereof other than
reasonable costs of investigation. The Sub-Adviser shall not have the right to
compromise on or settle the litigation without the prior written consent of the
Adviser Indemnified Person if the compromise or settlement results, or may
result in a finding of wrongdoing on the part of the Adviser Indemnified Person.
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 the date first indicated above and continue on an annual basis thereafter
with respect to the Series; provided that such annual continuance is
specifically approved each year by (a) the vote of a majority of the entire
Board of Directors of the Company, or by the vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Series, and
(b) the vote of a majority of those Directors 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 Sub-Adviser shall not provide any services for a
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 the 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 Company, 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 Adviser at any time without penalty, upon sixty
(60) days' written notice to the Sub-Adviser and the Company, (b) at any time
without payment of any penalty by the Company, upon the vote of a majority of
the Company's Board of Directors or a majority of the outstanding voting
securities of each Series, upon sixty (60) days' written notice to the Adviser
and the Sub-Adviser, or (c) by the Sub-Adviser at any time without penalty, upon
sixty (60) days' written notice to the Adviser and the Company. 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 Adviser or the Company, free
from any claim or retention of rights in such record by the Sub-
- 11 -
<PAGE> 12
Adviser, although the Sub-Adviser 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 Directors of the
Company, including a majority of the Directors of the Company 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 MainStay or any derivative
thereof or logo associated with that name is the valuable property of the
Adviser and/or its affiliates, and that the Sub-Adviser has the right to use
such name (or derivative or logo) only with the approval of the Adviser and only
so long as the Adviser is Adviser to the Company and/or the Series. Upon
termination of the Investment Advisory Agreement between the Company and the
Adviser, the Sub-Adviser shall forthwith cease to use such name (or derivative
or logo).
(b) It is understood that the name ______________________or
any derivative thereof or logo associated with that name is the valuable
property of the Sub-Adviser and its affiliates and that the Company and/or the
Series have the right to use such name (or derivative or logo) in offering and
marketing materials of the Company with the approval of the Sub-Adviser and for
so long as the Sub-Adviser is a Sub-Adviser to the Company and/or the Series
with such approval not to be unreasonably withheld. In the event the Sub-Adviser
does not respond within (5) business days, such material shall be deemed
approved . Upon termination of this Agreement between the Company, the Adviser,
and the Sub-Adviser, the Company shall forthwith cease to use such name (or
derivative or logo).
19. The obligations of this Agreement shall be binding upon
the assets and property of the Company and shall not be binding upon any
Director, officer, or shareholder of the Company individually.
- 12 -
<PAGE> 13
20. Miscellaneous.
(a) This Agreement shall be governed by the laws of the State
of New York, 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
Sub-Adviser as an agent of the Adviser, or constituting the Adviser as an agent
of the Sub-Adviser.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed as of the day and year first above written.
MainStay VP Series Fund, Inc.
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
New York Life Insurance Company
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
American Century Investment
Management, Inc.
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
- 14 -
<PAGE> 15
SCHEDULE A
The Series of MainStay VP Series Fund, Inc., as described in Section 1
of the attached Sub-Advisory Agreement, to which American Century Investment
Management, Inc. shall act as Sub-Adviser is as follows:
American Century Income & Growth Portfolio
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<PAGE> 16
SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by American
Century Investment Management, Inc. to the following Series of MainStay VP
Series Fund, Inc., pursuant to the attached Sub-Advisory Agreement, the Adviser
will pay the Sub-Adviser a fee, 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:
Rate
.40% on assets up to $100 million
.35% on assets form $100 million to $200 million
.30% on assets over $200 million
- 16 -
<PAGE> 1
SUB-ADVISORY AGREEMENT
AGREEMENT made this ____ day of ______, 1998 among MainStay VP Series
Fund, Inc., (the "Company"), New York Life Insurance Company (the "Adviser") and
The Dreyfus Corporation (the "Sub-Adviser").
WHEREAS, the Company is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end, management investment
company;
WHEREAS, the Company is authorized to issue separate series, each of
which will offer a separate class of shares, each series having its own
investment objective or objectives, policies, and limitations;
WHEREAS, the Company 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 Investment Advisory Agreement, effective as of
December 15, 1996, a copy of which has been provided to the Sub-Adviser, the
Company has retained the Adviser to render advisory, management, and
administrative services to many of the Company's series;
WHEREAS, the Company and the Adviser wish to retain the Sub-Adviser to
furnish investment advisory services to one or more of the series of the
Company, and the Sub-Adviser is willing to furnish such services to the Company
and the Adviser;
NOW THEREFORE, in consideration of the premises and the promises and
mutual covenants herein contained, it is agreed between the Company, the
Adviser, and the Sub-Adviser as follows:
I. Appointment. The Company and the Adviser hereby appoint The
Dreyfus Corporation to act as Sub-Adviser to the Series designated on Schedule A
of this Agreement (the "Series") for the periods and on the terms set forth in
this Agreement. The Sub-Adviser accepts such appointment and agrees to furnish
the services herein set forth for the compensation herein provided.
In the event the Company designates one or more series other
than the Series with respect to which the Company and the Adviser wish to retain
the Sub-Adviser to render investment advisory services hereunder, they shall
notify the Sub-Adviser in writing. If the Sub-Adviser is willing to render such
services, it shall notify the Company and Adviser in writing, whereupon such
series shall become a Series hereunder, and be subject to this Agreement.
2. Sub-Advisory Duties. Subject to the supervision of the
Company's Board of Directors and the Adviser, the Sub-Adviser will provide a
continuous investment program for the Series' portfolio and determine the
composition of the assets of the Series' portfolio, including determination of
the purchase, retention, or sale of the securities, cash, and other investments
contained in the portfolio. The Sub-Adviser will provide investment research and
conduct a
<PAGE> 2
continuous program of evaluation, investment, sales, and reinvestment of the
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 the Series
should be held in the various securities and other investments in which it may
invest, and the Sub-Adviser is hereby authorized to execute and perform such
services on behalf of the Series. To the extent permitted by the investment
policies of the Series, the Sub-Adviser 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
Sub-Adviser will provide the services under this Agreement in accordance with
the Series' investment objective or objectives, policies, and restrictions as
stated in the Company's Registration Statement filed with the Securities and
Exchange Commission ("SEC"), as amended, copies of which shall be sent to the
Sub-Adviser by the Adviser. The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will (1) take all steps necessary to
manage the Series so that it will qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code, (2) take all steps necessary to
manage the Series so as to ensure compliance by the Series 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 as to ensure compliance by the Series with any other rules and
regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies. The Adviser or the Company will notify the
Sub-Adviser of any pertinent changes, modifications to, or interpretations of
Section 817(h) of the Internal Revenue Code and regulations issued thereunder.
(b) The Sub-Adviser will conform with 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 Company's Board
of Directors of which the Sub-Adviser has been sent a copy, and the provisions
of the Registration Statement of the Company under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as supplemented or amended, of which the
Sub-Adviser has received a copy. The Adviser or the Company will notify the
Sub-Adviser of pertinent provisions of applicable state insurance law with which
the Sub-Adviser must comply under this Paragraph 2(b).
(c) On occasions when the Sub-Adviser deems the purchase or
sale of a security to be in the best interest of the Series as well as of other
investment advisory clients of the Sub-Adviser or any of its affiliates, the
Sub-Adviser 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 Sub-Adviser in a manner that is fair and
equitable in the judgment of the Sub-Adviser in the exercise of its fiduciary
obligations to the Company and to such other clients, subject to review by the
Adviser and the Board of Directors.
- 2 -
<PAGE> 3
(d) In connection with the purchase and sale of securities for
the Series, the Sub-Adviser 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 Sub-Adviser will arrange for the automatic
transmission of the confirmation of such trades to the Company's custodian and
portfolio accounting agent.
(e) The Sub-Adviser will monitor on a daily basis the
determination by the portfolio accounting agent for the Company of the valuation
of portfolio securities and other investments of the Series. The Sub-Adviser
will assist the custodian and portfolio accounting agent for the Company in
determining or confirming, consistent with the procedures and policies stated in
the Registration Statement for the Company, the value of any portfolio
securities or other assets of the Series for which the custodian and portfolio
accounting agent seeks assistance from or identifies for review by the
Sub-Adviser.
(f) The Sub-Adviser will make available to the Company and the
Adviser, promptly upon request, all of the Series' investment records and
ledgers maintained by the Sub-Adviser (which shall not include the records and
ledgers maintained by the custodian or portfolio accounting agent for the
Company) as are necessary to assist the Company and the Adviser 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 Sub-Adviser 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 Company are being conducted in a manner
consistent with applicable laws and regulations.
(g) The Sub-Adviser will provide reports to the Company's
Board of Directors 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 Company's Board of Directors with respect to the
Series such periodic and special reports as the Directors and the Adviser may
reasonably request.
(h) In rendering the services required under this Agreement,
the Sub-Adviser 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 Sub-Adviser 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 Company's Board of Directors and a majority of
Directors 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 Company,
the Adviser, or the Sub-Adviser, or any such company that is retained as
subadviser, and is approved by the vote of a majority of the outstanding voting
- 3 -
<PAGE> 4
securities of the applicable Series of the Company to the extent required by the
1940 Act. The Sub-Adviser shall be responsible for making reasonable inquiries
and for reasonably ensuring that any employee of the Sub-Adviser, any subadviser
that the Sub-Adviser has employed or with which it has associated with respect
to the Series, or any employee thereof has not, to the best of the Sub-Adviser's
knowledge, in any material connection with the handling of Company 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 Sub-Adviser is responsible for
decisions to buy and sell securities and other investments for the Series'
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates. The Sub-Adviser'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 Company, 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 firm 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 Sub-Adviser in the
exercise of its fiduciary obligations to the Company, by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Directors may determine and consistent with Section 28(e) of the Securities
Exchange Act of 1934, the Sub-Adviser 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 Sub-Adviser 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 Sub-Adviser's or its affiliate's
overall responsibilities with respect to the Series and to their
- 4 -
<PAGE> 5
other clients as to which they exercise investment discretion. To the extent
consistent with these standards, the Sub-Adviser is further authorized to
allocate the orders placed by it on behalf of the Series to the Sub-Adviser 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 Sub-Adviser, or an
affiliate of the Sub-Adviser. Such allocation shall be in such amounts and
proportions as the Sub-Adviser shall determine consistent with the above
standards, and the Sub-Adviser will report on said allocation regularly to the
Board of Directors of the Company indicating the broker-dealers to which such
allocations have been made and the basis therefor.
4.Disclosure about Sub-Adviser. The Sub-Adviser has reviewed
the post-effective amendment to the Registration Statement for the Company filed
with the Securities and Exchange Commission that contains disclosure about the
Sub-Adviser, and represents and warrants that, with respect to the disclosure
about the Sub-Adviser or information relating, directly or indirectly, to the
Sub-Adviser, 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 Sub-Adviser further represents
and warrants that it is a duly registered investment adviser under the Advisers
Act and a duly registered investment adviser in all states in which the
Sub-Adviser is required to be registered.
5. Expenses. During the term of this Agreement, the
Sub-Adviser will pay all expenses incurred by it and its staff and for their
activities in connection with its Sub-Advisory duties under this Agreement. The
Adviser or the Company shall be responsible for all the expenses of the
Company's operations including, but not limited to:
(a) Expenses of all audits by the Company'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 the Series' net assets;
(e) Expenses of obtaining Portfolio Activity Reports and
Analyses of International Management Reports (as appropriate) for the Series;
(f) Expenses of maintaining the Company's tax records;
- 5 -
<PAGE> 6
(g) Salaries and other compensation of any of the Company's
executive officers and employees, if any, who are not officers, directors,
stockholders, or employees of the Sub-Adviser or an affiliate of the
Sub-Adviser;
(h) Taxes levied against the Company;
(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 Company's
shareholders, the preparation and mailings of prospectuses and reports of the
Company to its shareholders, the filing of reports with regulatory bodies, the
maintenance of the Company's existence, and the regulation of shares with
federal and state securities or insurance authorities;
(l) The Company's legal fees, including the legal fees related
to the registration and continued qualification of the Company's shares for
sale;
(m) Costs of printing stock certificates representing shares
of the Company;
(n) Directors' fees and expenses to Directors who are not
officers, employees, or stockholders of the Sub-Adviser or any affiliate
thereof;
(o) The Company'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 Company as may arise
including expenses incurred in connection with litigation, proceedings, and
other claims (unless the Sub-Adviser is responsible for such expenses under
Section 14 of this Agreement), and the legal obligations of the Company to
indemnify its Directors, officers, employees, shareholders, distributors, and
agents with respect thereto; and
(r) Organizational and offering expenses.
6. Compensation. For the services provided, the Adviser will
pay the Sub-Adviser a fee, payable monthly, as described on Schedule B.
7. Seed Money. The Adviser agrees that the Sub-Adviser shall
not be responsible for providing money for the initial capitalization of the
Series.
8. Compliance.
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<PAGE> 7
(a) The Sub-Adviser agrees that it shall immediately notify
the Adviser and the Company (1) in the event that the SEC has censured the
Sub-Adviser; placed limitations upon its activities, functions or operations;
suspended or revoked its 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. The Sub-Adviser further agrees to notify the Adviser and the Company
immediately of any material fact known to the Sub-Adviser respecting or relating
to the Sub-Adviser that is not contained in the Registration Statement or
prospectus for the Company, or any amendment or supplement thereto, or of any
statement contained therein that becomes untrue in any material respect.
(b) The Adviser agrees that it shall immediately notify the
Sub-Adviser (1) in the event that the SEC has censured the Adviser or the
Company; placed limitations upon either of their activities, functions, or
operations; suspended or revoked the Adviser'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 Sub-Adviser hereby agrees that all records
which it maintains for the Series are the property of the Company and further
agrees to surrender promptly to the Company any of such records upon the
Company's or the Adviser's request, although the Sub-Adviser may, at its own
expense, make and retain a copy of such records. The Sub-Adviser 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 Securities and Exchange Commission and state insurance regulators) in
connection with any investigation or inquiry relating to this Agreement or the
Company.
11. Representations Respecting Sub-Adviser. The Adviser and
the Company agree that neither the Company, the Adviser, nor affiliated persons
of the Company or the Adviser shall give any information or make any
representations or statements in connection with the sale of shares of the
Series concerning the Sub-Adviser or the Series other than the information or
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<PAGE> 8
representations contained in the Registration Statement, prospectus, or
statement of additional information for the Company shares, as they may be
amended or supplemented from time to time, or in reports or proxy statements for
the Company, or in sales literature or other promotional material approved in
advance by the Sub-Adviser, except with the prior permission of the Sub-
Adviser. The parties agree that in the event that the Adviser or an affiliated
person of the Adviser sends sales literature or other promotional material to
the Sub-Adviser for its approval and the Sub-Adviser has not commented within 30
days, the Adviser and its affiliated persons may use and distribute such sales
literature or other promotional material, although, in such event, the Sub-
Adviser shall not be deemed to have approved of the contents of such sales
literature or other promotional material.
12. Control. Notwithstanding any other provision of the
Agreement, it is understood and agreed that the Company 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 Sub-Adviser.
13. Services Not Exclusive. It is understood that the services
of the Sub-Adviser are not exclusive, and nothing in this Agreement shall
prevent the Sub-Adviser (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 Company and the Adviser
agree that the Sub-Adviser, any affiliated person of the Sub-Adviser, and each
person, if any, who, within the meaning of Section 15 of the 1933 Act controls
the Sub-Adviser 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
Sub-Adviser's duties, or by reason of reckless disregard of the Sub-Adviser's
obligations and duties under this Agreement.
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<PAGE> 9
15. Indemnification.
(a) The Adviser agrees to indemnify and hold harmless the
Sub-Adviser, any affiliated person of the Sub-Adviser, and each person, if any,
who, within the meaning of Section 15 of the 1933 Act controls ("controlling
person") the Sub-Adviser (all of such persons being referred to as "Sub-Adviser
Indemnified Persons") against any and all losses, claims, damages, liabilities,
or litigation (including legal and other expenses) to which a Sub-Adviser
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 Adviser's responsibilities to the Company which
(1) may be based upon any misfeasance, malfeasance, or nonfeasance by the
Adviser, any of its employees or representatives or any affiliate of or any
person acting on behalf of the Adviser 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 Adviser and contained in the Registration
Statement or prospectus covering shares of the Company 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
Adviser 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 Adviser or the Company or to any
affiliated person of the Adviser by a Sub-Adviser Indemnified Person; provided
however, that in no case shall the indemnity in favor of the Sub-Adviser
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
Sub-Adviser agrees to indemnify and hold harmless the Adviser, any affiliated
person of the Adviser, and each person, if any, who, within the meaning of
Section 15 of the 1933 Act, controls ("controlling person") the Adviser (all of
such persons being referred to as "Adviser Indemnified Persons") against any and
all losses, claims, damages, liabilities, or litigation (including legal and
other expenses) to which a Adviser 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 Sub-Adviser's
responsibilities as Sub-Adviser of the Series which (1) may be based upon any
misfeasance, malfeasance, or nonfeasance by the Sub-Adviser, any of its
employees or representatives, or any affiliate of or any person acting on behalf
of the Sub-Adviser, (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 Company 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 Sub-Adviser
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 Adviser, the Company, or any affiliated person
of the Adviser or Company by the Sub-Adviser or any affiliated person of the
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<PAGE> 10
Sub-Adviser; provided, however, that in no case shall the indemnity in favor of
a Adviser 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 Adviser shall not be liable under Paragraph (a) of
this Section 15 with respect to any claim made against a Sub-Adviser Indemnified
Person unless such Sub-Adviser Indemnified Person shall have notified the
Adviser 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 Sub-Adviser Indemnified Person (or after such
Sub- Adviser Indemnified Person shall have received notice of such service on
any designated agent), but failure to notify the Adviser of any such claim shall
not relieve the Adviser from any liability which it may have to the Sub-Adviser
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 Sub-Adviser
Indemnified Person, the Adviser will be entitled to participate, at its own
expense, in the defense thereof or, after notice to the Sub-Adviser Indemnified
Person, to assume the defense thereof, with counsel satisfactory to the
Sub-Adviser Indemnified Person. If the Adviser assumes the defense of any such
action and the selection of counsel by the Adviser to represent both the Adviser
and the Sub-Adviser Indemnified Person would result in a conflict of interests
and therefore, would not, in the reasonable judgment of the Sub-Adviser
Indemnified Person, adequately represent the interests of the Sub-Adviser
Indemnified Person, the Adviser will, at its own expense, assume the defense
with counsel to the Adviser and, also at its own expense, with separate counsel
to the Sub-Adviser Indemnified Person, which counsel shall be satisfactory to
the Adviser and to the Sub-Adviser Indemnified Person. The Sub-Adviser
Indemnified Person shall bear the fees and expenses of any additional counsel
retained by it, and the Adviser shall not be liable to the Sub-Adviser
Indemnified Person under this Agreement for any legal or other expenses
subsequently incurred by the Sub-Adviser Indemnified Person independently in
connection with the defense thereof other than reasonable costs of
investigation. The Adviser shall not have the right to compromise on or settle
the litigation without the prior written consent of the Sub-Adviser Indemnified
Person if the compromise or settlement results, or may result in a finding of
wrongdoing on the part of the Sub-Adviser Indemnified Person.
(d) The Sub-Adviser shall not be liable under Paragraph (b) of
this Section 15 with respect to any claim made against a Adviser Indemnified
Person unless such Adviser Indemnified Person shall have notified the
Sub-Adviser 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 Adviser Indemnified Person (or after such
Adviser Indemnified Person shall have received notice of such service on any
designated agent), but failure to notify the Sub-Adviser of any such claim shall
not relieve the Sub-Adviser from any liability which it may have to the Adviser
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 Adviser
Indemnified Person, the Sub-Adviser will be entitled to participate, at its own
expense, in
- 10 -
<PAGE> 11
the defense thereof or, after notice to the Adviser Indemnified Person, to
assume the defense thereof, with counsel satisfactory to the Adviser Indemnified
Person. If the Sub-Adviser assumes the defense of any such action and the
selection of counsel by the Sub-Adviser to represent both the Sub-Adviser and
the Adviser Indemnified Person would result in a conflict of interests and
therefore, would not, in the reasonable judgment of the Adviser Indemnified
Person, adequately represent the interests of the Adviser Indemnified Person,
the Sub-Adviser will, at its own expense, assume the defense with counsel to the
Sub-Adviser and, also at its own expense, with separate counsel to the Adviser
Indemnified Person which counsel shall be satisfactory to the Sub-Adviser and
to the Adviser Indemnified Person. The Adviser Indemnified Person shall bear the
fees and expenses of any additional counsel retained by it, and the Sub-Adviser
shall not be liable to the Adviser Indemnified Person under this Agreement for
any legal or other expenses subsequently incurred by the Adviser Indemnified
Person independently in connection with the defense thereof other than
reasonable costs of investigation. The Sub-Adviser shall not have the right to
compromise on or settle the litigation without the prior written consent of the
Adviser Indemnified Person if the compromise or settlement results, or may
result in a finding of wrongdoing on the part of the Adviser Indemnified Person.
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 the date first indicated above and continue on an annual basis thereafter
with respect to the Series; provided that such annual continuance is
specifically approved each year by (a) the vote of a majority of the entire
Board of Directors of the Company, or by the vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Series, and
(b) the vote of a majority of those Directors 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 Sub-Adviser shall not provide any services for a
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 the 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 Company, 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 Adviser at any time without penalty, upon sixty
(60) days' written notice to the Sub-Adviser and the Company, (b) at any time
without payment of any penalty by the Company, upon the vote of a majority of
the Company's Board of Directors or a majority of the outstanding voting
securities of each Series, upon sixty (60) days' written notice to the Adviser
and the Sub-Adviser, or (c) by the Sub-Adviser at any time without penalty, upon
sixty (60) days' written notice to the Adviser and the Company. 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 Adviser or the Company, free
from any claim or retention of rights in such record by the Sub-
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<PAGE> 12
Adviser, although the Sub-Adviser 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 Directors of the
Company, including a majority of the Directors of the Company 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 MainStay or any derivative
thereof or logo associated with that name is the valuable property of the
Adviser and/or its affiliates, and that the Sub-Adviser has the right to use
such name (or derivative or logo) only with the approval of the Adviser and only
so long as the Adviser is Adviser to the Company and/or the Series. Upon
termination of the Investment Advisory Agreement between the Company and the
Adviser, the Sub-Adviser shall forthwith cease to use such name (or derivative
or logo).
(b) It is understood that the name ______________________or
any derivative thereof or logo associated with that name is the valuable
property of the Sub-Adviser and its affiliates and that the Company and/or the
Series have the right to use such name (or derivative or logo) in offering and
marketing materials of the Company with the approval of the Sub-Adviser and for
so long as the Sub-Adviser is a Sub-Adviser to the Company and/or the Series
with such approval not to be unreasonably withheld. In the event the Sub-Adviser
does not respond within (5) business days, such material shall be deemed
approved . Upon termination of this Agreement between the Company, the Adviser,
and the Sub-Adviser, the Company shall forthwith cease to use such name (or
derivative or logo).
19. The obligations of this Agreement shall be binding upon
the assets and property of the Company and shall not be binding upon any
Director, officer, or shareholder of the Company individually.
- 12 -
<PAGE> 13
20. Miscellaneous.
(a) This Agreement shall be governed by the laws of the State
of New York, 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
Sub-Adviser as an agent of the Adviser, or constituting the Adviser as an agent
of the Sub-Adviser.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed as of the day and year first above written.
MainStay VP Series Fund, Inc.
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
New York Life Insurance Company
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
The Dreyfus Corporation
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
- 14 -
<PAGE> 15
SCHEDULE A
The Series of MainStay VP Series Fund, Inc., as described in Section 1
of the attached Sub-Advisory Agreement, to which The Dreyfus Corporation shall
act as Sub-Adviser are as follows:
Dreyfus Large Company Value Portfolio
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<PAGE> 16
SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by The Dreyfus Corporation to the following
Series of MainStay VP Series Fund, Inc., pursuant to the attached Sub-Advisory
Agreement, the Adviser will pay the Sub-Adviser a fee, 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:
Rate
.50% on assets up to $100 million
.45% on assets form $100 million to $250 million
.40% on assets over $250 million
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<PAGE> 1
SUB-ADVISORY AGREEMENT
AGREEMENT made this ____ day of ______, 199__ among MainStay VP Series
Fund, Inc., (the "Company"), New York Life Insurance Company (the "Adviser") and
Eagle Asset Management Inc. (the "Sub-Adviser").
WHEREAS, the Company is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end, management investment
company;
WHEREAS, the Company is authorized to issue separate series, each of
which will offer a separate class of shares, each series having its own
investment objective or objectives, policies, and limitations;
WHEREAS, the Company 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 Investment Advisory Agreement, effective as of
December 15, 1996, a copy of which has been provided to the Sub-Adviser, the
Company has retained the Adviser to render advisory, management, and
administrative services to many of the Company's series;
WHEREAS, the Company and the Adviser wish to retain the Sub-Adviser to
furnish investment advisory services to one or more of the series of the
Company, and the Sub-Adviser is willing to furnish such services to the Company
and the Adviser;
NOW THEREFORE, in consideration of the premises and the promises and
mutual covenants herein contained, it is agreed between the Company, the
Adviser, and the Sub-Adviser as follows:
1. Appointment. The Company and the Adviser hereby appoint
Eagle Asset Management Inc. to act as Sub-Adviser to the Series designated on
Schedule A of this Agreement (the "Series") for the periods and on the terms set
forth in this Agreement. The Sub-Adviser accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
In the event the Company designates one or more series other
than the Series with respect to which the Company and the Adviser wish to retain
the Sub-Adviser to render investment advisory services hereunder, they shall
notify the Sub-Adviser in writing. If the Sub-Adviser is willing to render such
services, it shall notify the Company and Adviser in writing, whereupon such
series shall become a Series hereunder, and be subject to this Agreement.
2. Sub-Advisory Duties. Subject to the supervision of the
Company's Board of Directors and the Adviser, the Sub-Adviser will provide a
continuous investment program for the Series' portfolio and determine the
composition of the assets of the Series' portfolio, including determination of
the purchase, retention, or sale of the securities, cash, and other investments
contained in the portfolio. The Sub-Adviser will provide investment research and
conduct a
<PAGE> 2
continuous program of evaluation, investment, sales, and reinvestment of the
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 the Series
should be held in the various securities and other investments in which it may
invest, and the Sub-Adviser is hereby authorized to execute and perform such
services on behalf of the Series. To the extent permitted by the investment
policies of the Series, the Sub-Adviser 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
Sub-Adviser will provide the services under this Agreement in accordance with
the Series' investment objective or objectives, policies, and restrictions as
stated in the Company's Registration Statement filed with the Securities and
Exchange Commission ("SEC"), as amended, copies of which shall be sent to the
Sub-Adviser by the Adviser. The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will (1) take all steps necessary to
manage the Series so that it will qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code, (2) take all steps necessary to
manage the Series so as to ensure compliance by the Series 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 as to ensure compliance by the Series with any other rules and
regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies. The Adviser or the Company will notify the
Sub-Adviser of any pertinent changes, modifications to, or interpretations of
Section 817(h) of the Internal Revenue Code and regulations issued thereunder.
(b) The Sub-Adviser will conform with 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 Company's Board
of Directors of which the Sub-Adviser has been sent a copy, and the provisions
of the Registration Statement of the Company under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as supplemented or amended, of which the
Sub-Adviser has received a copy. The Adviser or the Company will notify the
Sub-Adviser of pertinent provisions of applicable state insurance law with which
the Sub-Adviser must comply under this Paragraph 2(b).
(c) On occasions when the Sub-Adviser deems the purchase or
sale of a security to be in the best interest of the Series as well as of other
investment advisory clients of the Sub-Adviser or any of its affiliates, the
Sub-Adviser 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 Sub-Adviser in a manner that is fair and
equitable in the judgment of the Sub-Adviser in the exercise of its fiduciary
obligations to the Company and to such other clients, subject to review by the
Adviser and the Board of Directors.
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<PAGE> 3
(d) In connection with the purchase and sale of securities for
the Series, the Sub-Adviser 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 Sub-Adviser will arrange for the automatic
transmission of the confirmation of such trades to the Company's custodian and
portfolio accounting agent.
(e) The Sub-Adviser will monitor on a daily basis the
determination by the portfolio accounting agent for the Company of the valuation
of portfolio securities and other investments of the Series. The Sub-Adviser
will assist the custodian and portfolio accounting agent for the Company in
determining or confirming, consistent with the procedures and policies stated in
the Registration Statement for the Company, the value of any portfolio
securities or other assets of the Series for which the custodian and portfolio
accounting agent seeks assistance from or identifies for review by the
Sub-Adviser.
(f) The Sub-Adviser will make available to the Company and the
Adviser, promptly upon request, all of the Series' investment records and
ledgers maintained by the Sub-Adviser (which shall not include the records and
ledgers maintained by the custodian or portfolio accounting agent for the
Company) as are necessary to assist the Company and the Adviser 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 Sub-Adviser 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 Company are being conducted in a manner
consistent with applicable laws and regulations.
(g) The Sub-Adviser will provide reports to the Company's
Board of Directors 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 Company's Board of Directors with respect to the
Series such periodic and special reports as the Directors and the Adviser may
reasonably request.
(h) In rendering the services required under this Agreement,
the Sub-Adviser 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 Sub-Adviser 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 Company's Board of Directors and a majority of
Directors 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 Company,
the Adviser, or the Sub-Adviser, or any such company that is retained as
subadviser, and is approved by the vote of a majority of the outstanding voting
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<PAGE> 4
securities of the applicable Series of the Company to the extent required by the
1940 Act. The Sub-Adviser shall be responsible for making reasonable inquiries
and for reasonably ensuring that any employee of the Sub-Adviser, any subadviser
that the Sub-Adviser has employed or with which it has associated with respect
to the Series, or any employee thereof has not, to the best of the Sub-Adviser's
knowledge, in any material connection with the handling of Company 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 Sub-Adviser is responsible for
decisions to buy and sell securities and other investments for the Series'
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates. The Sub-Adviser'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 Company, 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 firm 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 Sub-Adviser in the
exercise of its fiduciary obligations to the Company, by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Directors may determine and consistent with Section 28(e) of the Securities
Exchange Act of 1934, the Sub-Adviser 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 Sub-Adviser 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 Sub-Adviser's or its affiliate's
overall responsibilities with respect to the Series and to their
- 4 -
<PAGE> 5
other clients as to which they exercise investment discretion. To the extent
consistent with these standards, the Sub-Adviser is further authorized to
allocate the orders placed by it on behalf of the Series to the Sub-Adviser 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 Sub-Adviser, or an
affiliate of the Sub-Adviser. Such allocation shall be in such amounts and
proportions as the Sub-Adviser shall determine consistent with the above
standards, and the Sub-Adviser will report on said allocation regularly to the
Board of Directors of the Company indicating the broker-dealers to which such
allocations have been made and the basis therefor.
4.Disclosure about Sub-Adviser. The Sub-Adviser has reviewed
the post-effective amendment to the Registration Statement for the Company filed
with the Securities and Exchange Commission that contains disclosure about the
Sub-Adviser, and represents and warrants that, with respect to the disclosure
about the Sub-Adviser or information relating, directly or indirectly, to the
Sub-Adviser, 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 Sub-Adviser further represents
and warrants that it is a duly registered investment adviser under the Advisers
Act and a duly registered investment adviser in all states in which the
Sub-Adviser is required to be registered.
5. Expenses. During the term of this Agreement, the
Sub-Adviser will pay all expenses incurred by it and its staff and for their
activities in connection with its Sub-Advisory duties under this Agreement. The
Adviser or the Company shall be responsible for all the expenses of the
Company's operations including, but not limited to:
(a) Expenses of all audits by the Company'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 the Series' net assets;
(e) Expenses of obtaining Portfolio Activity Reports and
Analyses of International Management Reports (as appropriate) for the Series;
(f) Expenses of maintaining the Company's tax records;
- 5 -
<PAGE> 6
(g) Salaries and other compensation of any of the Company's
executive officers and employees, if any, who are not officers, directors,
stockholders, or employees of the Sub-Adviser or an affiliate of the
Sub-Adviser;
(h) Taxes levied against the Company;
(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 Company's
shareholders, the preparation and mailings of prospectuses and reports of the
Company to its shareholders, the filing of reports with regulatory bodies, the
maintenance of the Company's existence, and the regulation of shares with
federal and state securities or insurance authorities;
(l) The Company's legal fees, including the legal fees related
to the registration and continued qualification of the Company's shares for
sale;
(m) Costs of printing stock certificates representing shares
of the Company;
(n) Directors' fees and expenses to Directors who are not
officers, employees, or stockholders of the Sub-Adviser or any affiliate
thereof;
(o) The Company'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 Company as may arise
including expenses incurred in connection with litigation, proceedings, and
other claims (unless the Sub-Adviser is responsible for such expenses under
Section 14 of this Agreement), and the legal obligations of the Company to
indemnify its Directors, officers, employees, shareholders, distributors, and
agents with respect thereto; and
(r) Organizational and offering expenses.
6. Compensation. For the services provided, the Adviser will
pay the Sub-Adviser a fee, payable monthly, as described on Schedule B.
7. Seed Money. The Adviser agrees that the Sub-Adviser shall
not be responsible for providing money for the initial capitalization of the
Series.
8. Compliance.
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<PAGE> 7
(a) The Sub-Adviser agrees that it shall immediately notify
the Adviser and the Company (1) in the event that the SEC has censured the
Sub-Adviser; placed limitations upon its activities, functions or operations;
suspended or revoked its 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. The Sub-Adviser further agrees to notify the Adviser and the Company
immediately of any material fact known to the Sub-Adviser respecting or relating
to the Sub-Adviser that is not contained in the Registration Statement or
prospectus for the Company, or any amendment or supplement thereto, or of any
statement contained therein that becomes untrue in any material respect.
(b) The Adviser agrees that it shall immediately notify the
Sub-Adviser (1) in the event that the SEC has censured the Adviser or the
Company; placed limitations upon either of their activities, functions, or
operations; suspended or revoked the Adviser'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 Sub-Adviser hereby agrees that all records
which it maintains for the Series are the property of the Company and further
agrees to surrender promptly to the Company any of such records upon the
Company's or the Adviser's request, although the Sub-Adviser may, at its own
expense, make and retain a copy of such records. The Sub-Adviser 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 Securities and Exchange Commission and state insurance regulators) in
connection with any investigation or inquiry relating to this Agreement or the
Company.
11. Representations Respecting Sub-Adviser. The Adviser and
the Company agree that neither the Company, the Adviser, nor affiliated persons
of the Company or the Adviser shall give any information or make any
representations or statements in connection with the sale of shares of the
Series concerning the Sub-Adviser or the Series other than the information or
- 7 -
<PAGE> 8
representations contained in the Registration Statement, prospectus, or
statement of additional information for the Company shares, as they may be
amended or supplemented from time to time, or in reports or proxy statements for
the Company, or in sales literature or other promotional material approved in
advance by the Sub-Adviser, except with the prior permission of the Sub-
Adviser. The parties agree that in the event that the Adviser or an affiliated
person of the Adviser sends sales literature or other promotional material to
the Sub-Adviser for its approval and the Sub-Adviser has not commented within 30
days, the Adviser and its affiliated persons may use and distribute such sales
literature or other promotional material, although, in such event, the Sub-
Adviser shall not be deemed to have approved of the contents of such sales
literature or other promotional material.
12. Control. Notwithstanding any other provision of the
Agreement, it is understood and agreed that the Company 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 Sub-Adviser.
13. Services Not Exclusive. It is understood that the services
of the Sub-Adviser are not exclusive, and nothing in this Agreement shall
prevent the Sub-Adviser (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 Company and the Adviser
agree that the Sub-Adviser, any affiliated person of the Sub-Adviser, and each
person, if any, who, within the meaning of Section 15 of the 1933 Act controls
the Sub-Adviser 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
Sub-Adviser's duties, or by reason of reckless disregard of the Sub-Adviser's
obligations and duties under this Agreement.
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<PAGE> 9
15. Indemnification.
(a) The Adviser agrees to indemnify and hold harmless the
Sub-Adviser, any affiliated person of the Sub-Adviser, and each person, if any,
who, within the meaning of Section 15 of the 1933 Act controls ("controlling
person") the Sub-Adviser (all of such persons being referred to as "Sub-Adviser
Indemnified Persons") against any and all losses, claims, damages, liabilities,
or litigation (including legal and other expenses) to which a Sub-Adviser
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 Adviser's responsibilities to the Company which
(1) may be based upon any misfeasance, malfeasance, or nonfeasance by the
Adviser, any of its employees or representatives or any affiliate of or any
person acting on behalf of the Adviser 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 Adviser and contained in the Registration
Statement or prospectus covering shares of the Company 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
Adviser 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 Adviser or the Company or to any
affiliated person of the Adviser by a Sub-Adviser Indemnified Person; provided
however, that in no case shall the indemnity in favor of the Sub-Adviser
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
Sub-Adviser agrees to indemnify and hold harmless the Adviser, any affiliated
person of the Adviser, and each person, if any, who, within the meaning of
Section 15 of the 1933 Act, controls ("controlling person") the Adviser (all of
such persons being referred to as "Adviser Indemnified Persons") against any and
all losses, claims, damages, liabilities, or litigation (including legal and
other expenses) to which a Adviser 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 Sub-Adviser's
responsibilities as Sub-Adviser of the Series which (1) may be based upon any
misfeasance, malfeasance, or nonfeasance by the Sub-Adviser, any of its
employees or representatives, or any affiliate of or any person acting on behalf
of the Sub-Adviser, (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 Company 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 Sub-Adviser
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 Adviser, the Company, or any affiliated person
of the Adviser or Company by the Sub-Adviser or any affiliated person of the
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<PAGE> 10
Sub-Adviser; provided, however, that in no case shall the indemnity in favor of
a Adviser 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 Adviser shall not be liable under Paragraph (a) of
this Section 15 with respect to any claim made against a Sub-Adviser Indemnified
Person unless such Sub-Adviser Indemnified Person shall have notified the
Adviser 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 Sub-Adviser Indemnified Person (or after such
Sub- Adviser Indemnified Person shall have received notice of such service on
any designated agent), but failure to notify the Adviser of any such claim shall
not relieve the Adviser from any liability which it may have to the Sub-Adviser
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 Sub-Adviser
Indemnified Person, the Adviser will be entitled to participate, at its own
expense, in the defense thereof or, after notice to the Sub-Adviser Indemnified
Person, to assume the defense thereof, with counsel satisfactory to the
Sub-Adviser Indemnified Person. If the Adviser assumes the defense of any such
action and the selection of counsel by the Adviser to represent both the Adviser
and the Sub-Adviser Indemnified Person would result in a conflict of interests
and therefore, would not, in the reasonable judgment of the Sub-Adviser
Indemnified Person, adequately represent the interests of the Sub-Adviser
Indemnified Person, the Adviser will, at its own expense, assume the defense
with counsel to the Adviser and, also at its own expense, with separate counsel
to the Sub-Adviser Indemnified Person, which counsel shall be satisfactory to
the Adviser and to the Sub-Adviser Indemnified Person. The Sub-Adviser
Indemnified Person shall bear the fees and expenses of any additional counsel
retained by it, and the Adviser shall not be liable to the Sub-Adviser
Indemnified Person under this Agreement for any legal or other expenses
subsequently incurred by the Sub-Adviser Indemnified Person independently in
connection with the defense thereof other than reasonable costs of
investigation. The Adviser shall not have the right to compromise on or settle
the litigation without the prior written consent of the Sub-Adviser Indemnified
Person if the compromise or settlement results, or may result in a finding of
wrongdoing on the part of the Sub-Adviser Indemnified Person.
(d) The Sub-Adviser shall not be liable under Paragraph (b) of
this Section 15 with respect to any claim made against a Adviser Indemnified
Person unless such Adviser Indemnified Person shall have notified the
Sub-Adviser 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 Adviser Indemnified Person (or after such
Adviser Indemnified Person shall have received notice of such service on any
designated agent), but failure to notify the Sub-Adviser of any such claim shall
not relieve the Sub-Adviser from any liability which it may have to the Adviser
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 Adviser
Indemnified Person, the Sub-Adviser will be entitled to participate, at its own
expense, in
- 10 -
<PAGE> 11
the defense thereof or, after notice to the Adviser Indemnified Person, to
assume the defense thereof, with counsel satisfactory to the Adviser Indemnified
Person. If the Sub-Adviser assumes the defense of any such action and the
selection of counsel by the Sub-Adviser to represent both the Sub-Adviser and
the Adviser Indemnified Person would result in a conflict of interests and
therefore, would not, in the reasonable judgment of the Adviser Indemnified
Person, adequately represent the interests of the Adviser Indemnified Person,
the Sub-Adviser will, at its own expense, assume the defense with counsel to the
Sub-Adviser and, also at its own expense, with separate counsel to the Adviser
Indemnified Person which counsel shall be satisfactory to the Sub-Adviser and
to the Adviser Indemnified Person. The Adviser Indemnified Person shall bear the
fees and expenses of any additional counsel retained by it, and the Sub-Adviser
shall not be liable to the Adviser Indemnified Person under this Agreement for
any legal or other expenses subsequently incurred by the Adviser Indemnified
Person independently in connection with the defense thereof other than
reasonable costs of investigation. The Sub-Adviser shall not have the right to
compromise on or settle the litigation without the prior written consent of the
Adviser Indemnified Person if the compromise or settlement results, or may
result in a finding of wrongdoing on the part of the Adviser Indemnified Person.
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 the date first indicated above and continue on an annual basis thereafter
with respect to the Series; provided that such annual continuance is
specifically approved each year by (a) the vote of a majority of the entire
Board of Directors of the Company, or by the vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Series, and
(b) the vote of a majority of those Directors 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 Sub-Adviser shall not provide any services for a
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 the 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 Company, 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 Adviser at any time without penalty, upon sixty
(60) days' written notice to the Sub-Adviser and the Company, (b) at any time
without payment of any penalty by the Company, upon the vote of a majority of
the Company's Board of Directors or a majority of the outstanding voting
securities of each Series, upon sixty (60) days' written notice to the Adviser
and the Sub-Adviser, or (c) by the Sub-Adviser at any time without penalty, upon
sixty (60) days' written notice to the Adviser and the Company. 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 Adviser or the Company, free
from any claim or retention of rights in such record by the Sub-
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<PAGE> 12
Adviser, although the Sub-Adviser 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 Directors of the
Company, including a majority of the Directors of the Company 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 MainStay or any derivative
thereof or logo associated with that name is the valuable property of the
Adviser and/or its affiliates, and that the Sub-Adviser has the right to use
such name (or derivative or logo) only with the approval of the Adviser and only
so long as the Adviser is Adviser to the Company and/or the Series. Upon
termination of the Investment Advisory Agreement between the Company and the
Adviser, the Sub-Adviser shall forthwith cease to use such name (or derivative
or logo).
(b) It is understood that the name ______________________or
any derivative thereof or logo associated with that name is the valuable
property of the Sub-Adviser and its affiliates and that the Company and/or the
Series have the right to use such name (or derivative or logo) in offering and
marketing materials of the Company with the approval of the Sub-Adviser and for
so long as the Sub-Adviser is a Sub-Adviser to the Company and/or the Series
with such approval not to be unreasonably withheld. In the event the Sub-Adviser
does not respond within (5) business days, such material shall be deemed
approved . Upon termination of this Agreement between the Company, the Adviser,
and the Sub-Adviser, the Company shall forthwith cease to use such name (or
derivative or logo).
19. The obligations of this Agreement shall be binding upon
the assets and property of the Company and shall not be binding upon any
Director, officer, or shareholder of the Company individually.
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<PAGE> 13
20. Miscellaneous.
(a) This Agreement shall be governed by the laws of the State
of New York, 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
Sub-Adviser as an agent of the Adviser, or constituting the Adviser as an agent
of the Sub-Adviser.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed as of the day and year first above written.
MainStay VP Series Fund, Inc.
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
New York Life Insurance Company
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
Eagle Asset Management Inc.
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
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<PAGE> 15
SCHEDULE A
The Series of MainStay VP Series Fund, Inc., as described in Section 1
of the attached Sub-Advisory Agreement, to which Eagle Asset Management Inc.
shall act as Sub-Adviser are as follows:
Eagle Growth Equity Portfolio
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<PAGE> 16
SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by Eagle Asset Management Inc. to the
following Series of MainStay VP Series Fund, Inc., pursuant to the attached
Sub-Advisory Agreement, the Adviser will pay the Sub-Adviser a fee, 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:
Rate
.45% on assets up to $50 million
.40% on assets from $50 million to $300 million
.30% on assets over $300 million
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<PAGE> 1
SUB-ADVISORY AGREEMENT
AGREEMENT made this ____ day of ______, 199__ among MainStay VP Series
Fund, Inc., (the "Company"), New York Life Insurance Company (the "Adviser") and
Lord Abbett & Co. (the "Sub-Adviser").
WHEREAS, the Company is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end, management investment
company;
WHEREAS, the Company is authorized to issue separate series, each of
which will offer a separate class of shares, each series having its own
investment objective or objectives, policies, and limitations;
WHEREAS, the Company 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 Investment Advisory Agreement, effective as of
December 15, 1996, a copy of which has been provided to the Sub-Adviser, the
Company has retained the Adviser to render advisory, management, and
administrative services to many of the Company's series;
WHEREAS, the Company and the Adviser wish to retain the Sub-Adviser to
furnish investment advisory services to one or more of the series of the
Company, and the Sub-Adviser is willing to furnish such services to the Company
and the Adviser;
NOW THEREFORE, in consideration of the premises and the promises and
mutual covenants herein contained, it is agreed between the Company, the
Adviser, and the Sub-Adviser as follows:
I. Appointment. The Company and the Adviser hereby appoint
Lord Abbett & Co. to act as Sub-Adviser to the Series designated on Schedule A
of this Agreement (the "Series") for the periods and on the terms set forth in
this Agreement. The Sub-Adviser accepts such appointment and agrees to furnish
the services herein set forth for the compensation herein provided.
In the event the Company designates one or more series other
than the Series with respect to which the Company and the Adviser wish to retain
the Sub-Adviser to render investment advisory services hereunder, they shall
notify the Sub-Adviser in writing. If the Sub-Adviser is willing to render such
services, it shall notify the Company and Adviser in writing, whereupon such
series shall become a Series hereunder, and be subject to this Agreement.
2. Sub-Advisory Duties. Subject to the supervision of the
Company's Board of Directors and the Adviser, the Sub-Adviser will provide a
continuous investment program for the Series' portfolio and determine the
composition of the assets of the Series' portfolio, including determination of
the purchase, retention, or sale of the securities, cash, and other investments
contained in the portfolio. The Sub-Adviser will provide investment research and
conduct a
<PAGE> 2
continuous program of evaluation, investment, sales, and reinvestment of the
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 the Series
should be held in the various securities and other investments in which it may
invest, and the Sub-Adviser is hereby authorized to execute and perform such
services on behalf of the Series. To the extent permitted by the investment
policies of the Series, the Sub-Adviser 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
Sub-Adviser will provide the services under this Agreement in accordance with
the Series' investment objective or objectives, policies, and restrictions as
stated in the Company's Registration Statement filed with the Securities and
Exchange Commission ("SEC"), as amended, copies of which shall be sent to the
Sub-Adviser by the Adviser. The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will (1) take all steps necessary to
manage the Series so that it will qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code, (2) take all steps necessary to
manage the Series so as to ensure compliance by the Series 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 as to ensure compliance by the Series with any other rules and
regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies. The Adviser or the Company will notify the
Sub-Adviser of any pertinent changes, modifications to, or interpretations of
Section 817(h) of the Internal Revenue Code and regulations issued thereunder.
(b) The Sub-Adviser will conform with 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 Company's Board
of Directors of which the Sub-Adviser has been sent a copy, and the provisions
of the Registration Statement of the Company under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as supplemented or amended, of which the
Sub-Adviser has received a copy. The Adviser or the Company will notify the
Sub-Adviser of pertinent provisions of applicable state insurance law with which
the Sub-Adviser must comply under this Paragraph 2(b).
(c) On occasions when the Sub-Adviser deems the purchase or
sale of a security to be in the best interest of the Series as well as of other
investment advisory clients of the Sub-Adviser or any of its affiliates, the
Sub-Adviser 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 Sub-Adviser in a manner that is fair and
equitable in the judgment of the Sub-Adviser in the exercise of its fiduciary
obligations to the Company and to such other clients, subject to review by the
Adviser and the Board of Directors.
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<PAGE> 3
(d) In connection with the purchase and sale of securities for
the Series, the Sub-Adviser 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 Sub-Adviser will arrange for the automatic
transmission of the confirmation of such trades to the Company's custodian and
portfolio accounting agent.
(e) The Sub-Adviser will monitor on a daily basis the
determination by the portfolio accounting agent for the Company of the valuation
of portfolio securities and other investments of the Series. The Sub-Adviser
will assist the custodian and portfolio accounting agent for the Company in
determining or confirming, consistent with the procedures and policies stated in
the Registration Statement for the Company, the value of any portfolio
securities or other assets of the Series for which the custodian and portfolio
accounting agent seeks assistance from or identifies for review by the
Sub-Adviser.
(f) The Sub-Adviser will make available to the Company and the
Adviser, promptly upon request, all of the Series' investment records and
ledgers maintained by the Sub-Adviser (which shall not include the records and
ledgers maintained by the custodian or portfolio accounting agent for the
Company) as are necessary to assist the Company and the Adviser 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 Sub-Adviser 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 Company are being conducted in a manner
consistent with applicable laws and regulations.
(g) The Sub-Adviser will provide reports to the Company's
Board of Directors 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 Company's Board of Directors with respect to the
Series such periodic and special reports as the Directors and the Adviser may
reasonably request.
(h) In rendering the services required under this Agreement,
the Sub-Adviser 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 Sub-Adviser 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 Company's Board of Directors and a majority of
Directors 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 Company,
the Adviser, or the Sub-Adviser, or any such company that is retained as
subadviser, and is approved by the vote of a majority of the outstanding voting
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<PAGE> 4
securities of the applicable Series of the Company to the extent required by the
1940 Act. The Sub-Adviser shall be responsible for making reasonable inquiries
and for reasonably ensuring that any employee of the Sub-Adviser, any subadviser
that the Sub-Adviser has employed or with which it has associated with respect
to the Series, or any employee thereof has not, to the best of the Sub-Adviser's
knowledge, in any material connection with the handling of Company 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 Sub-Adviser is responsible for
decisions to buy and sell securities and other investments for the Series'
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates. The Sub-Adviser'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 Company, 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 firm 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 Sub-Adviser in the
exercise of its fiduciary obligations to the Company, by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Directors may determine and consistent with Section 28(e) of the Securities
Exchange Act of 1934, the Sub-Adviser 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 Sub-Adviser 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 Sub-Adviser's or its affiliate's
overall responsibilities with respect to the Series and to their
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<PAGE> 5
other clients as to which they exercise investment discretion. To the extent
consistent with these standards, the Sub-Adviser is further authorized to
allocate the orders placed by it on behalf of the Series to the Sub-Adviser 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 Sub-Adviser, or an
affiliate of the Sub-Adviser. Such allocation shall be in such amounts and
proportions as the Sub-Adviser shall determine consistent with the above
standards, and the Sub-Adviser will report on said allocation regularly to the
Board of Directors of the Company indicating the broker-dealers to which such
allocations have been made and the basis therefor.
4. Disclosure about Sub-Adviser. The Sub-Adviser has reviewed
the post-effective amendment to the Registration Statement for the Company filed
with the Securities and Exchange Commission that contains disclosure about the
Sub-Adviser, and represents and warrants that, with respect to the disclosure
about the Sub-Adviser or information relating, directly or indirectly, to the
Sub-Adviser, 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 Sub-Adviser further represents
and warrants that it is a duly registered investment adviser under the Advisers
Act and a duly registered investment adviser in all states in which the
Sub-Adviser is required to be registered.
5. Expenses. During the term of this Agreement, the
Sub-Adviser will pay all expenses incurred by it and its staff and for their
activities in connection with its Sub-Advisory duties under this Agreement. The
Adviser or the Company shall be responsible for all the expenses of the
Company's operations including, but not limited to:
(a) Expenses of all audits by the Company'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 the Series' net assets;
(e) Expenses of obtaining Portfolio Activity Reports and
Analyses of International Management Reports (as appropriate) for the Series;
(f) Expenses of maintaining the Company's tax records;
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<PAGE> 6
(g) Salaries and other compensation of any of the Company's
executive officers and employees, if any, who are not officers, directors,
stockholders, or employees of the Sub-Adviser or an affiliate of the
Sub-Adviser;
(h) Taxes levied against the Company;
(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 Company's
shareholders, the preparation and mailings of prospectuses and reports of the
Company to its shareholders, the filing of reports with regulatory bodies, the
maintenance of the Company's existence, and the regulation of shares with
federal and state securities or insurance authorities;
(l) The Company's legal fees, including the legal fees related
to the registration and continued qualification of the Company's shares for
sale;
(m) Costs of printing stock certificates representing shares
of the Company;
(n) Directors' fees and expenses to Directors who are not
officers, employees, or stockholders of the Sub-Adviser or any affiliate
thereof;
(o) The Company'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 Company as may arise
including expenses incurred in connection with litigation, proceedings, and
other claims (unless the Sub-Adviser is responsible for such expenses under
Section 14 of this Agreement), and the legal obligations of the Company to
indemnify its Directors, officers, employees, shareholders, distributors, and
agents with respect thereto; and
(r) Organizational and offering expenses.
6. Compensation. For the services provided, the Adviser will
pay the Sub-Adviser a fee, payable monthly, as described on Schedule B.
7. Seed Money. The Adviser agrees that the Sub-Adviser shall
not be responsible for providing money for the initial capitalization of the
Series.
8. Compliance.
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<PAGE> 7
(a) The Sub-Adviser agrees that it shall immediately notify
the Adviser and the Company (1) in the event that the SEC has censured the
Sub-Adviser; placed limitations upon its activities, functions or operations;
suspended or revoked its 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. The Sub-Adviser further agrees to notify the Adviser and the Company
immediately of any material fact known to the Sub-Adviser respecting or relating
to the Sub-Adviser that is not contained in the Registration Statement or
prospectus for the Company, or any amendment or supplement thereto, or of any
statement contained therein that becomes untrue in any material respect.
(b) The Adviser agrees that it shall immediately notify the
Sub-Adviser (1) in the event that the SEC has censured the Adviser or the
Company; placed limitations upon either of their activities, functions, or
operations; suspended or revoked the Adviser'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 Sub-Adviser hereby agrees that all records
which it maintains for the Series are the property of the Company and further
agrees to surrender promptly to the Company any of such records upon the
Company's or the Adviser's request, although the Sub-Adviser may, at its own
expense, make and retain a copy of such records. The Sub-Adviser 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 Securities and Exchange Commission and state insurance regulators) in
connection with any investigation or inquiry relating to this Agreement or the
Company.
11. Representations Respecting Sub-Adviser. The Adviser and
the Company agree that neither the Company, the Adviser, nor affiliated persons
of the Company or the Adviser shall give any information or make any
representations or statements in connection with the sale of shares of the
Series concerning the Sub-Adviser or the Series other than the information or
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<PAGE> 8
representations contained in the Registration Statement, prospectus, or
statement of additional information for the Company shares, as they may be
amended or supplemented from time to time, or in reports or proxy statements for
the Company, or in sales literature or other promotional material approved in
advance by the Sub-Adviser, except with the prior permission of the Sub-
Adviser. The parties agree that in the event that the Adviser or an affiliated
person of the Adviser sends sales literature or other promotional material to
the Sub-Adviser for its approval and the Sub-Adviser has not commented within 30
days, the Adviser and its affiliated persons may use and distribute such sales
literature or other promotional material, although, in such event, the Sub-
Adviser shall not be deemed to have approved of the contents of such sales
literature or other promotional material.
12. Control. Notwithstanding any other provision of the
Agreement, it is understood and agreed that the Company 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 Sub-Adviser.
13. Services Not Exclusive. It is understood that the services
of the Sub-Adviser are not exclusive, and nothing in this Agreement shall
prevent the Sub-Adviser (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 Company and the Adviser
agree that the Sub-Adviser, any affiliated person of the Sub-Adviser, and each
person, if any, who, within the meaning of Section 15 of the 1933 Act controls
the Sub-Adviser 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
Sub-Adviser's duties, or by reason of reckless disregard of the Sub-Adviser's
obligations and duties under this Agreement.
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<PAGE> 9
15. Indemnification.
(a) The Adviser agrees to indemnify and hold harmless the
Sub-Adviser, any affiliated person of the Sub-Adviser, and each person, if any,
who, within the meaning of Section 15 of the 1933 Act controls ("controlling
person") the Sub-Adviser (all of such persons being referred to as "Sub-Adviser
Indemnified Persons") against any and all losses, claims, damages, liabilities,
or litigation (including legal and other expenses) to which a Sub-Adviser
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 Adviser's responsibilities to the Company which
(1) may be based upon any misfeasance, malfeasance, or nonfeasance by the
Adviser, any of its employees or representatives or any affiliate of or any
person acting on behalf of the Adviser 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 Adviser and contained in the Registration
Statement or prospectus covering shares of the Company 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
Adviser 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 Adviser or the Company or to any
affiliated person of the Adviser by a Sub-Adviser Indemnified Person; provided
however, that in no case shall the indemnity in favor of the Sub-Adviser
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
Sub-Adviser agrees to indemnify and hold harmless the Adviser, any affiliated
person of the Adviser, and each person, if any, who, within the meaning of
Section 15 of the 1933 Act, controls ("controlling person") the Adviser (all of
such persons being referred to as "Adviser Indemnified Persons") against any and
all losses, claims, damages, liabilities, or litigation (including legal and
other expenses) to which a Adviser 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 Sub-Adviser's
responsibilities as Sub-Adviser of the Series which (1) may be based upon any
misfeasance, malfeasance, or nonfeasance by the Sub-Adviser, any of its
employees or representatives, or any affiliate of or any person acting on behalf
of the Sub-Adviser, (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 Company 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 Sub-Adviser
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 Adviser, the Company, or any affiliated person
of the Adviser or Company by the Sub-Adviser or any affiliated person of the
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<PAGE> 10
Sub-Adviser; provided, however, that in no case shall the indemnity in favor of
a Adviser 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 Adviser shall not be liable under Paragraph (a) of
this Section 15 with respect to any claim made against a Sub-Adviser Indemnified
Person unless such Sub-Adviser Indemnified Person shall have notified the
Adviser 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 Sub-Adviser Indemnified Person (or after such
Sub-Adviser Indemnified Person shall have received notice of such service on
any designated agent), but failure to notify the Adviser of any such claim shall
not relieve the Adviser from any liability which it may have to the Sub-Adviser
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 Sub-Adviser
Indemnified Person, the Adviser will be entitled to participate, at its own
expense, in the defense thereof or, after notice to the Sub-Adviser Indemnified
Person, to assume the defense thereof, with counsel satisfactory to the
Sub-Adviser Indemnified Person. If the Adviser assumes the defense of any such
action and the selection of counsel by the Adviser to represent both the Adviser
and the Sub-Adviser Indemnified Person would result in a conflict of interests
and therefore, would not, in the reasonable judgment of the Sub-Adviser
Indemnified Person, adequately represent the interests of the Sub-Adviser
Indemnified Person, the Adviser will, at its own expense, assume the defense
with counsel to the Adviser and, also at its own expense, with separate counsel
to the Sub-Adviser Indemnified Person, which counsel shall be satisfactory to
the Adviser and to the Sub-Adviser Indemnified Person. The Sub-Adviser
Indemnified Person shall bear the fees and expenses of any additional counsel
retained by it, and the Adviser shall not be liable to the Sub-Adviser
Indemnified Person under this Agreement for any legal or other expenses
subsequently incurred by the Sub-Adviser Indemnified Person independently in
connection with the defense thereof other than reasonable costs of
investigation. The Adviser shall not have the right to compromise on or settle
the litigation without the prior written consent of the Sub-Adviser Indemnified
Person if the compromise or settlement results, or may result in a finding of
wrongdoing on the part of the Sub-Adviser Indemnified Person.
(d) The Sub-Adviser shall not be liable under Paragraph (b) of
this Section 15 with respect to any claim made against a Adviser Indemnified
Person unless such Adviser Indemnified Person shall have notified the
Sub-Adviser 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 Adviser Indemnified Person (or after such
Adviser Indemnified Person shall have received notice of such service on any
designated agent), but failure to notify the Sub-Adviser of any such claim shall
not relieve the Sub-Adviser from any liability which it may have to the Adviser
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 Adviser
Indemnified Person, the Sub-Adviser will be entitled to participate, at its own
expense, in
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<PAGE> 11
the defense thereof or, after notice to the Adviser Indemnified Person, to
assume the defense thereof, with counsel satisfactory to the Adviser Indemnified
Person. If the Sub-Adviser assumes the defense of any such action and the
selection of counsel by the Sub-Adviser to represent both the Sub-Adviser and
the Adviser Indemnified Person would result in a conflict of interests and
therefore, would not, in the reasonable judgment of the Adviser Indemnified
Person, adequately represent the interests of the Adviser Indemnified Person,
the Sub-Adviser will, at its own expense, assume the defense with counsel to the
Sub-Adviser and, also at its own expense, with separate counsel to the Adviser
Indemnified Person which counsel shall be satisfactory to the Sub-Adviser and
to the Adviser Indemnified Person. The Adviser Indemnified Person shall bear the
fees and expenses of any additional counsel retained by it, and the Sub-Adviser
shall not be liable to the Adviser Indemnified Person under this Agreement for
any legal or other expenses subsequently incurred by the Adviser Indemnified
Person independently in connection with the defense thereof other than
reasonable costs of investigation. The Sub-Adviser shall not have the right to
compromise on or settle the litigation without the prior written consent of the
Adviser Indemnified Person if the compromise or settlement results, or may
result in a finding of wrongdoing on the part of the Adviser Indemnified Person.
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 the date first indicated above and continue on an annual basis thereafter
with respect to the Series; provided that such annual continuance is
specifically approved each year by (a) the vote of a majority of the entire
Board of Directors of the Company, or by the vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Series, and
(b) the vote of a majority of those Directors 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 Sub-Adviser shall not provide any services for a
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 the 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 Company, 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 Adviser at any time without penalty, upon sixty
(60) days' written notice to the Sub-Adviser and the Company, (b) at any time
without payment of any penalty by the Company, upon the vote of a majority of
the Company's Board of Directors or a majority of the outstanding voting
securities of each Series, upon sixty (60) days' written notice to the Adviser
and the Sub-Adviser, or (c) by the Sub-Adviser at any time without penalty, upon
sixty (60) days' written notice to the Adviser and the Company. 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 Adviser or the Company, free
from any claim or retention of rights in such record by the Sub-
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<PAGE> 12
Adviser, although the Sub-Adviser 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 Directors of the
Company, including a majority of the Directors of the Company 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 MainStay or any derivative
thereof or logo associated with that name is the valuable property of the
Adviser and/or its affiliates, and that the Sub-Adviser has the right to use
such name (or derivative or logo) only with the approval of the Adviser and only
so long as the Adviser is Adviser to the Company and/or the Series. Upon
termination of the Investment Advisory Agreement between the Company and the
Adviser, the Sub-Adviser shall forthwith cease to use such name (or derivative
or logo).
(b) It is understood that the name ______________________or
any derivative thereof or logo associated with that name is the valuable
property of the Sub-Adviser and its affiliates and that the Company and/or the
Series have the right to use such name (or derivative or logo) in offering and
marketing materials of the Company with the approval of the Sub-Adviser and for
so long as the Sub-Adviser is a Sub-Adviser to the Company and/or the Series
with such approval not to be unreasonably withheld. In the event the Sub-Adviser
does not respond within (5) business days, such material shall be deemed
approved . Upon termination of this Agreement between the Company, the Adviser,
and the Sub-Adviser, the Company shall forthwith cease to use such name (or
derivative or logo).
19. The obligations of this Agreement shall be binding upon
the assets and property of the Company and shall not be binding upon any
Director, officer, or shareholder of the Company individually.
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<PAGE> 13
20. Miscellaneous.
(a) This Agreement shall be governed by the laws of the State
of New York, 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
Sub-Adviser as an agent of the Adviser, or constituting the Adviser as an agent
of the Sub-Adviser.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed as of the day and year first above written.
MainStay VP Series Fund, Inc.
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
New York Life Insurance Company
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
Lord Abbett & Co.
________________________ By:________________________________
Attest
________________________ ______________________________
Title Title
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<PAGE> 15
SCHEDULE A
The Series of MainStay VP Series Fund, Inc., as described in Section 1
of the attached Sub-Advisory Agreement, to which Lord Abbett & Co. shall act as
Sub-Adviser are as follows:
Lord Abbett Developing Growth Portfolio
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<PAGE> 16
SCHEDULE B
COMPENSATION FOR SERVICES TO SERIES
For the services provided by Lord Abbett & Co. to the following Series
of MainStay VP Series Fund, Inc., pursuant to the attached Sub-Advisory
Agreement, the Adviser will pay the Sub-Adviser a fee, 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:
Rate
0.50%
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<PAGE> 1
EXHIBIT 11(a)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director and officer
of MainStay VP Series Fund, Inc. (the "Fund") does hereby constitute and
appoint each of Richard M. Kernan, Jr., Anne F. Pollack, Robert D. Rock, Sara
L. Badler and David L. Katz his true and lawful attorney-in-fact and agent,
each with full power of substitution and resubstitution for him in his name,
place and stead, to sign any and all Registration Statements applicable to the
Fund and any amendments or supplements thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ John D. Weisser Director February 10, 1998
- -------------------
John D. Weisser
