<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1999
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. 27 [X]
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 28 [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
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A. THOMAS SMITH III, ESQ.
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
JEFFREY L. STEELE
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
[X] On May 1, 1999, 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
[ ] On May 1, 1999 pursuant to paragraph (a)(1) 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.
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<PAGE> 2
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
<TABLE>
<CAPTION>
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
</TABLE>
PART B
<TABLE>
<CAPTION>
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;
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
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> 4
MainStay VP Series Fund, Inc. Prospectus May 1, 1999
- --------------------------------------------------------------------------------
Neither the Securities and Exchange
Commission nor any state securities
commission has approved or disapproved of
these securities or passed upon the
accuracy or adequacy of this prospectus.
Any representation to the contrary is a
criminal offense.
<TABLE>
<S> <C>
MAINSTAY VP SERIES FUND, INC.
OFFERS 15 PORTFOLIOS
Growth
Capital Appreciation Portfolio........ page A-5
Eagle Asset Management Growth Equity
Portfolio........................... page A-6
Growth Equity Portfolio............... page A-7
Indexed Equity Portfolio.............. page A-8
International Equity Portfolio........ page A-9
Lord Abbett Developing Growth
Portfolio........................... page A-10
Growth & Income
American Century Income & Growth
Portfolio........................... page A-11
Convertible Portfolio................. page A-12
Dreyfus Large Company Value
Portfolio........................... page A-13
Total Return Portfolio................ page A-14
Value Portfolio....................... page A-15
Income
Bond Portfolio........................ page A-16
Government Portfolio.................. page A-17
High Yield Corporate Bond Portfolio... page A-19
Cash Management Portfolio............. page A-20
</TABLE>
A-1
<PAGE> 5
WHAT'S INSIDE?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE FUND AND THE SEPARATE ACCOUNTS.......................... A-3
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND
PRINCIPAL RISKS: AN OVERVIEW.............................. A-4
MORE ABOUT INVESTMENT STRATEGIES AND RISKS.................. A-21
THE FUND AND ITS MANAGEMENT................................. A-23
Investment Advisers.................................... A-23
Portfolio Managers -- Biographies...................... A-24
Administrator.......................................... A-25
PURCHASE AND REDEMPTION OF SHARES........................... A-26
TAXES, DIVIDENDS AND DISTRIBUTIONS.......................... A-26
Taxes.................................................. A-26
Dividends and Distributions............................ A-26
GENERAL INFORMATION......................................... A-27
Custodian.............................................. A-27
Performance and Yield Information...................... A-27
FINANCIAL HIGHLIGHTS........................................ A-28
</TABLE>
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A-2
<PAGE> 6
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 fifteen 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
Asset Management Growth Equity Portfolio ("Eagle Asset Management Growth
Equity") and the MainStay VP Lord Abbett Developing Growth Portfolio ("Lord
Abbett Developing Growth") (each a "Portfolio" and collectively the
"Portfolios"). 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 certain Separate Accounts to
fund variable annuity policies and variable life insurance policies issued by
New York Life Insurance and Annuity Corporation ("NYLIAC") (collectively,
"Policies" and individually, "Policy").
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 of a Policy ("Owner"). 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> 7
Investment Objectives, Principal Investment Strategies
and Principal Risks: An Overview
This prospectus discusses 15 Portfolios which invest for varying combinations of
income and capital appreciation. Each of the Portfolios pursues somewhat
different strategies to achieve its objective, but all of the equity Portfolios
invest, under normal market conditions, primarily in equity securities and all
of the fixed income Portfolios invest, under normal market conditions, primarily
in debt or fixed income securities.
Publicly held corporations may raise needed cash by issuing or selling equity
securities to investors. When you buy stock in a corporation you become part
owner. The Portfolios may buy equity securities through principal stock
exchanges, such as the New York Stock Exchange or the American Stock Exchange,
or in the over-the-counter market. There are many different types of equity
securities, including stocks, convertible securities, American Depositary
Receipts and others. Investors buy equity securities to make money through
dividend payments and/or selling them for more than they paid.
Both governments and private companies may raise needed cash by issuing or
selling debt securities to investors. The Portfolios may buy debt securities
directly from those governments and companies or in the secondary trading
markets. There are many different types of debt securities, including bonds,
notes, debentures and others. Some pay fixed rates of return; others pay
variable rates. Interest may be paid at different intervals. Some debt
securities do not make regular interest payments, but instead are initially sold
at a discount to the principal amount to be paid at maturity. The amount of
interest paid is subject to many variables, including creditworthiness of the
issuer, length of maturity of the security, market factors, and the nature of
the debt instrument. Each of the Portfolios described in this prospectus invests
in particular types of debt securities, consistent with its own investment
objective and strategies which are described in the succeeding pages of this
prospectus.
NOT INSURED
An investment in the Portfolios is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Cash Management Portfolio seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by investing in
the Portfolio.
YOU COULD LOSE MONEY
Before considering one or more investments, you should understand that you could
lose money.
NAV WILL FLUCTUATE
The value of Portfolio shares, also known as the net asset value (NAV), will
fluctuate based on the value of the Portfolio's holdings. Security values
change. Investment in common stocks and other equity securities is particularly
subject to the risks of changing economic, stock market, industry and company
conditions and the risks inherent in management's ability to anticipate such
changes that can adversely affect the value of a Portfolio's holdings. In the
case of debt securities, security values change when interest rates change.
Generally when interest rates go up, the value of a debt security goes down and
when interest rates go down, the value of a debt security goes up. Other
factors, such as changes in how the market views the creditworthiness of an
issuer, changes in economic or market conditions, changes in relative values of
currencies, the risks inherent in management's ability to anticipate such
changes, and changes in the average maturity of a Portfolio's investment can
also affect security values and Portfolio share price.
MORE INFORMATION
The next section of this prospectus gives you more detailed information about
the investment objectives, policies, principal investment strategies, principal
risks, performance and expenses of each of the Portfolios offered in this
prospectus. Please review it carefully.
A-4
<PAGE> 8
CAPITAL APPRECIATION PORTFOLIO
INVESTMENT OBJECTIVE -- The Capital Appreciation Portfolio's investment
objective is to seek long-term growth of capital. Dividend income, if any, is an
incidental consideration.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests in common
stock of companies with investment characteristics such as:
- - participation in expanding product or service markets
- - increasing unit sales volume
- - increasing return on investment
- - 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)
INVESTMENT PROCESS -- The Portfolio maintains a flexible approach towards
investing in various types of companies as well as types of securities,
including common stocks, preferred stocks, warrants and other equity securities,
depending upon the economic environment and the relative attractiveness of the
various securities markets.
As a result, the Portfolio may invest in any other securities which, in the
judgment of MacKay-Shields Financial Corporation ("MacKay-Shields"), the
Portfolio's Adviser, are ready for a rise in price, or expected to undergo an
acceleration in growth of earnings. The latter could occur because of special
factors such as new management, new products, changes in consumer demand or
changes in the economy.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings. Opportunities for greater gain often come with greater risk of loss.
Some of the securities may carry above-average risk compared to common stock
indexes such as the Dow Jones Industrial Average and the S&P 500.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year, five
years and the life of the Portfolio compare to those of a broad-based securities
market index. Separate account and contract charges are not reflected in the bar
chart. If they were, returns would be less than those shown. As with all mutual
funds, past performance is not necessarily an indication of how the Portfolio
will perform in the future.
<TABLE>
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO QUARTER/YEAR RETURN
<S> <C> <C>
Highest Return/Best Quarter 4/98 26.65
Lowest Return/Worst Quarter 3/98 -8.33
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
SINCE
1 YEAR 5 YEARS INCEPTION 1/29/93
<S> <C> <C> <C>
Capital Appreciation
Portfolio 38.14 21.33 21.50
S&P 500 Index* 28.58 24.06 21.78
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
[Capital Appreciation Fund Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
94 -4.38
95 35.78
96 18.75
97 23.49
98 38.14
</TABLE>
A-5
<PAGE> 9
EAGLE ASSET MANAGEMENT GROWTH EQUITY PORTFOLIO
INVESTMENT OBJECTIVE -- The Eagle Asset Management Growth Equity Portfolio's
investment objective is to seek growth through long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests at least 65%
of the Portfolio's total assets in U.S. common stocks. A majority of the Eagle
Asset Management 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.
INVESTMENT PROCESS -- The Portfolio invests in common stocks that Eagle Asset
Management, Inc., the Portfolio's Sub-Adviser, believes have sufficient
long-term growth potential to offer above average long-term capital
appreciation. Companies in which the Portfolio invests will normally 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
- - high profit margin, or
- - consistent and predictable earnings.
The Sub-Adviser selects common stock of a company based in part on the
sustainability of the company's competitive advantage in the marketplace as well
as the strength of the company's management team.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns.
PAST PERFORMANCE -- Performance information is not included as of December 31,
1998 because the Portfolio had less than one year of operating history.
A-6
<PAGE> 10
GROWTH EQUITY PORTFOLIO
INVESTMENT OBJECTIVE -- The Growth Equity Portfolio's investment objective is to
seek long-term growth of capital, with income as a secondary consideration.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests in common
stocks of larger capitalization, well managed companies which appear to have
better than average potential for capital appreciation.
INVESTMENT PROCESS -- The Portfolio will seek to identify companies which, in
the opinion of Madison Square Advisors, Inc, the Portfolio's Adviser, are
considered to represent good value based on historical investment standards,
including price/book value ratios and price/earnings ratios. The Portfolio is
managed with a growth/value orientation which is determined by market
conditions. The Adviser uses a "top-down" approach which assesses the
macroeconomic environment to determine sector weightings.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns.
The principal risk of investing in value stocks is that the value stocks in
which the Portfolio invests may never reach what the Adviser believes is their
full value or that they may even go down in value.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over a ten year period and by showing how
the Portfolio's average annual total returns for one, five and ten years compare
to those of a broad-based securities market index. Separate account and contract
charges are not reflected in the bar chart. If they were, returns would be less
than those shown. As with all mutual funds, past performance is not necessarily
an indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
GROWTH EQUITY PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 4/98 20.11
Lowest Return/Worst Quarter 3/90 -14.90
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Growth Equity Portfolio 26.59 21.16 18.16
S&P 500 Index* 28.58 24.06 19.21
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
[Growth Equity Fund Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
89 25.97
90 -5.89
91 33.86
92 12.57
93 13.73
94 1.21
95 29.16
96 24.50
97 26.75
98 26.59
</TABLE>
A-7
<PAGE> 11
INDEXED EQUITY PORTFOLIO
INVESTMENT OBJECTIVE -- The Indexed Equity Portfolio's investment objective is
to seek to provide investment results that correspond to the total return
performance (and reflect reinvestment of dividends) of publicly traded common
stocks represented by the S&P 500 Index.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests at least 80%
of its total assets in stocks in the S&P 500 Index, to the extent feasible, in
the same proportion as they are represented in the S&P 500 Index.
INVESTMENT PROCESS -- Unlike other funds, which generally seek to beat market
averages index funds seek to match their respective indices. No attempt is made
to manage the portfolio in the traditional sense using economic, financial and
market analysis. Monitor Capital Advisors, Inc., the Portfolio's Adviser, uses
statistical techniques to determine which stocks are to be purchased or sold to
replicate the S&P 500 Index to the extent feasible. From time to time,
adjustments may be made in the Portfolio's holdings because of changes in the
composition of the S&P 500 Index, but such changes should be infrequent.
The correlation between the performance of the Portfolio and the S&P 500 Index
is expected to be at least 0.95. A
- ------------
"Standard & Poor's(R)", "S&P(R)", "500", "Standard & Poor's 500" and "S&P
500(R)" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by Monitor Capital Advisors, Inc. Standard & Poor's does not sponsor,
endorse, sell or promote the Portfolio or represent the advisability of
investing in the Portfolio. The S&P 500 is an unmanaged index and is considered
to be generally representative of the U.S. stock market. Typically, companies
included in the S&P 500 Index are the largest and most dominant firms in their
respective industries.
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 Index.
The Portfolio's investments also include S&P 500 Index futures which are used to
replicate the S&P 500 Index and for cash management purposes.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings. If the value of the S&P 500 Index declines, the net asset value of
shares of the Portfolio will also decline. The Portfolio's ability to mirror the
S&P 500 Index may be affected by, among other things, transactions costs,
changes in either the makeup of the S&P 500 Index or number of shares
outstanding for the components of the S&P 500 Index, and the timing and amount
of contributions to, and redemptions from, the Portfolio by shareholders.
Consistent with its principal investment strategies, the Portfolio's investments
include DERIVATIVES such as futures. The Portfolio may lose money using
derivatives. The use of derivatives may increase the volatility of the
Portfolio's net asset value and may involve a small investment of cash relative
to the magnitude of risk assumed.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year, five
years and the life of the Portfolio compare to those of a broad-based securities
market index. Separate account and contract charges are not reflected in the bar
chart. If they were, returns would be less than those shown. As with all mutual
funds, past performance is not necessarily an indication of how the Portfolio
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
INDEXED EQUITY PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 4/98 21.46
Lowest Return/Worst Quarter 3/98 -9.97
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION 1/29/93
Indexed Equity Portfolio 28.49 23.58 21.23
S&P 500 Index* 28.58 24.06 21.78
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
[Indexed Equity Fund Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
94 0.76
95 36.89
96 22.42
97 32.84
98 28.49
</TABLE>
A-8
<PAGE> 12
INTERNATIONAL EQUITY PORTFOLIO
INVESTMENT OBJECTIVE -- The International Equity Portfolio's investment
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.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests at least 65%
of its total assets in a diversified portfolio of equity securities of issuers,
wherever organized, who do business mainly outside the United States.
Investments will be made in a variety of countries, with a minimum of five
countries other than the United States. This includes countries with established
economies as well as emerging market countries that MacKay-Shields Financial
Corporation, the Portfolio's Adviser, believes present favorable opportunities.
INVESTMENT PROCESS -- In pursuing the Portfolio's investment strategy, the
Adviser seeks to identify investment opportunities by beginning with country
selection. Local currencies are then assessed for upside potential and downside
risk. Finally, individual securities are evaluated based on the financial
condition and competitiveness of individual companies. In making investments in
foreign markets, the Adviser considers several factors including prospects for
currency exchange, interest rates, inflation, relative economic growth and
governmental policies.
As part of its investment strategy, the Portfolio may buy and sell currency on a
spot basis and enter into foreign currency forward contracts for hedging
purposes or to increase the Portfolio's investment return. In addition, the
Portfolio may buy foreign currency options, securities and securities index
options, foreign currency options, and enter into swap agreements and futures
contracts and related options. These techniques may be used for any legally
permissible purpose including to increase the Portfolio's returns.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings.
Since the Portfolio principally invests in FOREIGN SECURITIES, it will be
subject to various risks of loss that are different from risks of investing in
securities of U.S. based companies. These include losses due to fluctuating
currency values, less liquid trading markets, greater price volatility,
political and economic instability, less publicly available issuer information,
changes in U.S. or foreign tax or currency laws, and changes in monetary policy.
The risks are likely to be greater in emerging market countries than in
developed market countries.
The Portfolio's investments include DERIVATIVES such as options, futures,
forwards, and swap agreements. The Portfolio may use derivatives to try to
enhance returns or reduce the risk of loss (hedge) of certain of its holdings.
Regardless of the purpose, the Portfolio may lose money using derivatives. The
derivatives may increase the volatility of the Portfolio's net asset value and
may involve a small investment of cash relative to the magnitude of risk
assumed.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year and the
life of the Portfolio compare to those of a broad-based securities market index.
Separate account and contract charges are not reflected in the bar chart. If
they were, returns would be less than those shown. As with all mutual funds,
past performance is not necessarily an indication of how the Portfolio will
perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 4/98 19.78
Lowest Return/Worst Quarter 3/98 -13.31
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C>
SINCE
1 YEAR INCEPTION 8/1/95
International Equity Portfolio 23.11 11.66
Morgan Stanley Capital
International EAFE Index* 20.00 8.81
</TABLE>
* The Morgan Stanley Capital International Europe, Australia, Far East
Index -- the EAFE Index -- is an unmanaged, capitalization-weighted index
containing approximately 1,200 equity securities of companies located outside
the U.S.
[International Equity Fund Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
96 10.54
97 5.17
98 23.11
</TABLE>
A-9
<PAGE> 13
LORD ABBETT DEVELOPING GROWTH PORTFOLIO
INVESTMENT OBJECTIVE -- The Lord Abbett Developing Growth Portfolio's investment
objective is to seek 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.
PRINCIPAL INVESTMENT STRATEGIES -- Normally, the Portfolio invests primarily in
the common stocks of companies with long-range growth potential, particularly
smaller companies considered to be in the developing growth phase. This phase is
a period of swift development, when growth occurs at a rate rarely equaled by
established companies in their mature years. The Portfolio looks for companies
in this phase and, under normal circumstances, will invest at least 65% of its
total assets in securities of such companies. Developing growth companies are
almost always small, often young (in relation to the large companies which make
up the Standard & Poor's 500 Stock Index), and their shares are frequently
traded over the counter. Having, in Lord, Abbett & Co.'s, the Portfolio's
Sub-Adviser, view, passed the pitfalls of the formative years, these companies
may now be in a position to grow rapidly in their market. However, the actual
growth of a company cannot be foreseen and it may be difficult to determine in
which phase a company is presently situated. In addition, the Portfolio may
invest in companies which are in their formative years.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns.
Opportunities for greater gain often come with greater risk of loss. The stocks
of Developing Growth Companies may carry above-average risk compared to common
stock indexes such as the S&P 500 Index.
PAST PERFORMANCE -- Performance information is not included as of December 31,
1998 because the Portfolio had less than one year of operating history.
A-10
<PAGE> 14
AMERICAN CENTURY INCOME & GROWTH PORTFOLIO
INVESTMENT OBJECTIVE -- The American Century Income & Growth Portfolio's
investment objective is to seek dividend growth, current income and capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests in equity
securities of the 1,500 largest companies traded in the United States (ranked by
market capitalization).
INVESTMENT PROCESS -- American Century Investment Management, Inc., the
Portfolio's Sub-Adviser, uses quantitative management strategies in pursuit of
the Portfolio's investment objective.
Quantitative management combines two investment approaches. The first is to rank
stocks based on their relative attractiveness. The attractiveness of a stock is
determined analytically by using a computer model to combine measures of a
stock's value and measures of its growth potential. Examples of valuation
measures include stock price to book value and stock price to cash flow ratios
while examples of growth measures include the rate of growth of a company's
earnings and changes in analysts' earnings estimates.
The second step is to use a technique referred to as portfolio optimization.
Using a computer the Sub-Adviser constructs a portfolio (i.e., company names and
shares held in each) which seeks the optimal tradeoff between the risk of the
portfolio relative to a benchmark (i.e., the S&P 500) and the expected return of
the portfolio as measured by the stock ranking model. With respect to the
Portfolio, the portfolio optimization includes targeting a dividend yield that
exceeds that of the S&P 500.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings.
PAST PERFORMANCE -- Performance information is not included as of December 31,
1998 because the Portfolio had less than one year of operating history.
A-11
<PAGE> 15
CONVERTIBLE PORTFOLIO
INVESTMENT OBJECTIVE -- The Convertible Portfolio's investment objective is to
seek capital appreciation together with current income.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests at least 65%
of its total assets in such "convertible securities" as bonds, debentures,
corporate notes, preferred stocks or other securities that are convertible into
common stock or the cash value of a stock or a basket or index of equity
securities.
The Portfolio takes a flexible approach by investing in a broad range of
securities of a variety of companies and industries. The Portfolio may invest
without restriction in securities rated BB or B by S&P or Ba or B by Moody's,
or, if unrated, that are judged to be of comparable quality by MacKay-Shields
Financial Corporation, the Portfolio's Adviser.
The balance of the Portfolio may be invested in non-convertible debt or equity
securities or U.S. Government securities or may be invested or held in cash or
cash equivalents.
INVESTMENT PROCESS -- In selecting convertible securities for purchase or sale,
the Adviser 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.
RISKS -- The value of debt securities fluctuates depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities. Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings. 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.
Principal Investments include high yield debt securities (sometimes called "junk
bonds") which are generally considered speculative because they present a
greater risk of loss than higher quality debt securities. These securities pay a
premium -- a high interest rate or yield -- because of this increased risk of
loss. These securities can be also subject to greater price volatility.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year and the
life of the Portfolio compare to those of a broad-based securities market index.
Separate account and contract charges are not reflected in the bar chart. If
they were, returns would be less than those shown. As with all mutual funds,
past performance is not necessarily an indication of how the Portfolio will
perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
CONVERTIBLE PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 1/98 10.90
Lowest Return/Worst Quarter 3/98 -11.30
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C>
SINCE
1 YEAR INCEPTION 10/1/96
Convertible Portfolio 4.49 13.24
First Boston Convertible
Securities Index* 6.55 11.70
</TABLE>
* The First Boston Convertible Securities Index generally includes 250-300
issues -- convertibles must have a minimum issue size of $50 million; bonds
and preferreds must be rated B- or better by S&P; and preferreds must have a
minimum of 500,000 shares outstanding. Eurobonds are also included if they are
issued by U.S.-domiciled companies, rated B- or higher by S&P, and have an
issue size of greater than $100 million.
[Convertible Portfolio Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
97 15.42
98 4.49
</TABLE>
A-12
<PAGE> 16
DREYFUS LARGE COMPANY VALUE PORTFOLIO
INVESTMENT OBJECTIVE -- The Dreyfus Large Company Value Portfolio's investment
objective is capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests at least 65%
of its total assets in equity securities of large capitalization domestic and
foreign issuers which are characterized as "value" companies. Value companies
are those The Dreyfus Corporation, the Portfolio's Sub-Adviser, believes are
underpriced according to certain financial measurements of their intrinsic worth
or business prospects, such as price to earnings or price to book ratios. Equity
securities consist of common stocks, convertible securities and preferred
stocks. The Portfolio's economic sector weightings generally approximate those
of the S&P 500(R) Index.
INVESTMENT PROCESS -- In choosing stocks, the Sub-Adviser uses proprietary
computer models to identify stocks that appear favorably priced and that may
benefit from the current market and economic conditions. The Sub-Adviser then
reviews these stocks for factors that could signal a rise in price, such as: new
products or markets; opportunities for greater market share; more effective
management; or positive changes in corporate structure or market perception.
The Portfolio may also invest some assets in options futures and foreign
currencies. The Portfolio typically sells a stock when it is no longer
considered a value company, appears less likely to benefit from the current
market and economic environment, shows deteriorating fundamentals or falls short
of the Sub-Adviser's expectations.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings.
The principal risk of investing in value stocks is that the value stocks in
which the Portfolio invests may never reach what the Sub-Adviser believes is
their full value or that they may even go down in value. In addition, different
types of stocks tend to shift in and out of favor depending on market and
economic conditions and therefore the Portfolio's performance may be lower or
higher than that of funds that invest in other types of equity securities (such
as those emphasizing growth stocks).
Since the Portfolio invests in FOREIGN SECURITIES, it will be subject to various
risks of loss that are different from risks of investing in securities of U.S.
based companies. These include losses due to fluctuating currency values, less
liquid trading markets, greater price volatility, political and economic
instability, less publicly available issuer information, changes in U.S. or
foreign tax or currency laws, and changes in monetary policy. The risks are
likely to be greater in emerging market countries than in developed market
countries.
Principal investments include DERIVATIVES such as options and futures. The
Portfolio may use derivatives to try to enhance returns or reduce the risk of
loss (hedge) of certain of its holdings. Regardless of the purpose, the
Portfolio may lose money using derivatives. The derivatives may increase the
volatility of the Portfolio's net asset value and may involve a small investment
of cash relative to the magnitude of risk assumed.
The Portfolio can buy securities with borrowed money (a form of leverage), which
could have the effect of magnifying the Portfolio's gains or losses.
PAST PERFORMANCE -- Performance information is not included as of December 31,
1998 because the Portfolio had less than one year of operating history.
A-13
<PAGE> 17
TOTAL RETURN PORTFOLIO
INVESTMENT OBJECTIVE -- The Total Return Portfolio's investment objective is to
realize current income consistent with reasonable opportunity for future growth
of capital and income.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests a minimum of
30% of its net assets in equity securities and a minimum of 30% of its net
assets in debt 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 at the time of purchase. The Portfolio will also invest in stocks
and other equity securities which it believes to be undervalued.
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 Financial
Corporation, the Portfolio's Adviser. Principal debt investments include U.S.
government securities, mortgage-related and asset-backed securities.
Mortgage-related securities (including mortgage-backed securities) are debt
securities whose values are based on underlying pools of mortgages. These
securities may be issued by U.S. governmental entities or private investors. The
values of asset-backed securities are based on underlying pools of other
receivables. As part of the Portfolio's principal strategies, the Adviser may
use mortgage dollar roll transactions or investment practice. In a mortgage
dollar roll transaction, the Portfolio sells a mortgage-backed security to
another party and agrees to buy a similar security from the same party at a set
price at a later date.
INVESTMENT PROCESS -- 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.
PRINCIPAL RISKS -- Since the Portfolio may allocate its assets among equity and
debt securities, it therefore has some exposure to the risks of both stocks and
bonds. Investment in common stocks and other equity securities is particularly
subject to the risks of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Portfolio's holdings. The
value of debt securities fluctuate depending upon various factors, including
interest rates, issuer creditworthiness, market conditions and maturities.
Consistent with its principal investment strategies, the Portfolio's investments
include DERIVATIVES such as mortgaged-related and asset-backed securities. The
Portfolio may use derivatives to try to enhance returns or reduce the risk of
loss (hedge) of certain of its holdings. Regardless of the purpose, the
Portfolio may lose money using derivatives.
The principal risk of MORTGAGE DOLLAR ROLLS is that the security the Portfolio
receives at the end of the transaction is worth less than the security the
Portfolio sold to the same counterparty at the beginning of the transaction.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year, five
years and the life of the Portfolio compare to those of a broad-based securities
market index. Separate account and contract charges are not reflected in the bar
chart. If they were, returns would be less than those shown. As with all mutual
funds, past performance is not necessarily an indication of how the Portfolio
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL RETURN PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 4/98 16.87
Lowest Return/Worst Quarter 2/94 -4.36
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION 1/29/93
Total Return Portfolio 27.13 15.64 15.72
S&P 500 Index* 25.58 24.06 21.78
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
[Total Return Portfolio Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
94 -3.99
95 28.33
96 12.08
97 17.79
98 27.13
</TABLE>
A-14
<PAGE> 18
VALUE PORTFOLIO
INVESTMENT OBJECTIVE -- The Value Portfolio's investment objective is to realize
maximum long-term total return from a combination of capital growth and income.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests at least 65%
of its total assets in common stocks that:
- - MacKay-Shields Financial Corporation, the Portfolio's Adviser, believes were
"undervalued" (selling below their value) when purchased;
- - typically pay dividends, although there may be non-dividend paying stocks if
they meet the "undervalued" criteria; and
- - are listed on a national securities exchange or are traded in the
over-the-counter market.
INVESTMENT PROCESS -- Usually, stocks deemed by the Portfolio's Adviser to be at
full value will be replaced with new, "undervalued" stocks. When assessing
whether a stock is undervalued, the Adviser considers many factors and will
compare the market price to:
- - the company's "book" value;
- - estimated value of the company's assets (liquidating value);
- - cash flow; and
- - to a lesser extent will also look at trends and forecasts such as growth rates
and future earnings.
The Portfolio is not designed or managed primarily to produce current income.
PRINCIPAL RISKS -- Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Portfolio's
holdings.
The principal risk of investing in value stocks is that they may never reach
what the Adviser believes is their full value or that they may even go down in
value. In addition, different types of stocks tend to shift in and out of favor
depending on market and economic conditions and therefore the Portfolio's
performance may be lower or higher than that of funds that invest in other types
of equity securities (such as those emphasizing growth stocks).
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year and the
life of the Portfolio compare to those of a broad-based securities market index.
Separate account and contract charges are not reflected in the bar chart. If
they were, returns would be less than those shown. As with all mutual funds,
past performance is not necessarily an indication of how the Portfolio will
perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
VALUE PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 2/97 11.26
Lowest Return/Worst Quarter 3/98 -14.07
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C>
SINCE
1 YEAR INCEPTION 5/1/95
Value Portfolio -4.14 14.55
S&P 500 Index* 28.58 29.33
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
[Value Portfolio Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
96 23.22
97 22.89
98 -4.14
</TABLE>
A-15
<PAGE> 19
BOND PORTFOLIO
INVESTMENT OBJECTIVE -- The Bond Portfolio's investment objective is to seek the
highest income over the long term consistent with preservation of principal.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests 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.
Madison Square Advisors, Inc. is the Portfolio's Adviser.
PRINCIPAL RISKS -- The value of debt securities fluctuate depending upon various
factors, including interest rates, issuer creditworthiness, market conditions
and maturity. Investments in the Portfolio are not guaranteed even though some
of the Portfolio's investments are guaranteed by the U.S. government or its
agencies or instrumentalities.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over a ten year period and by showing how
the Portfolio's average annual total returns for one, five and ten years compare
to those of a broad-based securities market index. Separate account and contract
charges are not reflected in the bar chart. If they were, returns would be less
than those shown. As with all mutual funds, past performance is not necessarily
an indication of how the Portfolio will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BOND PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 2/89 6.74
Lowest Return/Worst Quarter 1/94 -2.97
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Bond Portfolio 9.12 6.89 8.96
Merrill Lynch Corporate and*
Government Master Index 9.53 7.34 9.35
</TABLE>
* The Merrill Lynch Corporate and Government Master Index is an unmanaged index
consisting of issues of the U.S. Government and its agencies as well as
investment-grade corporate securities. Results assume the reinvestment of all
income and capital gains distributions.
[Bond Portfolio Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
89 11.56
90 8.01
91 18.43
92 8.13
93 11.38
94 -3.4
95 18.31
96 2.05
97 9.65
98 9.12
</TABLE>
A-16
<PAGE> 20
GOVERNMENT PORTFOLIO
INVESTMENT OBJECTIVE -- The Government Portfolio's investment objective is to
seek a high level of current income, consistent with safety of principal.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests at least 65%
of its total assets in U.S. government securities. It may invest up to 35% of
its total assets in mortgage-related and asset-backed securities or other
securities that are not U.S. government securities. Mortgage-related securities
(including mortgage-backed securities) are debt securities whose values are
based on underlying pools of mortgages. These securities may be issued by U.S.
governmental entities or private investors. The values of asset-backed
securities are based on underlying pools of other receivables.
INVESTMENT PROCESS -- In pursuing the Portfolio's investment strategies,
MacKay-Shields Financial Corporation, the Portfolio's Adviser, uses a combined
approach to investing, analyzing economic trends, as well as factors pertinent
to particular issuers and securities.
The Portfolio's principal investments are debt securities issued or guaranteed
by the U.S. government and its agencies and instrumentalities. These securities
include U.S. Treasury bills (maturing in one year or less), notes (maturing in
1-10 years) and bonds (generally maturing in 10 or more years), as well as
Government National Mortgage Association mortgage-backed certificates and other
U.S. government securities representing ownership interests in mortgage pools
such as securities issued by the Federal National Mortgage Association and by
the Federal Home Loan Mortgage Corporation. Principal investments also include
floaters and inverse floaters as well as money market instruments and cash
equivalents. Floaters are debt securities with a variable interest rate that is
tied to another interest rate such as a money market index or Treasury bill
rate. 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. As
part of the Portfolio's principal strategies, the Adviser may use a variety of
investment practices such as mortgage-dollar roll transactions, transactions on
a when-issued basis and portfolio securities lending. In a mortgage dollar roll
transaction the Portfolio sells a mortgage-backed security from its portfolio to
a another party, and agrees to buy a similar security from the same party at a
later date. A when-issued security is a security that, although authorized, has
not yet been issued. The price (or yield) of such security is fixed at the time
of purchase but delivery and payment take place at a later date.
PRINCIPAL RISKS -- The value of debt securities fluctuates depending upon
various factors, including interest rates, issuer creditworthiness, market
conditions and maturity. Investments in the Portfolio are NOT GUARANTEED, even
though some of the Portfolio's investments are guaranteed by the U.S. government
or its agencies or instrumentalities.
Principal investments also include DERIVATIVES such as floaters and inverse
floaters and mortgaged-related and asset-backed securities. The Portfolio may
use derivatives to try to enhance returns or reduce the risk of loss (hedge) of
certain of its holdings. Regardless of the purpose, the Portfolio may lose money
using derivatives. The derivatives may increase the volatility of the
Portfolio's net asset value.
The Portfolio's use of investment practices such as mortgage dollar rolls,
forward commitments, transactions on a when-issued basis and securities lending
also presents certain risks. The principal risk of MORTGAGE DOLLAR ROLL
TRANSACTIONS is that the security the Portfolio receives at the end of the
transaction is worth less than the security the Portfolio sold to the same
counterparty at the beginning of the transaction. The principal risk of
WHEN-ISSUED SECURITIES is that the security will be worth less when it is issued
than the price the Portfolio agreed to pay when it made the commitment. The
principal risk of SECURITIES LENDING is that the financial institution that
borrows securities from the Portfolio could go bankrupt and the Portfolio might
not be able to recover the securities or their value.
A-17
<PAGE> 21
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year, five
years and the life of the Portfolio compare to those of a broad-based securities
market index. Separate account and contract charges are not reflected in the bar
chart. If they were, returns would be less than those shown. As with all mutual
funds, past performance is not necessarily an indication of how the Portfolio
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
GOVERNMENT PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 2/95 5.52
Lowest Return/Worst Quarter 1/96 -2.46
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION 1/29/93
Government Portfolio 9.00 6.94 6.32
Lehman Brothers
Government Bond Index* 9.85 7.18 7.49
</TABLE>
* The Lehman Brothers Government Bond Index includes issues of the U.S.
government and agencies thereof, as well as fixed rate debt-issues that are
rated investment grade by Moody's, S&P, or Fitch, in that order, with at least
one year to maturity.
[Government Portfolio Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
94 -1.84
95 16.72
96 2.28
97 9.48
98 9.00
</TABLE>
A-18
<PAGE> 22
HIGH YIELD CORPORATE BOND PORTFOLIO
INVESTMENT OBJECTIVES -- The High Yield Corporate Bond Portfolio's investment
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.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio normally invests at least 65%
of its total assets in corporate debt securities including all types of domestic
and foreign corporate debt securities that are ordinarily rated in the lower
rating categories of Moody's (Baa and below) and S&P (BBB and below) or that are
unrated but that are considered by MacKay-Shields Financial Corporation, the
Portfolio's Adviser, to be of comparable quality.
INVESTMENT PROCESS -- In pursuing the Portfolio's investment strategy, the
Adviser seeks to identify investment opportunities based on the financial
condition and competitiveness of individual companies. The Portfolio's principal
investments include domestic corporate debt securities, Yankee
(dollar-denominated) debt securities, zero coupon bonds and U.S. government
securities. Zero coupon bonds are debt obligations issued without any
requirement for the periodic payment of interest. They are issued at a
significant discount to face value and tend to be more volatile than
conventional debt securities. The Portfolio may invest up to 25% of its total
assets in equity securities.
PRINCIPAL RISKS -- The value of debt securities fluctuates depending upon
various factors, including interest rates, issuer creditworthiness, market
conditions and maturity. The Portfolio principally invests in HIGH YIELD DEBT
SECURITIES (sometimes called "junk bonds") which are generally considered
speculative because they present a greater risk of loss, including default, than
higher quality debt securities. The securities in these categories pay a
premium--a high interest rate or yield--because of the increased risk of loss.
These securities can be also subject to greater price volatility.
Investment in common stocks and other equity securities is particularly subject
to risks of changing economic, stock market, industry and company conditions
which can adversely affect the value of the Portfolio's holdings.
Since the Portfolio invests in FOREIGN SECURITIES, it can be subject to various
risks of loss that are different from the risks of investing in securities of
U.S. based companies. These include losses due to fluctuating currency values,
less liquid trading markets, greater price volatility, political and economic
instability, less publicly available information about issuers, changes in U.S.
or foreign tax or currency laws, and changes in monetary policy. These risks are
likely to be greater in emerging market countries than in developed market
countries.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year and the
life of the Portfolio compare to those of a broad-based securities market index.
Separate account and contract charges are not reflected in the bar chart. If
they were, returns would be less than those shown. As with all mutual funds,
past performance is not necessarily an indication of how the Portfolio will
perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
HIGH YIELD CORPORATE BOND PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 2/97 6.40
Lowest Return/Worst Quarter 3/98 -7.26
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C>
SINCE
1 YEAR INCEPTION 5/1/95
High Yield Corporate Bond Portfolio 2.66 12.61
First Boston High Yield Index* 0.58 9.54
</TABLE>
* The First Boston High Yield Index is a market-weighted index that includes
publicly traded bonds rated below BBB by S&P and Baa by Moody's.
[High Yield Corporate Bond Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
96 17.16
97 13.03
98 2.66
</TABLE>
A-19
<PAGE> 23
CASH MANAGEMENT PORTFOLIO
INVESTMENT OBJECTIVE -- The Cash Management Portfolio's investment objective is
to seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity.
PRINCIPAL INVESTMENT STRATEGIES -- The Portfolio invests in short-term
dollar-denominated securities, maturing in 397 days (13 months) or less. The
weighted average portfolio maturity will not exceed 90 days. These securities
may include U.S. government securities; bank and bank holding company
obligations such as CDs and bankers' acceptances; commercial paper which is
short-term; unsecured loans to corporations; other corporate loans of one year
or less; and dollar-denominated loans to U.S. and foreign issuers and securities
of foreign branches of U.S. banks such as negotiable CDs, also known as
Eurodollars. These securities may be variable rate master demand notes, floating
rate notes and mortgage-related and asset-backed securities. Mortgage-related
securities (including mortgage-backed securities) are debt securities whose
values are based on underlying pools of mortgages. These securities may be
issued by U.S. governmental entities or private investors. The values of
asset-backed securities are based on underlying pools of other receivables.
Floaters are debt securities with a variable rate that is tied to another
interest rate such as a money market index or Treasury bill rate. All securities
purchased by the Portfolio must meet the requirements of Rule 2a-7 of the
Investment Company Act of 1940 which are designed to mitigate the risk of loss.
There must be a reasonable expectation that at any time until the final maturity
of a floating rate instrument or the period remaining until the principal amount
can be recovered through demand, the market value of the floating rate
instrument will approximate its amortized cost.
PRINCIPAL RISKS -- An investment in the Portfolio is NOT INSURED OR GUARANTEED
by the Federal Deposit Insurance Corporation or any other government agency.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Portfolio. This
could occur because of highly unusual market conditions or a sudden collapse in
the creditworthiness of a company once believed to be an issuer of high-quality,
short-term securities.
Since the Portfolio invests in dollar denominated FOREIGN SECURITIES, it can be
subject to various risks of loss that are different from risks of investing in
securities of U.S. based issuers. These include political and economic
instability, less publicly available issuer information and changes in U.S. or
foreign tax or currency laws.
The Portfolio's principal investments include DERIVATIVES such as variable rate
master demand notes, floaters and mortgage-related and asset-backed securities.
If the Adviser is wrong about its creditworthiness assessments, expectations of
changes in interest rates or market conditions, as a result of an investment or
its use of derivatives the Portfolio could suffer a loss.
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Portfolio
by showing changes in its performance over the life of the Portfolio and by
showing how the Portfolio's average annual total returns for one year, five
years and the life of the Portfolio compare to those of a broad-based securities
market index. Separate account and contract charges are not reflected in the bar
chart. If they were, returns would be less than those shown. As with all mutual
funds, past performance is not necessarily an indication of how the Portfolio
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
CASH MANAGEMENT PORTFOLIO QUARTER/YEAR RETURN
Highest Return/Best Quarter 2/95 1.40
Lowest Return/Worst Quarter 1/94 0.70
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION 1/29/93
Cash Management Portfolio 5.18 4.96 4.60
Lipper Money Market Funds
Index* 5.10 4.90 4.56
</TABLE>
* The Lipper Money Market Funds Index is an equally weighted performance index
adjusted for capital gains distributions and income dividends of the largest
qualifying funds in the investment objective. The funds invest in high-quality
financial instruments rated in the top two grades with a dollar-weighted
average maturity of less than 90 days.
[Cash Management Portfolio Bar Chart]
<TABLE>
<CAPTION>
<S> <C>
94 3.82
95 5.59
96 4.96
97 5.25
98 5.18
</TABLE>
A-20
<PAGE> 24
MORE ABOUT INVESTMENT STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
Information about each Portfolio's principal investments, investment practices
and principal risks appears at the beginning of the prospectus. The information
below further describes the principal investments, investment practices and
risks pertinent to a Portfolio.
DERIVATIVE SECURITIES
The value of derivatives is based on certain underlying equity or fixed-income
securities, interest rates, currencies or indexes. They may be hard to sell and
are very sensitive to changes in the underlying security, interest rate,
currency or index, and as a result can be highly volatile. If an Adviser is
wrong about its expectations of changes in interest rates or market conditions,
the use of derivatives could result in a loss.
In addition, the leverage associated with inverse floaters, a type of
derivative, may result in greater volatility in their market value than other
income-producing securities. With respect to mortgage-backed and asset-backed
securities, if interest rates fall, the underlying mortgages and debt may be
paid off reducing the value of a Portfolio's investments.
FOREIGN SECURITIES
Foreign investments could be more difficult to sell than U.S. investments. They
also may subject a Portfolio to risks different from investing in domestic
securities. Investments in foreign securities involve difficulties in receiving
or interpreting financial and economic information, possible imposition of
taxes, higher brokerage and custodian fees, possible currency exchange controls
or other government restrictions, including possible seizure or nationalization
of foreign deposits or assets. Foreign securities may also be less liquid and
more volatile than U.S. securities. There may also be difficulty in invoking
legal protections across borders. In addition, investment in emerging market
countries presents risks in greater degree than those presented by investment in
foreign issuers in countries with developed securities markets and more advanced
regulatory systems.
Some foreign securities are issued by companies organized outside the United
States and are traded only or primarily in trading markets outside the United
States. These foreign securities can be subject to most, if not all, of the
risks of foreign investing. Some foreign securities are issued by companies
organized outside the United States but are traded in U.S. securities markets
and are denominated in U.S. dollars. For example, American Depositary Receipts
and shares of some large foreign-based companies are traded on principal U.S.
exchanges. Other securities are not traded in the United States but are
denominated in U.S. dollars. These securities are not subject to all the risks
of foreign investing. For example, foreign trading market or currency risks will
not apply to dollar denominated securities traded in U.S. securities markets.
Many of the foreign securities in which the Portfolios invest will be
denominated in foreign currencies. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in foreign currencies. Exchange
rate movements can be large and can endure for extended periods of time,
affecting either favorably or unfavorably the value of the Portfolios' assets. A
Portfolio may, however, engage in foreign currency transactions to attempt to
protect itself against fluctuations in currency exchange rates in relation to
the U.S. dollar. See "Risk Management Techniques."
LENDING OF PORTFOLIO SECURITIES
Portfolio securities may be lent to brokers, dealers and financial institutions
to realize additional income under guidelines adopted by the Board of Directors.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities, a Portfolio's Adviser or
Sub-Adviser will consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities are derivative securities whose
value is based on 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 Adviser's or Sub-Adviser's
ability to correctly forecast interest rates and other economic factors
correctly will impact the success of investments in mortgage-backed and
asset-backed securities. 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 some or
all of the premium may be lost in the event of prepayment.
RISK MANAGEMENT TECHNIQUES
Various techniques can be used to increase or decrease a Portfolio's exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices or other
A-21
<PAGE> 25
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 and securities indexes.
These practices can be used 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 Adviser or Sub-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.
SWAP AGREEMENTS
Certain of the Portfolios may enter into interest rate, index and currency
exchange rate swap agreements to attempt to obtain a desired return at a lower
cost than a direct investment in an instrument yielding that desired return.
Whether a Portfolio's use of swap agreements will be successful will depend on
whether the Adviser correctly predicts movements in interest rates, indexes and
currency exchange rates. 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, with swap agreements the other party could go bankrupt
and a Portfolio could lose the value of the security it should have received in
the swap. See "Tax Status" in the SAI for information regarding the tax
considerations relating to swap agreements.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Debt securities are often issued on a when-issued basis. The price (or yield) 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 no interest accrues to the Portfolio. The market value of the
when-issued securities on the settlement date may be more or less than the
purchase price payable at settlement date. Similarly, a Portfolio may commit to
purchase a security at a future date at a price determined at the time of the
commitment. The same procedures for when-issued securities will be followed.
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
Debt securities rated lower than Baa by Moody's or BBB by S&P or, if not rated,
determined to be of equivalent quality by the Adviser are sometimes referred to
as junk bonds and are considered speculative.
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. Moreover, such
securities may, under certain circumstances, be less liquid than higher rated
debt securities.
TEMPORARY DEFENSIVE INVESTMENTS
In times of unusual or adverse conditions, for temporary defensive purposes each
Portfolio may invest outside the scope of its principal investment focus. During
this time, the Portfolio may not invest in accordance with its investment
objective or investment strategies. As a result, there is no assurance that the
Portfolio will achieve its investment objective. Under such conditions, each
Portfolio may invest without limit in money market and other investments and as
described in the next section of the prospectus. In addition, under such
conditions, the International Equity Portfolio may invest without limit in
equity securities of U.S. issuers and bonds and the High Yield Corporate Bond
Portfolio may invest without limit in securities rated A or higher by Moody's or
S&P and in U.S. government securities.
PORTFOLIO TURNOVER
Portfolio turnover measures the amount of trading a Portfolio does during the
year. The portfolio turnover for each Portfolio is found in the Financial
Highlights section. The use of certain investment strategies may generate
increased portfolio turnover. Portfolios with high turnover rates (over 100%)
often have higher transaction costs (which are paid by the Portfolio).
OTHER INFORMATION
The services provided to the Portfolios by the Adviser, the Sub-Advisers and the
Portfolio's other service providers (including foreign sub-custodians and
depositories) are dependent on those service providers' computer systems. Many
computer software and hardware systems in use today cannot distinguish between
the year 2000 and the year 1900 because of the way dates are encoded and
calculated (the "Year 2000 Issue"). The failure to make
A-22
<PAGE> 26
this distinction could have a negative implication on handling securities
trades, pricing and account services. The Adviser, the Sub-Adviser and the
Portfolios' other service providers are taking steps that each believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that they use. The Portfolios have no reason to believe these steps will
not be sufficient to avoid any material adverse impact on the Portfolios,
although there can be no assurances. The costs or consequences of incomplete or
untimely resolution of the Year 2000 Issue are unknown to the Adviser, the
Sub-Adviser and the Portfolios' other service providers at this time but could
have a material adverse impact on the operations of the Portfolios and the
Adviser, the Sub-Adviser and the Portfolios' other service providers. In
addition, companies in which the Portfolios invest may experience Year 2000
Issue difficulties which could adversely impact their business and adversely
affect the value of the securities issued by them.
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
The Board of Directors supervises the business affairs and investments of each
Portfolio, which are managed on a daily basis by each Portfolio's Adviser or
Sub-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, 1998, MacKay-Shields managed
over $30 billion in assets, primarily for institutional clients.
Madison Square Advisors, Inc., 51 Madison Avenue, New York, NY 10010 is the
investment adviser to the Bond and Growth Equity Portfolios. Madison Square
Advisors is a wholly-owned subsidiary of NYLIFE Inc. and an indirect subsidiary
of New York Life and replaced New York Life as investment adviser to the Bond
and Growth Equity Portfolios pursuant to a Substitution Agreement dated May 1,
1999. The substitution had no effect on investment personnel, investment
strategies or fees of the Portfolio. As of December 31, 1998 Madison Square
Advisors managed over $100 million in assets.
New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010 is the
investment adviser to the American Century Income & Growth, Dreyfus Large
Company Value, Eagle Asset Management 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 over $75
billion as of December 31, 1998.
Monitor Capital Advisors, Inc., 504 Carnegie Center, Princeton, NJ 08540 is the
investment adviser to the Indexed Equity Portfolio. As of December 31, 1998,
Monitor managed over $4.4 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 Agreement for each Portfolio,
MacKay-Shields, Madison Square Advisors, New York Life or Monitor 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 the Portfolios it manages, monitors the Sub-Advisers'
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-Advisory 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, Madison Square
Advisors, New York Life or Monitor a monthly fee for the investment advisory
A-23
<PAGE> 27
services performed at an annual 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%
Indexed Equity Portfolio.................... .10%
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 Asset Management Growth Equity
Portfolio................................. .50%
Growth Equity Portfolio..................... .25%
Lord Abbett Developing Growth Portfolio..... .60%
</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. For these services, the Sub-Advisers are
paid a monthly fee by New York Life, not the Portfolios (see the SAI for a
breakdown of fees.) 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.
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. The Dreyfus Corporation is an indirect wholly owned subsidiary
of Mellon Bank Corporation, which provides a comprehensive range of financial
products and services.
Eagle Asset Management, Inc., whose principal place of business is St.
Petersburg, Florida, serves as Sub-Adviser to the Eagle Asset Management Growth
Equity Portfolio. 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.
PORTFOLIO MANAGERS -- BIOGRAPHIES
NEIL FEINBERG -- Mr. Feinberg has managed the Convertible Portfolio since
inception. Mr. Feinberg is a Director of MacKay-Shields. He joined the firm in
1992.
DENIS LAPLAIGE -- Mr. Laplaige has managed the Value Portfolio since inception.
Mr. Laplaige is President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields. He joined the firm in 1982, became a Director in 1988,
Managing Director in 1991, a member of the Board of Directors in 1993, President
in 1994 and Senior Managing Director and Chief Investment Officer in 1996.
MAUREEN MCFARLAND -- Ms. McFarland has managed the International Equity
Portfolio since 1998. Ms. McFarland is an Associate Director at MacKay-Shields.
She joined MacKay-Shields in 1997 as Currency Overlay Manager in the Global
Division. Prior to joining the company, Ms. McFarland was employed at Brown
Brothers Harriman & Co., where she was the Team Leader of the Global Fixed
Income Area.
EDWARD MUNSHOWER -- Mr. Munshower has managed the Government Portfolio since
inception. Mr. Munshower is a Director of MacKay-Shields. He joined
MacKay-Shields as a fixed income investment specialist in 1985 after having been
an investment analyst for New York Life Insurance Company.
JOSEPH PORTERA -- Mr. Portera has managed the International Equity Portfolio
since 1998. Mr. Portera is a Director of MacKay-Shields specializing in
international bonds. He returned to MacKay-Shields in December 1996 after
working at Fiduciary Trust Company International as a portfolio manager in
international bonds. Mr. Portera joined MacKay-Shields in 1991.
STEVEN TANANBAUM -- Mr. Tananbaum has managed the High Yield Corporate Bond
Portfolio since inception. Mr. Tananbaum, a Managing Director of MacKay-
Shields, joined MacKay-Shields in 1989.
JAMES AGOSTISI -- Mr. Agostisi has managed the Growth Equity Portfolio since
1994. Mr. Agostisi is a Director--Portfolio Management of Madison Square
Advisors and of New York Life Insurance Company. He has 14 years of investment
experience at New York Life and has been a Director--Portfolio Management of
Madison Square Advisors since its establishment.
A-24
<PAGE> 28
RUDOLPH C. CARRYL -- Mr. Carryl has managed the Capital Appreciation and Total
Return Portfolios since inception. Mr. Carryl is a Managing Director of
MacKay-Shields. He joined MacKay-Shields as a Director in 1992 with 12 years of
investment management and research experience. Mr. Carryl was Research Director
and Senior Portfolio Manager at Value Line, Inc. from 1978 to 1992.
JEFFERSON C. BOYCE -- Mr. Boyce has managed the Indexed Equity Portfolio since
March 1999. Mr. Boyce has been Chairman and Chief Executive Officer of Monitor
Capital since 1997. Prior to that he was Senior Vice President of Monitor
Capital from 1992 to 1997. Mr. Boyce is also a Senior Vice President of New York
Life and serves as an officer and/or director of various other subsidiaries and
affiliated entities of New York Life.
STEPHEN KILLIAN -- Mr. Killian has managed the Indexed Equity Portfolio since
February 1999. Mr. Killian is a Vice President with portfolio management
responsibility for international equity funds, active quantitative equity
portfolios and development of quantitative strategies at Monitor Capital. He
joined Monitor Capital in 1997 after being a Partner and Senior Portfolio
Manager at RhumbLine Advisers from 1992 to 1997. Mr. Killian is a candidate in
the CFA Program.
PATRICIA S. ROSSI -- Ms. Rossi has managed the Growth Equity Portfolio since
1995. Ms. Rossi is Managing Director--Portfolio Management of Madison Square
Advisors and of New York Life Insurance Company. She joined New York Life in
1995 as Head of Public Equities and has been a Managing Director--Portfolio
Management of Madison Square Advisors since its establishment. Ms. Rossi has
over 20 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.
RICHARD ROSEN -- Mr. Rosen has managed the Value Portfolio since January 1999.
Mr. Rosen is a Director of MacKay-Shields and specializes in equity securities.
He joined MacKay-Shields in January 1999 after working as a Managing Director
and equity portfolio manager at Prudential Investments.
STEPHEN J. MCGRUDER -- Mr. McGruder has managed the Lord Abbett Developing
Growth Portfolio since its inception 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. Mr. McGruder has been in the investment
business since 1969.
JOHN SCHNIEDWIND -- Mr. Schniedwind has managed the American Century Income &
Growth Portfolio since its inception. He is Senior Vice President and Group
Head -- Quantitative Equity, at American Century which he joined in 1982.
KURT BORGWARDT -- Mr. Borgwardt has managed the American Century Income & Growth
Portfolio since its inception. He joined American Century in 1990 and has served
as the Director of Quantitative Equity Research since then.
TIMOTHY M. GHRISKEY -- Mr. Ghriskey is the Portfolio Manager of the Dreyfus
Large Company Value Portfolio and has been with Dreyfus since July 1995. From
1988 to June 1995 Mr. Ghriskey was Vice President and Associate Managing Partner
of Loomis, Sayles & Company.
ASHI PARIKH -- Mr. Parikh has managed the Eagle Asset Management Growth Equity
Portfolio since April 1999. He is Managing Director and Portfolio Manager for
the large capitalization Growth Equity Program at Eagle. Mr. Parikh joined Eagle
in 1999 from Banc One Investment Advisors, Inc., where he was Managing Director
of their Growth Equity Team. He joined Banc One Corporation in 1992 and Banc One
Investment Advisors in 1994.
ALBERT R. CORAPI, JR -- Mr. Corapi has managed the Bond Portfolio since 1990. He
joined Madison Square Advisors as a Portfolio Manager in 1997. He is also a
Director in the Investment Department of New York Life which he joined in 1985.
CELIA M. HOLTZBERG -- Ms. Holtzberg manages the Bond Portfolio. She joined
Madison Square Advisors as a Portfolio Manager in 1997. She is also a Vice
President in the Investment Department of New York Life which she joined in
1986.
JOSEPH DEPASQUALE -- Mr. DePasquale has managed the Bond Portfolio since 1998.
He joined Madison Square Advisors as a Portfolio Manager in 1997. He is also a
Director in the Investment Department of New York Life which he joined in 1992.
EDMUND C. SPELMAN -- Mr. Spelman has managed the Capital Appreciation and Total
Return Portfolios since inception. Mr. Spelman is a Managing Director at MacKay-
Shields and specializes in equity securities. He joined MacKay-Shields in 1991
after working as a securities analyst at Oppenheimer & Co., Inc. from 1983 to
1990.
THOMAS WYNN -- Mr. Wynn has managed the Convertible Portfolio since 1997. Mr.
Wynn joined MacKay-Shields in 1995 as a research analyst. He was previously a
portfolio manager at Fiduciary Trust for nine years and has over 12 years
experience in investment management and research.
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
A-25
<PAGE> 29
agreement, retained MainStay Management, Inc., 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.
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.
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
Shares in each of the Portfolios 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 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.
Certain Portfolios invest in securities that are primarily listed on foreign
securities exchanges that trade on weekdays or other days when the Fund does not
price shares. As a result, the net asset value of those Portfolios' shares may
change on days when shareholders will not be able to purchase or redeem their
shares.
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
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
A-26
<PAGE> 30
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.
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,
90 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.
A-27
<PAGE> 31
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Portfolios' financial performance for the past five years or, if shorter, the
period of a Portfolio's operations. Certain information reflects financial
results for a single portfolio share. The total returns in the table represent
the rate that an investor would have earned on an investment in that portfolio
(assuming reinvestment of all dividends and distributions). This information has
been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, are included in the Fund's Statement of Additional
Information, which is available upon request.
<TABLE>
<CAPTION>
CAPITAL APPRECIATION CASH MANAGEMENT
PORTFOLIO PORTFOLIO
------------------------------------------------------ -------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------------------------ -------------------
1998 1997 1996 1995 1994 1998 1997
---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD........................... $ 22.39 $ 18.39 $ 15.49 $ 11.45 $ 12.03 $ 1.00 $ 1.00
---------- -------- -------- -------- -------- -------- --------
Net investment income.............. 0.03 0.00(a) 0.01 0.06 0.05 0.05 0.05
Net realized and unrealized gain
(loss) on investments............ 8.51 4.31 2.90 4.04 (0.58) -- --
---------- -------- -------- -------- -------- -------- --------
Total from investment operations... 8.54 4.31 2.91 4.10 (0.53) 0.05 0.05
---------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income....... (0.03) (0.00)(a) (0.01) (0.06) (0.05) (0.05) (0.05)
From net realized gain on
investments.................... (0.29) (0.31) -- -- -- -- --
---------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.................... (0.32) (0.31) (0.01) (0.06) (0.05) (0.05) (0.05)
---------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD... $ 30.61 $ 22.39 $ 18.39 $ 15.49 $ 11.45 $ 1.00 $ 1.00
========== ======== ======== ======== ======== ======== ========
Total investment return#........... 38.14% 23.49% 18.75% 35.78% (4.38%) 5.18% 5.25%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Net investment income............ 0.11% 0.00%(b) 0.09% 0.57% 0.63% 5.05% 5.13%
Net expenses..................... 0.64% 0.65% 0.73% 0.73% 0.73% 0.54% 0.54%
Expenses (before
reimbursement)................. 0.64% 0.65% 0.75% 0.90% 0.91% 0.54% 0.54%
Portfolio turnover rate............ 27% 34% 16% 35% 39% -- --
Net assets at end of period (in
000's)........................... $1,236,864 $763,079 $503,622 $244,536 $113,999 $231,552 $140,782
<CAPTION>
CASH MANAGEMENT CONVERTIBLE
PORTFOLIO PORTFOLIO
---------------------------- ------------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED OCT. 1,
DECEMBER 31, DECEMBER 31, 1996** TO
---------------------------- ------------------ DEC. 31,
1996 1995 1994 1998 1997 1996
-------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD........................... $ 1.00 $ 1.00 $ 1.00 $ 10.76 $ 10.27 $ 10.00
-------- ------- ------- ------- ------- -------
Net investment income.............. 0.05 0.05 0.04 0.51 0.44 0.10
Net realized and unrealized gain
(loss) on investments............ -- -- -- (0.02) 1.12 0.29
-------- ------- ------- ------- ------- -------
Total from investment operations... 0.05 0.05 0.04 0.49 1.56 0.39
-------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income....... (0.05) (0.05) (0.04) (0.52) (0.44) (0.10)
From net realized gain on
investments.................... -- -- -- (0.40) (0.63) (0.02)
-------- ------- ------- ------- ------- -------
Total dividends and
distributions.................... (0.05) (0.05) (0.04) (0.92) (1.07) (0.12)
-------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD... $ 1.00 $ 1.00 $ 1.00 $ 10.33 $ 10.76 $ 10.27
======== ======= ======= ======= ======= =======
Total investment return#........... 4.95% 5.59% 3.82% 4.49% 15.43% 3.89%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Net investment income............ 4.92% 5.44% 3.97% 5.19% 5.13% 5.14%*
Net expenses..................... 0.62% 0.62% 0.62% 0.72% 0.73% 0.73%*
Expenses (before
reimbursement)................. 0.64% 0.94% 0.89% 0.72% 0.78% 1.46%*
Portfolio turnover rate............ -- -- -- 209% 217% 15%
Net assets at end of period (in
000's)........................... $118,347 $87,839 $71,116 $57,711 $39,768 $15,464
</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) Less than one cent per share.
(b) Less than one-hundredth of a percent.
A-28
<PAGE> 32
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT
PORTFOLIO
------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD................................ $ 9.83 $ 9.59 $ 10.01 $ 9.21 $ 10.15
-------- ------- ------- ------- -------
Net investment income................... 0.45 0.67 0.65 0.75 0.75
Net realized and unrealized gain (loss)
on investments........................ 0.44 0.24 (0.42) 0.80 (0.94)
Net realized and unrealized gain (loss)
on foreign currency transactions...... -- -- -- -- --
-------- ------- ------- ------- -------
Total from investment operations........ 0.89 0.91 0.23 1.55 (0.19)
-------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income............ (0.45) (0.67) (0.65) (0.75) (0.75)
From net realized gain on
investments......................... -- -- -- -- --
From net realized gain on investments
and foreign currency transactions... -- -- -- -- --
In excess of net investment income.... -- -- -- -- --
In excess of net realized gain on
investments......................... -- -- -- -- --
-------- ------- ------- ------- -------
Total dividends and distributions....... (0.45) (0.67) (0.65) (0.75) (0.75)
-------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD........ $ 10.27 $ 9.83 $ 9.59 $ 10.01 $ 9.21
======== ======= ======= ======= =======
Total investment return#................ 9.00% 9.48% 2.28% 16.72% (1.84%)
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Net investment income................. 5.50% 6.71% 6.66% 7.80% 8.16%
Net expenses.......................... 0.63% 0.63% 0.67% 0.67% 0.67%
Expenses (before reimbursement)....... 0.63% 0.63% 0.71% 0.82% 0.87%
Portfolio turnover rate................. 405% 345% 304% 592% 483%
Net assets at end of period (in
000's)................................ $119,021 $73,755 $73,123 $64,812 $61,641
<CAPTION>
HIGH YIELD CORPORATE BOND INTERNATIONAL EQUITY
PORTFOLIO PORTFOLIO
------------------------------------------ ---------------------------------------
FOR THE YEAR ENDED MAY 1, FOR THE YEAR ENDED MAY 1,
DECEMBER 31, 1995** TO DECEMBER 31, 1995** TO
------------------------------ DEC. 31, --------------------------- DEC. 31,
1998 1997 1996 1995 1998 1997 1996 1995
-------- -------- -------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD................................ $ 11.73 $ 11.61 $ 10.55 $ 10.00 $ 10.31 $ 10.65 $ 10.20 $ 10.00
-------- -------- -------- ------- ------- ------- ------- -------
Net investment income................... 1.08 0.85 0.59 0.37 0.23 1.06 0.44 0.64
Net realized and unrealized gain (loss)
on investments........................ (0.76) 0.65 1.22 0.61 2.20 0.27 0.06 0.01
Net realized and unrealized gain (loss)
on foreign currency transactions...... (0.00)(a) -- -- -- (0.05) (0.78) 0.56 0.05
-------- -------- -------- ------- ------- ------- ------- -------
Total from investment operations........ 0.32 1.50 1.81 0.98 2.38 0.55 1.06 0.70
-------- -------- -------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income............ (1.09) (0.84) (0.59) (0.37) (0.23) (0.89) (0.60) (0.06)
From net realized gain on
investments......................... (0.04) (0.54) (0.16) (0.04) -- -- -- --
From net realized gain on investments
and foreign currency transactions... -- -- -- -- -- -- (0.01) (0.44)
In excess of net investment income.... -- -- -- -- (0.06) -- -- --
In excess of net realized gain on
investments......................... -- -- -- (0.02) -- -- -- --
-------- -------- -------- ------- ------- ------- ------- -------
Total dividends and distributions....... (1.13) (1.38) (0.75) (0.43) (0.29) (0.89) (0.61) (0.50)
-------- -------- -------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD........ $ 10.92 $ 11.73 $ 11.61 $ 10.55 $ 12.40 $ 10.31 $ 10.65 $ 10.20
======== ======== ======== ======= ======= ======= ======= =======
Total investment return#................ 2.66% 13.03% 17.16% 10.06% 23.11% 5.17% 10.54% 6.96%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Net investment income................. 9.93% 8.84% 8.59% 10.02%* 1.13% 1.25% 1.01% 1.07%*
Net expenses.......................... 0.58% 0.59% 0.67% 0.67%* 0.97% 0.97% 0.97% 0.97%*
Expenses (before reimbursement)....... 0.58% 0.59% 0.71% 1.25%* 1.17% 1.25% 1.51% 2.51%*
Portfolio turnover rate................. 151% 153% 149% 95% 57% 61% 16% 14%
Net assets at end of period (in
000's)................................ $569,813 $424,567 $205,001 $43,314 $38,006 $30,272 $34,509 $14,631
</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) Less than one cent per share.
A-29
<PAGE> 33
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN VALUE
PORTFOLIO PORTFOLIO
---------------------------------------------------- ------------------------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED MAY 1,
DECEMBER 31, DECEMBER 31, 1995** TO
---------------------------------------------------- ------------------------------ DEC. 31,
1998 1997 1996 1995 1994 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF
PERIOD............... $ 16.47 $ 14.56 $ 13.26 $ 10.58 $ 11.32 $ 16.09 $ 13.90 $ 11.58 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- -------
Net investment
income............... 0.38 0.37 0.30 0.31 0.27 0.24 0.21 0.17 0.10
Net realized and
unrealized gain
(loss) on
investments.......... 4.07 2.21 1.30 2.69 (0.72) (0.90) 2.94 2.52 1.58
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total from investment
operations........... 4.45 2.58 1.60 3.00 (0.45) (0.66) 3.15 2.69 1.68
-------- -------- -------- -------- -------- -------- -------- -------- -------
Less dividends and
distributions:
From net investment
income............. (0.38) (0.36) (0.30) (0.32) (0.29) (0.24) (0.21) (0.17) (0.10)
From net realized
gain on
investments........ (0.55) (0.31) -- -- -- (1.23) (0.75) (0.20) --
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total dividends and
distributions........ (0.93) (0.67) (0.30) (0.32) (0.29) (1.47) (0.96) (0.37) (0.10)
-------- -------- -------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE AT END
OF PERIOD............ $ 19.99 $ 16.47 $ 14.56 $ 13.26 $ 10.58 $ 13.96 $ 16.09 $ 13.90 $ 11.58
======== ======== ======== ======== ======== ======== ======== ======== =======
Total investment
return#.............. 27.13% 17.79% 12.08% 28.33% (3.99%) (4.14%) 22.89% 23.22% 16.76%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Net investment
income............. 2.20% 2.46% 2.52% 3.06% 3.50% 1.60% 1.78% 2.10% 2.57%*
Net expenses......... 0.60% 0.60% 0.69% 0.69% 0.69% 0.65% 0.65% 0.73% 0.73%*
Expenses (before
reimbursement)..... 0.60% 0.60% 0.71% 0.81% 0.88% 0.65% 0.65% 0.79% 1.45%*
Portfolio turnover
rate................. 158% 125% 175% 253% 297% 69% 48% 41% 20%
Net assets at end of
period (in 000's).... $644,361 $446,624 $332,897 $194,893 $122,333 $319,743 $264,179 $120,415 $24,429
<CAPTION>
INDEXED EQUITY
PORTFOLIO
---------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF
PERIOD............... $ 20.58 $ 16.10 $ 13.53 $ 10.38 $ 10.58
-------- -------- -------- -------- -------
Net investment
income............... 0.26 0.27 0.24 0.27 0.24
Net realized and
unrealized gain
(loss) on
investments.......... 5.58 4.99 2.79 3.55 (0.15)
-------- -------- -------- -------- -------
Total from investment
operations........... 5.84 5.26 3.03 3.82 0.09
-------- -------- -------- -------- -------
Less dividends and
distributions:
From net investment
income............. (0.26) (0.27) (0.24) (0.28) (0.24)
From net realized
gain on
investments........ (0.27) (0.51) (0.22) (0.39) (0.05)
-------- -------- -------- -------- -------
Total dividends and
distributions........ (0.53) (0.78) (0.46) (0.67) (0.29)
-------- -------- -------- -------- -------
NET ASSET VALUE AT END
OF PERIOD............ $ 25.89 $ 20.58 $ 16.10 $ 13.53 $ 10.38
======== ======== ======== ======== =======
Total investment
return#.............. 28.49% 32.84% 22.42% 36.89% 0.76%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Net investment
income............. 1.30% 1.75% 2.14% 2.52% 2.61%
Net expenses......... 0.38% 0.39% 0.47% 0.47% 0.47%
Expenses (before
reimbursement)..... 0.38% 0.39% 0.50% 0.62% 0.68%
Portfolio turnover
rate................. 4% 5% 3% 5% 8%
Net assets at end of
period (in 000's).... $946,785 $496,772 $223,945 $105,171 $63,164
</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-30
<PAGE> 34
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH EQUITY PORTFOLIO
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
YEAR............................. $ 20.31 $ 18.63 $ 17.22 $ 14.69 $ 15.64
-------- -------- -------- -------- --------
Net investment income.............. 0.19 0.16 0.18 0.22 0.22
Net realized and unrealized gain
(loss) on investments............ 5.21 4.74 4.06 4.06 (0.03)
-------- -------- -------- -------- --------
Total from investment operations... 5.40 4.90 4.24 4.28 0.19
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income....... (0.19) (0.16) (0.18) (0.22) (0.22)
From net realized gain on
investments.................... (1.90) (3.06) (2.65) (1.53) (0.92)
-------- -------- -------- -------- --------
Total dividends and
distributions.................... (2.09) (3.22) (2.83) (1.75) (1.14)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR..... $ 23.62 $ 20.31 $ 18.63 $ 17.22 $ 14.69
======== ======== ======== ======== ========
Total investment return #.......... 26.59% 26.75% 24.50% 29.16% 1.20%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Net investment income............ 0.84% 0.80% 0.98% 1.29% 1.41%
Net expenses..................... 0.51% 0.50% 0.58% 0.62% 0.62%
Expenses (before
reimbursement)................. 0.51% 0.50% 0.58% 0.91% 0.65%
Portfolio turnover rate............ 69% 103% 104% 104% 108%
Net assets at end of year (in
000's)........................... $996,736 $759,054 $564,685 $427,507 $330,161
<CAPTION>
BOND PORTFOLIO
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
YEAR............................. $ 13.14 $ 12.83 $ 13.42 $ 12.09 $ 13.43
-------- -------- -------- -------- --------
Net investment income.............. 0.74 0.88 0.87 0.88 0.88
Net realized and unrealized gain
(loss) on investments............ 0.46 0.35 (0.59) 1.33 (1.34)
-------- -------- -------- -------- --------
Total from investment operations... 1.20 1.23 0.28 2.21 (0.46)
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income....... (0.74) (0.88) (0.87) (0.88) (0.88)
From net realized gain on
investments.................... (0.37) (0.04) -- -- --
-------- -------- -------- -------- --------
Total dividends and
distributions.................... (1.11) (0.92) (0.87) (0.88) (0.88)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR..... $ 13.23 $ 13.14 $ 12.83 $ 13.42 $ 12.09
======== ======== ======== ======== ========
Total investment return #.......... 9.12% 9.65% 2.05% 18.31% (3.39%)
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Net investment income............ 5.86% 6.42% 6.31% 6.55% 6.53%
Net expenses..................... 0.52% 0.50% 0.58% 0.62% 0.62%
Expenses (before
reimbursement)................. 0.52% 0.50% 0.58% 0.91% 0.67%
Portfolio turnover rate............ 206% 187% 103% 81% 88%
Net assets at end of year (in
000's)........................... $277,392 $228,949 $226,375 $235,030 $206,686
</TABLE>
- ------------
# 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-31
<PAGE> 35
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN CENTURY DREYFUS LARGE EAGLE ASSET MANAGEMENT
INCOME & GROWTH PORTFOLIO COMPANY VALUE PORTFOLIO GROWTH EQUITY PORTFOLIO
------------------------- ----------------------- -----------------------
MAY 1, 1998** MAY 1, 1998** MAY 1, 1998**
TO DEC. 31, 1998 TO DEC. 31, 1998 TO DEC. 31, 1998
------------------------- ----------------------- -----------------------
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD........................... $ 10.00 $ 10.00 $ 10.00
------- ------- -------
Net investment income (loss)....... 0.05 0.05 0.01
Net realized and unrealized gain
(loss) on investments............ 0.91 0.23 1.78
------- ------- -------
Total from investment operations... 0.96 0.28 1.79
------- ------- -------
Less dividends:
From net investment income....... (0.05) (0.05) (0.01)
------- ------- -------
NET ASSET VALUE AT END OF PERIOD... $ 10.91 $ 10.23 $ 11.78
======= ======= =======
Total investment return#........... 9.60% 2.83% 17.85%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Net investment income (loss)..... 1.20%* 1.02%* 0.11%*
Net expenses..................... 0.85%* 0.95%* 0.85%*
Expenses (before
reimbursement)................. 1.30%* 1.39%* 1.28%*
Portfolio turnover rate............ 34% 98% 31%
Net assets at end of period (in
000's)........................... $30,167 $18,918 $18,467
<CAPTION>
LORD ABBETT DEVELOPING
GROWTH PORTFOLIO
----------------------
MAY 1, 1998**
TO DEC. 31, 1998
----------------------
<S> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD........................... $ 10.00
-------
Net investment income (loss)....... (0.01)
Net realized and unrealized gain
(loss) on investments............ (0.78)
-------
Total from investment operations... (0.79)
-------
Less dividends:
From net investment income....... --
-------
NET ASSET VALUE AT END OF PERIOD... $ 9.21
=======
Total investment return#........... (7.90%)
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Net investment income (loss)..... (0.35%)*
Net expenses..................... 0.95% *
Expenses (before
reimbursement)................. 1.50% *
Portfolio turnover rate............ 12%
Net assets at end of period (in
000's)........................... $15,867
</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-32
<PAGE> 36
MORE INFORMATION ABOUT THE PORTFOLIOS IS AVAILABLE FREE UPON REQUEST:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Provides more details about the Portfolios. A current SAI is incorporated by
reference into the prospectus and has been filed with the SEC.
ANNUAL/SEMIANNUAL REPORTS
Provides additional information about the Portfolios' investments and include
discussions of market conditions and investment strategies that significantly
affected the Portfolios' performance during the last fiscal year.
TO OBTAIN INFORMATION:
Write to MainStay VP Series Fund, Inc., 51 Madison Avenue, New York, NY, 10010,
or call 1-800-598-2019.
You can obtain information about the Portfolios (including the SAI) by visiting
the SEC's Public Reference Room in Washington, D.C. (phone 1-800-SEC-0330). You
may visit the SEC's website at sec.gov or you may send your written request and
a duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009.
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.
[RECYCLE LOGO]
The Mainstay VP Series Fund, Inc.
SEC File Number: 811-03833
<PAGE> 37
MAINSTAY VP SERIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
------------------------
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, 1999 which may be obtained by calling the Fund at (800)
598-2019, or writing the Fund at 51 Madison Avenue, New York, NY 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................................................5
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP CAPITAL
APPRECIATION, CASH MANAGEMENT, CONVERTIBLE, GOVERNMENT, TOTAL RETURN, VALUE AND
INDEXED EQUITY PORTFOLIOS...................................................................5
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP HIGH YIELD
CORPORATE BOND PORTFOLIO....................................................................7
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP INTERNATIONAL
EQUITY PORTFOLIO............................................................................8
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE MAINSTAY VP
</TABLE>
<PAGE> 38
<TABLE>
<S> <C>
BOND ("BOND") AND MAINSTAY VP GROWTH EQUITY ("GROWTH EQUITY") PORTFOLIOS..................10
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE DREYFUS LARGE COMPANY VALUE
PORTFOLIO.................................................................................12
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE AMERICAN CENTURY INCOME &
GROWTH PORTFOLIO..........................................................................13
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE LORD ABBETT DEVELOPING GROWTH
PORTFOLIO.................................................................................14
ADDITIONAL NON-FUNDAMENTAL INVESTMENT RESTRICTIONS APPLICABLE TO CERTAIN
PORTFOLIOS................................................................................17
OTHER INVESTMENT POLICIES OF THE HIGH YIELD CORPORATE BOND PORTFOLIO...........................23
OTHER INVESTMENT POLICIES OF THE BOND AND GROWTH EQUITY PORTFOLIOS.............................23
OTHER INVESTMENT POLICIES OF THE GOVERNMENT PORTFOLIO..........................................25
OTHER INVESTMENT POLICIES OF THE CASH MANAGEMENT PORTFOLIO.....................................26
OTHER INVESTMENT POLICIES OF THE CONVERTIBLE PORTFOLIO.........................................29
OTHER INVESTMENT POLICIES OF THE DREYFUS LARGE COMPANY VALUE PORTFOLIO.........................30
OTHER INVESTMENT POLICIES OF THE EAGLE ASSET MANAGEMENT GROWTH EQUITY PORTFOLIO................32
OTHER INVESTMENT POLICIES OF THE INTERNATIONAL EQUITY PORTFOLIO................................37
CERTAIN INVESTMENT PRACTICES COMMON TO TWO OR MORE PORTFOLIOS .................................39
</TABLE>
<PAGE> 39
<TABLE>
<S> <C>
ARBITRAGE .....................................................................................39
CASH EQUIVALENTS...............................................................................40
DEBT SECURITIES................................................................................40
FLOATERS AND INVERSE FLOATERS..................................................................41
HIGH YIELD SECURITIES..........................................................................42
ZERO COUPON BONDS..............................................................................43
SHORT SALES AGAINST THE BOX....................................................................43
REPURCHASE AGREEMENTS..........................................................................44
LENDING OF PORTFOLIO SECURITIES................................................................46
BORROWING .....................................................................................47
FOREIGN SECURITIES.............................................................................47
FOREIGN CURRENCY TRANSACTIONS..................................................................48
BRADY BONDS....................................................................................51
WHEN-ISSUED SECURITIES.........................................................................52
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES.............................................53
OPTIONS ON SECURITIES..........................................................................59
FUTURES TRANSACTIONS...........................................................................67
SECURITIES INDEX OPTIONS.......................................................................77
</TABLE>
<PAGE> 40
<TABLE>
<S> <C>
ADDITIONAL INVESTMENT POLICIES APPLICABLE TO
THE INTERNATIONAL EQUITY PORTFOLIO........................................................78
STATE INSURANCE LAW REQUIREMENTS...............................................................80
PORTFOLIO TURNOVER.............................................................................80
MANAGEMENT OF THE FUND.........................................................................81
COMPENSATION TABLE.............................................................................83
DETERMINATION OF NET ASSET VALUE...............................................................87
INVESTMENT PERFORMANCE CALCULATIONS............................................................89
GENERAL INFORMATION............................................................................95
LEGAL COUNSEL..................................................................................97
FINANCIAL STATEMENTS...........................................................................97
APPENDIX A ....................................................................................98
</TABLE>
<PAGE> 41
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
- 5 -
<PAGE> 42
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) 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
- 6 -
<PAGE> 43
(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.
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,
- 7 -
<PAGE> 44
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) 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:
- 8 -
<PAGE> 45
(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, it 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;
(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);
- 9 -
<PAGE> 46
(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;
(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.
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
- 10 -
<PAGE> 47
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;
(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
- 11 -
<PAGE> 48
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 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 net 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 net 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;
(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 indices;
(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 extent 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), except that the entry
- 12 -
<PAGE> 49
into options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indices shall not constitute
borrowing, and except that this restriction does not prohibit borrowing for
purposes of leveraging up to the limits permitted under the 1940 Act;
(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 (I) that purchases and sales of options,
forward contracts, futures contracts, puts and calls may be deemed to give rise
to a senior security; (ii) except as appropriate to evidence indebtedness that
the Portfolio is permitted to incur and (iii) except for shares of existing or
additional series of the Fund; 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 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;
- 13 -
<PAGE> 50
(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 portfolio 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, futures contracts,
options on futures, or forward 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 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 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
- 14 -
<PAGE> 51
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 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) 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;
(7) 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;
(8) 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
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<PAGE> 52
(9) issue senior securities to the extent such issuance would violate
applicable law.
FUNDAMENTAL INVESTMENT POLICIES APPLICABLE TO THE EAGLE ASSET MANAGEMENT
GROWTH EQUITY PORTFOLIO
The investment restrictions set forth below apply to the Eagle Asset
Management 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 Asset Management Growth Equity Portfolio will 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, and except that 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.
(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
(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, and may
purchase and sell options, forward contracts, futures contracts, including those
related to indices, and options on futures contracts or indices.
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<PAGE> 53
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 net 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 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;
(4) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
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<PAGE> 54
(5) 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,
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
(6) 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 Convertible Portfolio will not invest more than 5% of
its total assets in securities rated less than B by S&P or Moody's, or if
unrated, that are judged to be of comparable quality by MacKay-Shields.
In addition, the Total Return Portfolio may not invest more than 20% of
the value of its investments in debt securities rated below A. Securities rated
below A must, however, be rated at least Ba by Moody's or BB by S&P, or, if
unrated, be deemed to be of comparable quality by MacKay-Shields.
In addition, the High Yield Corporate Bond Portfolio may invest no more
than 15% of its net assets in securities rated lower than B by Moody's or S&P,
or, if unrated, considered to be of comparable quality by MacKay-Shields.
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 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;
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<PAGE> 55
(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
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<PAGE> 57
(6) purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
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);
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<PAGE> 58
(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.
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 margins 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.
(4) enter into repurchase agreements or purchase any "illiquid
securities," illiquid securities being defined to include securities 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 10% of the net assets of the Portfolio 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).
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<PAGE> 59
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 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.
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<PAGE> 60
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;
(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; or
(6) 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 10% of the net assets of a Portfolio 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).
In addition, the Bond Portfolio may not:
(1) invest more than 25% of its total assets in debt securities which are
rated lower than the four highest grades as determined by Moody's or S&P, but
which are rated at least B, or in convertible debt securities or preferred or
convertible preferred stocks; or
(2) 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 exercising warrants purchased together with such securities.
The following is more detailed information regarding subjects addressed
in the Fund's current Prospectus.
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<PAGE> 61
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
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<PAGE> 62
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 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 generally be invested in
obligations which mature in 397 days or less and substantially all these
investments will be held to maturity; however, securities collateralizing
repurchase agreements may have maturities in excess of 397 days. The Portfolio
will,
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<PAGE> 63
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 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, if issued by an issuer that received a short-term rating from an NRSRO
with respect to a class of debt obligations that is comparable in 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; (3) an unrated security that is
of comparable quality to a security in the highest rating category as determined
by MacKay-Shields; (4) (i) with respect to a security that is subject to any
features that entitles the holder, under certain circumstances, to receive the
approximate amortized cost of the underlying security or securities plus accrued
interest "Demand Feature" or obligations of a person other than the issuer of
the security, under certain circumstances, to undertake to pay the principal
amount of the underlying security plus interest "Guarantee", the Guarantee has
received a rating from an NRSRO or the Guarantee is issued by a guarantor that
has received a rating from an NRSRO with respect to a class of debt obligations
that is comparable in priority and security to the Guarantee, with certain
exceptions, and (ii) the issuer of the Demand Feature or Guarantee, or another
institution, has undertaken promptly to notify the holder of the security in the
event that the Demand Feature or Guarantee is substituted with another Demand
Feature or Guarantee; (5) if it is a security issued by a money market fund
registered with the SEC under the 1940 Act; or (6) if it is a Government
Security. 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).
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 with
respect to 25% of its total assets for up to three business days after the
purchase of securities of any one issuer, and except that this limitation shall
not apply to U.S. government securities or securities subject to certain
Guarantees. Immediately after the acquisition of any Demand Feature or
Guarantees from the institution that issued the Demand Feature or Guarantee,
with certain exceptions. In addition, immediately after the acquisition of any
Demand Feature or
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<PAGE> 64
Guarantee (or a security after giving effect to the Demand Feature or Guarantee)
that is not within the highest rating category by NRSROs, the Portfolio shall
not have invested more than five percent of its total assets in securities
issued by or subject to Demand Features or Guarantees from the institution that
issued the Demand Feature or Guarantee. The Portfolio may not invest more than
the greater of 1% of its total assets or one million dollars, 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 or securities subject to certain Guarantees. 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 shall
promptly reassess whether such security presents minimal credit risk shall
recommend to the Valuation Committee of the Board of Directors ("the Valuation
Committee") that the Portfolio take such action as it determines is in the best
interest of the Portfolio and its shareholders. The Valuation Committee, after
consideration of the recommendation of the MacKay-Shields and such other
information as it deems appropriate, shall cause the Portfolio to take such
action as it deems appropriate, and shall report promptly to the Board of
Directors the action it has taken and the reasons for such action.
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.
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
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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 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, 1998, 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):
2.24% in securities rated AA
7.59% in securities rated A
5.87% in securities rated BBB
13.76% in securities rated BB
32.18% in securities rated B
0.11% in securities rated D
4.50% in cash and cash equivalents
33.75% in equity securities
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These figures are intended solely to provide disclosure about the
Portfolio's asset composition during its fiscal year ended December 31, 1998.
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.
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
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.
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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.
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.
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<PAGE> 68
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 8 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.
OTHER INVESTMENT POLICIES OF THE EAGLE ASSET MANAGEMENT GROWTH EQUITY
PORTFOLIO
Up to 35% of its total assets may be invested in common stocks of
foreign issuers, American Depository Receipts ("ADRs"), foreign currency
transactions with respect to underlying common stocks, preferred stock,
investment grade securities convertible into common stock, futures contracts,
options on equity securities or equity security indexes, rights or warrants to
subscribe for or purchase common stock, obligations of the U.S. Government, its
agencies or instrumentalities (including repurchase agreements thereon) and in
securities that track the performance of a broad-based securities index. The
Portfolio may invest in sponsored and unsponsored 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 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
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<PAGE> 69
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.
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.
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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.
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.
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OTHER INVESTMENT POLICIES OF THE 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.
During the fiscal year ended December 31, 1998, based upon the
dollar-weighted average ratings of the Portfolio's 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):
0.89% in securities rated A
5.24% in securities rated BBB
16.91% in securities rated BB
50.04% in securities rated B
10.63% in securities rated CCC
0.21% in securities rated CC
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0.87% in securities rated D
5.50% in cash and cash equivalents
9.71% in equity securities
These figures are intended solely to provide disclosure about the
Portfolio's asset composition during its fiscal year ended December 31, 1998.
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.
OTHER INVESTMENT POLICIES OF THE 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
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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.
OTHER INVESTMENT POLICIES OF THE 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 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 "Ratings of Debt Securities").
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The Portfolio also may invest in foreign securities in the form of 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.
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.
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CERTAIN INVESTMENT PRACTICES COMMON TO TWO OR MORE PORTFOLIOS
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.
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.
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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. Longer term debt
securities generally pay higher interest rates than shorter term debt
securities, but may also experience greater volatility as interest rates change.
Since shares of the Portfolios represent an investment in securities
with fluctuating market prices, the value of shares of each Portfolio will vary
as the aggregate value of the Portfolios' portofolio securities increases or
decreases. Moreover, the value of lower rated debt securities that a Portfolio
purchases may fluctuate more than the value of higher rated debt securities.
Lower rated debt securities generally carry greater risk that the issuer will
default on the payment of interest and
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principal. Lower rated fixed income securities generally tend to reflect
short-tern corporate and market developments to a greater extent than higher
rated securities 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 Portfolios
but will be reflected in the net asset value of the Portfolios' shares.
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, particpation 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).
When and if available, debt securities may be purchases at a discount
from face value. From time to time, each Portfolio my purchase securities not
paying interest or dividends at the time acquired if, in the opinion of the
Investment Adviser, such securities have the potential for future income (or
capital appreciation, if any).
FLOATERS AND INVERSE FLOATERS
Each Portfolio, other than the Capital Appreciation, Value, Growth
Equity, American Century Income and Growth, 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, American Century Income and Growth, 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 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
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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.
The secondary market on which high yield bonds are traded may be less
liquid than the market
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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
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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. 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. However, if the 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. 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.
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).
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
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price (which price will already include interest charges). 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.
LENDING OF PORTFOLIO SECURITIES
Each Portfolio, except the Cash Management Portfolio, may seek to
increase its income by lending portfolio securities, in accordance with
procedures adopted by the Board of Directors, to certain broker-dealers and
institutions. 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. This 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.
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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. The Dreyfus Large
Company Value Portfolio may engage in leveraging in an effort to increase
returns. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Portfolio's net
asset value; money borrowed will be subject to interest and other costs (which
may include commitment fees or the cost of maintaining minimum average balances,
or both), which may or may not exceed income received from the securities
purchased with the borrowed funds. The use of borrowing tends to result in a
faster than average movement, up or down, in the net asset value of the
Portfolio's shares. The Portfolio also may be required to maintain minimum
average balances in connection with such borrowing or to pay commitment or other
fees to maintain a line of credit; either of these requirements would increase
the cost of borrowing over the stated interest rate.
FOREIGN SECURITIES
Each Portfolio, except the Government Portfolio, may invest 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. 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
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securities to the extent that foreign securities are included in the S&P 500.
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.
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. 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.
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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."
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
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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 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.
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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.
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, is
initially 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
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maturity; (ii) the collateralized interest payments; (iii) the uncollateralized
interest payments; and (iv) any uncollateralized repayment of principal at
maturity (these uncollateralized amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero coupon bonds
(or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the Federal Reserve Bank
of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which 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.
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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.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Each Portfolio, except the American Century Income & Growth and Indexed
Equity Portfolios, 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.
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
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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. 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
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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
non-governmental 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 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
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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 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"). 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
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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.
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,
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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 APO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying 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.
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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.
OPTIONS ON SECURITIES
Each Portfolio, except the Cash Management, Bond and 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
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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 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
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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.
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 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,
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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 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
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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 Astraddle"
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, engage without limitation in
the writing of options on U.S. Government securities.
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
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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. 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.
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.
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.
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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.
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.
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.
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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 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
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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.
FUTURES TRANSACTIONS
The Convertible, Lord Abbett Developing Growth, Eagle Growth Equity,
Government, High Yield Corporate Bond, 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.
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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
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
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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.
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 Along" 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.
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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.
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
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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 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 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
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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
"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
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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 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.
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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 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.
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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 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
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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 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
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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 tothe 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
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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 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.
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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.
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, 1998, December 31, 1997 and December
31, 1996, the portfolio turnover rate for each of the following Portfolios was
as follows: Capital Appreciation Portfolio, 27.35%, 34.38% and 15.64%,
respectively, Government Portfolio, 405.06%, 344.99% and 303.83%, respectively;
High Yield Corporate Bond Portfolio, 151.42%, 153.19% and 148.74%; respectively,
International Equity Portfolio, 57.13%, 60.94% and 15.88%, respectively; Total
Return Portfolio, 157.56%, 124.72% and 174.77%, respectively; Value Portfolio,
69.10%, 48.19% and
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40.79%, respectively; Bond Portfolio, 205.66%, 187.20% and 103.02%,
respectively; Growth Equity Portfolio, 69.06%, 102.86% and 104.13%,
respectively; and Indexed Equity Portfolio, 4.04%, 5.21% and 3.11%,
respectively. With respect to the Cash Management Portfolio, the portfolio
turnover rate for the years ended December 31, 1998, December 31, 1997 and
December 31, 1996 as calculated in accordance with applicable SEC regulations,
was 0%. For the years ending December 31, 1998 and December 31, 1997, the
portfolio turnover rate for Convertible Portfolio was 209.48% and 217.35%,
respectively. 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%. For the period May 1, 1998 (commencement of
operations) through December 31, 1998, the unannualized portfolio turnover rate
for American Century Income & Growth, Dreyfus Large Company Value, Eagle Asset
Management Growth Equity and Lord Abbett Developing Growth Portfolios were
33.54%, 98.32%, 31.27% and 11.79%, respectively. A turnover rate in excess of
100% is likely to result in a Portfolio's bearing higher 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 With Principal Occupation(s) During Past Five Years
Registrant
Michael J. Drabb 64 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 43 Director Consultant, Jill Feinberg & Company from 1989 to date.
Ms. Feinberg is also a Director of New York Life
Settlement Corporation.
Daniel Herrick 77 Director Treasurer and Senior Executive, National Gallery of Art,
Washington, D.C. from December 1985 to June 1995.
Richard M. Kernan, Jr.* 57 Chairman of the Executive Vice President and Chief Investment Officer of
Board, Chief New York Life Insurance Company from September 1995
Executive Officer and to date; Executive Vice President prior thereto.
Director
</TABLE>
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<PAGE> 118
<TABLE>
<S> <C> <C> <C>
Anne F. Pollack* 42 President, Chief Senior Vice President of New York Life Insurance
Administrative Company from March 1992 to date.
Officer and Director
Robert D. Rock* 43 Vice President and Senior Vice President in charge of the Individual Annuity
Director Department of New York Life Insurance Company March
1991 to date.
Roman L. Weil 57 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>
OFFICERS (OTHER THAN DIRECTORS)
<TABLE>
<CAPTION>
Name and Address** Age Position(s) Held Principal Occupation(s) During Past Five Years
With Registrant
<S> <C> <C> <C>
Anthony W. Polis 53 Treasurer Vice President of New York Life Insurance Company from
1988 to date.
Marc J. Chalfin 51 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 57 Director President and Managing Director of Solomon Brothers,
Inc., from May 1971 through June 1995.
</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,
1998, the directors received an aggregate of $232,000 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 $35,000 per year plus
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$1,500 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, 1998, for each of the following persons:
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 Accrued Retirement Fund Complex Paid to
as Part of Fund Directors
Expenses
<S> <C> <C> <C> <C>
Michael J. Drabb, Director $44,000 $ 0 $ 0 $ 44,000
Jill Feinberg , Director $50,000 0 0 $ 50,000
Daniel Herrick, Director $44,000 0 0 $ 44,000
Richard M. Kernan, Jr., 0 0 0 0
Director
Anne F. Pollack, Director 0 0 0 0
Robert D. Rock, Director 0 0 0 0
Roman L. Weil, Director $44,000 0 0 $ 44,000
John Weisser, Director $50,000 0 0 $ 50,000
---------
TOTAL $ 232,000
=========
</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. Pursuant to an Investment Advisory Agreement dated December 15,
1996, New York Life performed these services for the Bond and Growth Equity
Portfolios. Pursuant to a Substitution Agreement dated May 1, 1999, between New
York Life and Madison Square Advisors, these services will be performed for the
Bond and Growth Equity Portfolios by Madison Square Advisors.
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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.
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, Monitor or Madison Square Advisors shall
not be liable to the Portfolios for any error of judgment by MacKay-Shields, New
York Life, Monitor or Madison Square Advisors 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).
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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 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
May 1, 1998 for each of the American Century Income & Growth Portfolio, the
Dreyfus Large Company Value Portfolio, the Eagle Asset Management 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
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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.
NYLIAC has agreed to limit the "Other Expenses" of each of the American
Century Income & Growth, Dreyfus Large Company Value, Eagle Asset Management
Growth Equity and the Lord Abbett Developing Growth Portfolios to 0.15% of
average daily net assets on an annualized basis through December 31, 1999.
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.
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<PAGE> 123
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.
For the years ending December 31, 1998, December 31, 1997 and December
31, 1996, the Fund paid total brokerage commissions of $3,573,208, $2,902,769,
and $2,121,056, 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
(amortizedcost 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
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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 deemed by the 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 market 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
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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 deems that the
particular event would materially affect net asset value, in which case an
adjustment will be made.
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, 1998, the Cash Management
Portfolio yield was 4.73%, and the effective yield was 4.85%.
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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:
(6)
2[(a - b +1) - 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; and
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
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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:
<TABLE>
(n)
P(1 + T) = ERV
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
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).
</TABLE>
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, 1998, the
average annual total returns for the Bond Portfolio were 9.12%, 6.89% and 8.96%,
respectively.
For the one, five and ten year periods ending December 31, 1998, the
average annual total returns for the Growth Equity Portfolio were 26.59%, 21.16%
and 18.16%, respectively. For the one-year period ending December 31, 1998, the
average annual total returns for the Capital Appreciation, Cash Management,
Government, Total Return and Indexed Equity Portfolios were 38.14%, 5.18%,
9.00%, 27.13%, and 28.49%, respectively. For the five-year period ending
December 31, 1998, the average annual total returns for the Capital
Appreciation, Cash Management, Government, Total Return and Indexed Equity
Portfolios were 21.33%, 4.96%, 6.94%, 15.64% and 23.58%, respectively. For the
period beginning January 29, 1993 (inception date) through December 31, 1998,
the average annual total returns for the Capital Appreciation, Cash Management,
Government, Total Return and Indexed Equity Portfolios were 21.50%, 4.59%,
6.81%,15.76%, and 21.23%, respectively. For the one year period ending December
31, 1998, the annual total returns for the High Yield Corporate Bond,
International Equity and Value Portfolios were 2.66%, 23.11%, and -4.14%,
respectively. For the period beginning May 1, 1995 (inception date) through
December 31, 1998, the average annual total returns for the High Yield Corporate
Bond, International Equity and Value Portfolios were 11.59%, 12.29% and 15.44%,
respectively. For the period beginning May 1, 1998 (inception date) through
December 31, 1998, the average arrival total
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returns for the American Century Income and Growth, Dreyfus Large Company Value,
Eagle Asset Management Growth Equity and Lord Abbett Developing Growth
Portfolios were 9.60% 2.83%, 17.85% and -7.90%, respectively.
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.
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
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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. 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.
TAXES
Each Portfolio of the Fund intends to qualify and elect to be treated 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.
To qualify for treatment as a regulated investment company, a Fund
generally must, among other things: (a) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of securities or
foreign currencies, and other income (including gains from certain options,
futures, and forward contracts) derived with respect to its business of
investing in securities or foreign currencies; (b) diversify its holdings so
that at the end of each quarter of the taxable year, (i) at least 50% of the
market value of a Fund's assets is represented by cash, cash items, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies), or of two or more
issuers which the Fund controls and which are engaged in the same or similar
trades or businesses or related trades or businesses; and (C) distribute in each
taxable year at least 90% of the sum of its investment company taxable income
and its net tax-exempt interest income. If a Fund does not meet all of these
Code requirements, it will be taxed as an ordinary corporation and its
distributions (to the extent of available earnings and profits) will be taxed to
shareholders as ordinary income (except to the extent a shareholder is exempt
from tax).
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Because the Fund is used to fund variable life insurance and variable
annuity contracts, each Portfolio must also meet the diversification
requirements imposed by Subchapter L of the Code or these Contracts will fail to
qualify as life insurance and annuities, as disclosed more fully under the
heading "Taxes" in the Prospectus. Compliance with the regulations is tested on
the first day of each calendar year quarter. There is a thirty (30) day period
after the end of each calendar year quarter in which to cure any non-compliance.
Generally, in order to avoid a 4% nondeductible excise tax, each
Portfolio must distribute to its shareholders during the calendar year the
following amounts:
- 98% of the Portfolio's ordinary income for the calendar year;
- 98% of the Portfolio's capital gain net income (all capital gains,
both long-term and short-term, minus all such capital losses), all
computed as if the Portfolio were on a taxable year ending October
31 of the year in question and beginning the previous November 1;
and
- any undistributed ordinary income or capital gain net income for
the prior year.
The excise tax generally is inapplicable to any regulated investment
company whose sole shareholders are either tax-exempt pension trusts or separate
accounts of life insurance companies funding variable contracts. Although each
Portfolio believes that it is not subject to the excise tax, the Portfolios
intend to make the distributions required to avoid the imposition of such a tax.
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.
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<PAGE> 131
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:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
NAME SHARES
- -------------------------------------------------------------------------------
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 Portfolio 100,000,000
- -------------------------------------------------------------------------------
Lord Abbett Developing Growth Portfolio 100,000,000
- -------------------------------------------------------------------------------
American Century Income & Growth Portfolio 100,000,000
- -------------------------------------------------------------------------------
Eagle Asset Management Growth Equity Portfolio 100,000,000
- -------------------------------------------------------------------------------
</TABLE>
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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 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
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<PAGE> 133
holding routine annual meetings results in Policy Owners having a lesser role in
governing the business of the Fund.
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 more fully describes
voting rights of an Owner.
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 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,
1998, including the financial highlights for each of the periods presented
appearing in the 1998 Annual Report to shareholders and the report thereon of
PricewaterhouseCoopers LLP, independent accountants, appearing therein, are
incorporated by reference in the statement of additional information.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Corporate and Municipal Bond Ratings 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 the 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 sometime 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.
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<PAGE> 135
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Advance refunded issues that are secured by escrowed funds held in cash,
held in trust, reinvested in direct noncallable United States government
obligations or noncallable obligations unconditionally guaranteed by the U.S.
government are identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security
depends upon the completion of some act or the fulfillment of some condition.
These are bonds secured by: (a) earnings of projects under construction; (b)
earnings of projects unseasoned in operating experience; (C) rentals that begin
when facilities are completed; or (d) payments to which some other limiting
condition attaches. The parenthetical rating denotes probable credit stature
upon completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Municipal Short-Term Loan Ratings
MIG 1/VMIG 1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
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<PAGE> 136
MIG 4/VMIG 4: This designation denotes adequate quality. Protection
commonly regarding as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics; leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a
superior ability for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurement and may requite relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
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<PAGE> 137
STANDARD & POOR'S
- --------------------------------------------------------------------------------
Corporate and Municipal Long-Term Debt Ratings
Investment Crade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Speculative Grade
Debt rated BB, B, CCC, CC and C is regarded as having significant
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposure to adverse
conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial or economic conditions will
likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
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<PAGE> 138
CCC: Debt rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial and economic conditions for the
obligor. In the event of adverse business, financial or economic conditions, the
obligor is not likely to have the capacity to meet its financial commitment on
the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or a similar action has been taken, but debt service
payments are continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Short-Term Rating Definitions
A-1: A short-term obligation rated 'A-1' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meets its financial commitment on these obligations is extremely strongly.
A-2: A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
-102-
<PAGE> 139
B: A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated 'D is in payment default. The 'D' is in
payment default. The 'D' rating category is used when payments on an obligation
are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
- 103 -
<PAGE> 140
PART C. OTHER INFORMATION
ITEM 23.
(a)(1) -- Articles of Incorporation of Registrant -- Previously filed as Exhibit
No. 1 to Post-Effective Amendment No. 9.
(a)(2) -- Articles Supplementary -- Previously filed as Exhibit 1(b) to
Post-Effective Amendment No. 25.
(a)(3) -- Articles of Amendment -- Previously filed as Exhibit No. 1(c) to
Post-Effective Amendment No. 21.
(b) -- By-laws of Registrant -- Previously filed as Exhibit No. 2 to
Post-Effective Amendment No. 9.
(c) -- 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
(d)(1) -- 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).
(d)(2) -- 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).
(d)(3) -- Form of Investment Advisory Agreement with New York Life Insurance
Company -- Previously filed as Exhibit 5(c) to Post-Effective
Amendment No. 15.
(d)(4) -- Form of Sub-Advisory Agreement between New York Life and American
Century Investment Management, Inc. -- Previously filed as Exhibit 5
(d) to Post-Effective Amendment No. 25.
(d)(5) -- Form of Sub-Advisory Agreement between New York and the Dreyfus
Corporation -- Previously filed as Exhibit 5(e) to Post-Effective
Amendment No. 25.
(d)(6) -- Form of Sub-Advisory Agreement between New York Life and Eagle Asset
Management -- Previously filed as Exhibit 5 (f) to Post-Effective
Amendment No. 25.
(d)(7) -- Form of Sub-Advisory Agreement between New York Life and Lord, Abbett
& Co. -- Previously filed as Exhibit 5(g) to Post-Effective Amendment
No. 25.
(d)(8) Form of Substitution Agreement between New York Life and Madison
Square Advisers -- previously filed as Exhibit (d)(8) to
Post-Effective Amendment No. 26
(e) -- None.
(f) -- None.
(g) -- Form of Custodian Agreement -- Previously filed as Exhibit 8 to
Pre-Effective Amendment No. 1.
(h)(1) -- Form of Stock Sale Agreement -- Previously filed as Exhibit 9(a) to
Pre-Effective Amendment No. 1.
(h)(2) -- 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.
(i) -- Opinion and Consent of Counsel.
(j)(1) -- Consent of PricewaterhouseCoopers LLP, Independent Public Accountants.
<PAGE> 141
(k) -- None.
(l) -- Form of Initial Stock Subscription Letter -- Previously filed as
Exhibit 13(a) to Pre-Effective Amendment No. 1.
(l) -- Form of Investment Undertaking -- Previously filed as Exhibit 13(b) to
Pre-Effective Amendment No. 1.
(m) -- None.
(n) -- Financial Data Schedules.
(o) -- None.
<PAGE> 142
Item 24. PERSONS CONTROLLED 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 controlled by New York
Life:
<TABLE>
<CAPTION>
PERCENT OF VOTING
-----------------
NAME JURISDICTION OF ORGANIZATION SECURITIES OWNED
- ---- ---------------------------- -----------------
<S> <C> <C>
Eagle Strategies Corporation Arizona 100%
NYLIFE Administration Corp. Texas 100%
MacKay-Shields Financial Corporation Delaware 100%
MSC Holding, Inc. (formerly Magnus Software Corporation, Inc.) Georgia 85.43%
Madison Square Advisors, Inc. Delaware 100%
MainStay Institutional Funds Inc. Maryland ***
MainStay Management, Inc. Delaware 100%
MainStay Shareholder Services, Inc. Delaware 100%
Monitor Capital Advisors, Inc. Delaware 100%
NYLIFE SFD Holding, Inc., Delaware 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas 100%
New York Life Capital Corporation Delaware 100%
New York Life Insurance and Annuity Corporation Delaware 100%
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:
</TABLE>
<PAGE> 143
<TABLE>
<CAPTION>
PERCENT OF VOTING
-----------------
NAME JURISDICTION OF ORGANIZATION SECURITIES OWNED
- ---- ---------------------------- -----------------
<S> <C> <C>
NYL Management Limited United Kingdom
MainStay VP Series Fund, Inc. Maryland *
New York Life International, Inc. (formerly New York Life Worldwide
Holding Inc.),
which owns 100% of the shares of: Delaware 100%
KOHAP New York Life Insurance Ltd.
and which owns 50.2% of the shares of: South Korea
P.T. Asuransi Jiwa Sewu - New York Life
and which owns 49% of the shares of: Indonesia
GEO New York Life, S.A. Mexico
New York Life Worldwide (Bermuda) Ltd. Bermuda
New York Life International Holding Ltd. Mauritius
New York Life Insurance Worldwide Ltd. Bermuda
New York Life (U.K.) Ltd.,
which owns 100% of the shares of: England 100%
Windsor Construction Company Limited
and 16.7% of England
Japan Life Gamma Asset Management Limited
and 31.5% of the shares of: Japan
Life Assurance Holding Corporation Limited,
which owns 100% of the shares of:
Windsor Life Assurance Company Limited U.K.
NYLIFE Depositary Corporation, which owns 16.67% of Delaware 100%
NYLIFE Structured Asset Management Company Ltd. Texas
New York Life Benefit Services, Inc. which owns 100% of Massachusetts 100%
ADQ Insurance Agency Inc. Massachusetts
New York Life Trust Company New York 100%
NYLIFE Distributors Inc. Delaware 100%
NYLIFE HealthCare Management Inc., which owns 54.3% Delaware
of total combined stock and 89.6% of the voting rights of:
Express Scripts, Inc., which owns 100% of the shares of: Delaware 100%
Great Plains Reinsurance Company Canada
Ivtx, Inc. Texas
Practice Pattern Science, Inc.
ESI Canada Holdings, Inc., Canada
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
PERCENT OF VOTING
-----------------
NAME JURISDICTION OF ORGANIZATION SECURITIES OWNED
- ---- ---------------------------- -----------------
<S> <C> <C>
which owns 100% of the shares of:
ESI Canada, Inc. Canada
Express Scripts Vision Corporation Delaware
Avanti Corporate Health Systems Inc.
which owns 100% of the shares of: Delaware 100%
Avanti of the District, Inc. Maryland
Avanti of New Jersey, Inc. New Jersey
and owns 80% of the shares of:
Physicians Health Services Foundation, Inc. Maryland
Prime Provider Corp.,
which owns 100% of the shares of: New York 100%
Prime Provider Corp. of Texas
Texas
WellPath of Arizona Reinsurance Company Arizona 100%
NYLCare NC Holdings, Inc. Delaware
which owns 25% of the shares of :
WellPath Community Health Plans, L.L.C. North Carolina
which owns 100% of:
WPCHP Holdings, Inc. Delaware
and 99% of:
WellPath Preferred Services, L.L.C. and North Carolina
WellPath Select Holdings, L.L.C. North Carolina
which owns 100% of:
WellPath Select, Inc. North Carolina
WellPath of Carolina, Inc. North Carolina
ETHIX Southeast, Inc. North Carolina 100%
NYLIFE Inc. New York 100%
NYLIFE Insurance Company of Arizona Arizona 100%
NYLIFE Refinery, Inc. Delaware 100%
NYLIFE Securities Inc. New York 100%
NYLINK Insurance Agency Incorporated
which owns 100% of the shares of: Delaware 100%
NYLINK Insurance Agency of Alabama, Alabama
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
PERCENT OF VOTING
-----------------
NAME JURISDICTION OF ORGANIZATION SECURITIES OWNED
- ---- ---------------------------- -----------------
<S> <C> <C>
Incorporated
NYLINK Insurance Agency of New Mexico, New Mexico
Incorporated
NYLINK Insurance Agency of Hawaii, Incorporated Hawaii
NYLINK Insurance Agency of Massachusetts, Massachusetts
Incorporated
and 50% of the shares of
NYLIFE Insurance Agency of Ohio, Incorporated Ohio 0%
NYLIFE International
Investment Asia Ltd. Mauritius 100%
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.
*** New York Life Insurance Company, MacKay-Shields Financial Corporation and
Monitor Capital Advisors, Inc. serve as sub-advisers to this entity.
<PAGE> 146
ITEM 25. 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
<PAGE> 147
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.
ITEM 26. 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. 801-19525) Madison Square Advisors (File No. 801-55061),
respectively, and are hereby incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS
Not applicable.
ITEM 28. 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 29. MANAGEMENT SERVICES
None.
ITEM 30. 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> 148
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
investment Company Act of 1940, the Registrant certifies that this
Post-Effective Amendment No. 27 to the Registration Statement meets the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933, as amended, 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 22 day of April, 1999.
MainStay VP Series Fund, Inc.
(Registrant)
By /s/Richard M. Kernan, Jr.
-------------------------------
RICHARD M. KERNAN, Jr.
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to 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 April 22, 1999
- --------------------------
MICHAEL J. DRABB
JILL FEINBERG* Director April 22, 1999
- --------------------------
JILL FEINBERG
DANIEL HERRICK* Director April 22, 1999
- --------------------------
DANIEL HERRICK
RICHARD M. KERNAN, JR.* Chairman of the Board April 22, 1999
(Chief Executive Officer)
- --------------------------
RICHARD M. KERNAN, JR.
ANNE F. POLLACK* President and Director April 22, 1999
(Chief Administrative Officer)
- --------------------------
ANNE F. POLLACK
ROBERT D. ROCK* Director April 22, 1999
- --------------------------
ROBERT D. ROCK
ROMAN L. WEIL* Director April 22, 1999
- --------------------------
ROMAN L. WEIL
JOHN D. WEISSER* Director April 22, 1999
- --------------------------
JOHN D. WEISSER
/s/ANTHONY W. POLIS Treasurer April 22, 1999
(Principal Financial Officer)
- --------------------------
ANTHONY W. POLIS
*By /s/Richard M. Kernan, Jr.
---------------------------
RICHARD M. KERNAN, Jr.
CHIEF EXECUTIVE OFFICER
</TABLE>
<PAGE> 149
EXHIBITS
23 (I) - - Opinion and Consent of Counsel
23(j)(1) - - Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants
23(n) - - Financial Data Schedules
<PAGE> 1
LAW OFFICES OF
DECHERT PRICE & RHOADS
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
April 29, 1999
MainStay VP Series Fund, Inc.
51 Madison Avenue
New York, NY 10010
Re: MainStay VP Series Fund, Inc.
Registration Statement on Form N-1A
(Registration No. 2-86082)
Dear Sirs:
We have acted as counsel for the MainStay VP Series Fund, Inc. (the
"Fund"), a corporation organized and validly existing under the laws of the
State of Maryland, in connection with the above-referenced Registration
Statement relating to the issuance and sale by the Fund of an indefinite number
of its shares of common stock under the Securities Act of 1933, as amended. We
have examined such governmental and corporate certificates and records as we
deemed necessary to render this opinion and we are familiar with the Fund's
Articles of Incorporation, Articles of Amendment and Articles Supplementary
thereto, and its Bylaws.
Based upon the foregoing, we are of the opinion that the shares
proposed to be sold pursuant to the Fund's Registration Statement, when paid for
as contemplated in the Fund's registration statement, will be legally and
validly issued, fully paid and non-assessable. We hereby consent to the filing
of this opinion as an exhibit to Post-Effective Amendment No. 17 to the Fund's
Registration Statement on Form N-1A, to be filed with the Securities and
Exchange Commission, and to the use of our name in the Fund's Statement of
Additional Information of the Fund's Registration Statement to be dated as of
May 1, 1999, and in any revised or amended versions thereof under the caption
"Legal Counsel." In giving such consent, however, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
Securities Act of 1933, as amended, and the rules and regulations thereunder.
Very truly yours,
/s/ Dechert Price & Rhoads
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 27 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 26, 1999, relating to the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Report to Shareholders of MainStay VP Series Fund, Inc., which financial
statements are also incorporated by reference into the Registration Statement.
We also consent to the references to us under the heading "Financial
Highlights" in the Prospectus and under the heading "Financial Statements" in
the Statement of Additional Information.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000887340
<NAME> MAINSTAY VP SERIES FUND, INC.
<SERIES>
<NUMBER> 1
<NAME> MAINSTAY VP CAPITAL APPRECIATION PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 730,987,068
<INVESTMENTS-AT-VALUE> 1,270,740,482
<RECEIVABLES> 5,123,268
<ASSETS-OTHER> 3,862
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,275,867,612
<PAYABLE-FOR-SECURITIES> 37,656,869
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,346,393
<TOTAL-LIABILITIES> 39,003,262
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 697,462,317
<SHARES-COMMON-STOCK> 40,404,549
<SHARES-COMMON-PRIOR> 34,083,384
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (351,381)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 539,753,414
<NET-ASSETS> 1,236,864,350
<DIVIDEND-INCOME> 4,579,502
<INTEREST-INCOME> 2,539,727
<OTHER-INCOME> 0
<EXPENSES-NET> (6,061,534)
<NET-INVESTMENT-INCOME> 1,057,695
<REALIZED-GAINS-CURRENT> 10,978,637
<APPREC-INCREASE-CURRENT> 308,212,084
<NET-CHANGE-FROM-OPS> 320,248,416
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,091,415)
<DISTRIBUTIONS-OF-GAINS> (11,365,243)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,453,709
<NUMBER-OF-SHARES-REDEEMED> (3,542,006)
<SHARES-REINVESTED> 409,462
<NET-CHANGE-IN-ASSETS> 473,785,594
<ACCUMULATED-NII-PRIOR> 29,913
<ACCUMULATED-GAINS-PRIOR> 35,225
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,409,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,062,000
<AVERAGE-NET-ASSETS> 946,862,000
<PER-SHARE-NAV-BEGIN> 22.390
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 8.510
<PER-SHARE-DIVIDEND> (0.030)
<PER-SHARE-DISTRIBUTIONS> (0.290)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 30.610
<EXPENSE-RATIO> 0.640
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000887340
<NAME> MAINSTAY VP SERIES FUND, INC.
<SERIES>
<NUMBER> 2
<NAME> MAINSTAY VP GROWTH EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 714,057,709
<INVESTMENTS-AT-VALUE> 997,370,340
<RECEIVABLES> 1,265,848
<ASSETS-OTHER> 2,883
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 998,639,071
<PAYABLE-FOR-SECURITIES> 612,584
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,290,047
<TOTAL-LIABILITIES> 1,902,631
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 713,423,809
<SHARES-COMMON-STOCK> 42,207,295
<SHARES-COMMON-PRIOR> 37,372,405
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 283,312,631
<NET-ASSETS> 996,736,440
<DIVIDEND-INCOME> 8,831,999
<INTEREST-INCOME> 2,849,861
<OTHER-INCOME> 0
<EXPENSES-NET> (4,422,528)
<NET-INVESTMENT-INCOME> 7,259,332
<REALIZED-GAINS-CURRENT> 73,678,921
<APPREC-INCREASE-CURRENT> 123,768,075
<NET-CHANGE-FROM-OPS> 204,706,328
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,247,513)
<DISTRIBUTIONS-OF-GAINS> (73,678,921)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,372,000
<NUMBER-OF-SHARES-REDEEMED> (3,976,906)
<SHARES-REINVESTED> 3,439,796
<NET-CHANGE-IN-ASSETS> 237,682,153
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,153,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,423,000
<AVERAGE-NET-ASSETS> 861,212,000
<PER-SHARE-NAV-BEGIN> 20.310
<PER-SHARE-NII> 0.190
<PER-SHARE-GAIN-APPREC> 5.210
<PER-SHARE-DIVIDEND> (0.190)
<PER-SHARE-DISTRIBUTIONS> (1.900)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 23.620
<EXPENSE-RATIO> 0.510
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000887340
<NAME> MAINSTAY VP SERIES FUND, INC.
<SERIES>
<NUMBER> 3
<NAME> MAINSTAY VP INDEXED EQUITY PORTIFO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 663,084,246
<INVESTMENTS-AT-VALUE> 937,401,942
<RECEIVABLES> 11,391,595
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 36,895
<TOTAL-ASSETS> 948,830,432
<PAYABLE-FOR-SECURITIES> 1,453,017
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 592,455
<TOTAL-LIABILITIES> 2,045,472
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 665,416,157
<SHARES-COMMON-STOCK> 38,572,435
<SHARES-COMMON-PRIOR> 24,141,792
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,583,358
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 274,785,445
<NET-ASSETS> 946,784,960
<DIVIDEND-INCOME> 9,873,539
<INTEREST-INCOME> 1,989,840
<OTHER-INCOME> 0
<EXPENSES-NET> (2,687,886)
<NET-INVESTMENT-INCOME> 9,155,693
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<NAME> MAINSTAY VP AMERICAN CENTURY INCOME & GROWTH
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<NAME> MAINSTAY VP EAGLE ASSET MANAGEMENT GROWTH & EQUITY
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<SERIES>
<NUMBER> 15
<NAME> MAINSTAY VP LORD ABBETT DEVELOPING GROWTH
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