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                            PACIFICA VARIABLE TRUST
                                237 PARK AVENUE
                                   SUITE 910
                               NEW YORK, NY 10017
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                                   PROSPECTUS
                                DECEMBER 1, 1995
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     Pacifica Variable Trust (the "Trust") is an open-end, management investment
company, shares of which are currently offered only to separate accounts
("Separate Accounts") funding variable annuity contracts issued by Anchor
National Life Insurance Company (the "Participating Insurance Company"). Shares
of the Trust are not offered to the general public.
 
     The Trust currently offers five separate funds:
 
          -  EMERGING GROWTH PORTFOLIO -- This Portfolio seeks long-term capital
     appreciation by investing primarily in common stocks of medium-sized
     companies.
 
          -  EQUITY VALUE PORTFOLIO -- This Portfolio seeks long-term capital
     appreciation by investing in common stocks of large, well-established
     companies and smaller companies with market capitalizations exceeding $50
     million.
 
          -  BALANCED PORTFOLIO -- This Portfolio seeks both capital
     appreciation and current income resulting in a high total investment return
     by investing in a balanced and diversified program of equity securities and
     debt instruments.
 
          -  INTERMEDIATE BOND PORTFOLIO -- This Portfolio seeks a high level of
     current income consistent with the preservation of capital and maintenance
     of liquidity through investments in a broad range of investment grade debt
     instruments.
 
          -  MONEY MARKET PORTFOLIO -- This Portfolio seeks current income and
     stability of principal by investing in high-quality "money market"
     instruments.
 
This Prospectus sets forth concisely certain information about the Trust that
you should know before making an investment decision. You are encouraged to read
this Prospectus carefully and retain it for future reference. Additional
information about the Trust is contained in a Statement of Additional
Information dated December 1, 1995, that is available free of charge by calling
(800)-FIB-1223, or by contacting your Participating Insurance Company. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated by reference into this
Prospectus.
 
     SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, ANY FIRST INTERSTATE OR OTHER BANK, AND ARE
NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY. THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. AN INVESTMENT IN THE
PORTFOLIOS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
 
     THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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                               TABLE OF CONTENTS
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<TABLE>
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INVESTMENT OBJECTIVES AND POLICIES...................................................      3
  The Emerging Growth Portfolio......................................................      3
  The Equity Value Portfolio.........................................................      3
  The Balanced Portfolio.............................................................      4
  The Intermediate Bond Portfolio....................................................      4
  The Money Market Portfolio.........................................................      5
INVESTMENT LIMITATIONS...............................................................      7
GENERAL..............................................................................      8
  MANAGEMENT OF THE PORTFOLIOS.......................................................      8
  FUND SHARE VALUATION...............................................................      9
  DIVIDENDS AND DISTRIBUTIONS........................................................     10
  TAXES..............................................................................     10
  PERFORMANCE INFORMATION............................................................     11
  DESCRIPTION OF THE TRUST...........................................................     12
INVESTOR GUIDE.......................................................................     12
  PURCHASE AND REDEMPTION OF SHARES..................................................     12
  MISCELLANEOUS......................................................................     13
PROSPECTUS APPENDIX..................................................................    A-1
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                       INVESTMENT OBJECTIVES AND POLICIES
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This Prospectus describes five diversified investment portfolios. Each Fund has
distinct investment objective policies. The Trust offers five investment options
with the following investment objectives:
 
The Emerging Growth Portfolio. The investment objective of the Emerging Growth
Portfolio is to provide investors with long-term capital appreciation. In
pursuing its investment objective the Portfolio will invest, under normal market
conditions, at least 65% of the value of its total assets in a diversified group
of small to medium-sized companies using a research intensive approach and
valuation techniques that emphasize earnings growth. "Small to medium-sized"
companies are (1) domestic companies that are not included in (a) the top 100 of
the 500 largest industrial corporations as ranked by Fortune Magazine
("Fortune") or (b) in the top 20% of Fortune's separate rankings for other
industries or (2) foreign companies with market capitalizations of less than $10
billion. In addition, to qualify as a small to medium-sized company, both
domestic and foreign companies must have either revenues or market
capitalizations of at least $50 million. The Portfolio may also invest a portion
of its assets in larger companies that offer improved growth possibilities
because of rejuvenated management, product changes or some other development
that might stimulate earnings growth, and in smaller companies that have limited
product lines, markets or financial resources, or are dependent upon one-person
management. The securities of smaller companies in which the Portfolio may
invest may have limited marketability, may be subject to more abrupt or erratic
market movements than securities of larger companies or the market averages in
general and may involve greater risk than is customarily associated with more
established companies. However, to qualify for investment by the Portfolio, a
company will be expected to demonstrate the potential for reasonable long-term
annual earnings growth. No assurance can be given that any of these expectations
will be met.
 
In addition to common stocks, the Portfolio may invest in preferred stocks,
convertible securities and common stock warrants, and may invest up to 25% of
its total assets directly, or indirectly through investments in American
Depository Receipts ("ADRs") and European Depository Receipts ("EDRs"), in
securities issued by foreign companies ("foreign securities"). Further, the
Portfolio may invest in securities issued by other investment companies within
the limits prescribed by the Investment Company Act of 1940 (the "1940 Act").
 
In accordance with its investment policies, the Portfolio may hold uninvested
cash reserves, which do not earn income, pending investment, to meet anticipated
redemption requests and during defensive periods. In addition, the Portfolio may
invest in short-term instruments that are eligible for purchase by the Money
Market Portfolio in such proportions as, in the opinion of the adviser, existing
conditions warrant.
 
The Equity Value Portfolio. The investment objective of the Equity Value Fund is
to provide investors with long-term capital appreciation. This Portfolio pursues
its investment objective by investing primarily in common stocks of both
domestic and foreign companies. The Portfolio may invest in large,
well-established companies and smaller companies with market capitalizations
exceeding $50 million. Income generation is a secondary consideration for the
Portfolio. However, the Portfolio may purchase dividend paying stocks of
particular issuers when the issuer's dividend record may, in the opinion of the
adviser, have a favorable influence on the market value of the securities.
 
In selecting equity investments, the adviser uses both quantitative and
qualitative analysis to identify those issuers that, in its opinion, exhibit
below-average valuation multiples, above-average financial strength, a strong
position in their industry and a history of steady profit growth. In addition to
common stocks, the Portfolio may invest in preferred stocks, investment grade
convertible securities and common stock warrants, and may invest either directly
or indirectly, through investments in ADRs and EDRs, in foreign securities.
 
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Normally, the Portfolio will invest at least 65% of its total assets in common
stocks or securities convertible into common stocks. For temporary defensive
purposes, however, the Portfolio may invest, in accordance with its investment
policies, in short-term instruments that are eligible for purchase by the Money
Market Portfolio and in debt obligations of corporations (corporate bonds,
debentures, notes and other similar corporate debt instruments) which are rated
investment grade or better (within the four highest rating categories assigned
by an unaffiliated nationally recognized statistical rating organization (an
"NRSRO"), or, if unrated, of comparable quality as determined by the adviser).
 
The Balanced Portfolio. The investment objective of the Balanced Fund is to
realize both capital appreciation and current income. This Portfolio invests
between 30% to 70% of its assets in common stocks that are considered by the
adviser to have better than average prospects for growth of capital and income.
The Portfolio will invest primarily in domestic equity securities, but may
invest up to 5% of its assets in equity securities listed or traded exclusively
on a foreign exchange excluding ADRs and EDRs. The remaining 30% to 70% balance
of the Portfolio's assets will be invested in senior fixed income securities,
including corporate debt securities, commercial paper and mortgage and asset-
backed securities. The debt instruments in which the Portfolio invests will be
rated at least investment grade (within the four highest rating categories
assigned by an NRSRO, or, if unrated, of comparable quality as determined by the
adviser).
 
In selecting equity investments, the adviser uses both quantitative and
qualitative analysis to identify those issuers that, in its opinion, exhibit
below-average valuation multiples, above-average financial strength, a strong
position in their industry and a history of steady profit growth. In addition to
common stocks, the Portfolio may invest in preferred stocks, investment grade
convertible securities and common stock warrants.
 
In selecting senior fixed income securities, the adviser seeks debt instruments
that appear best calculated to achieve the Portfolio's investment objective
within the credit and risk tolerances established for the Portfolio. In
accordance with those policies, the Portfolio may purchase commercial paper and
mortgage and asset-backed securities rated by an NRSRO within the two highest
rating categories and corporate debt securities rated by an NRSRO within the
four highest rating categories. The Portfolio also may invest in other debt
instruments which are of comparable quality as determined by the adviser.
 
The Intermediate Bond Portfolio. The investment objective of the Intermediate
Bond Portfolio is to provide investors with a high level of current income
consistent with the preservation of capital and maintenance of liquidity. This
Portfolio pursues its investment objective by investing in a broad range of
corporate debt obligations such as fixed and variable-rate bonds, zero coupon
bonds, debentures, obligations convertible into common stock and various types
of demand instruments, obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, dollar-denominated debt obligations of
foreign issuers, including foreign corporations and foreign governments, and
money market instruments. The Portfolio is also permitted to acquire obligations
issued by state and local governments ("Municipal Obligations"). The purchase of
Municipal Obligations may be advantageous when, as a result of prevailing
economic, regulatory or other circumstances, the yield of such securities, on a
pre-tax basis, is comparable to that of corporate or U.S. Government
obligations. The Portfolio will maintain an average weighted maturity between
three and ten years.
 
In acquiring particular portfolio securities, the adviser will consider, among
other things, historical yield relationships between corporate and government
bonds, intermarket yield relationships among various industry sectors, current
economic cycles and the attractiveness and creditworthiness of particular
issuers. Depending upon its analysis to these and other factors, the Portfolio's
holdings in issuers in particular industry sectors may be overweighted when
compared to the relative industry weightings in the Shearson Lehman Brothers
Intermediate-Term Index or other recognized indexes.
 
The policy of the Portfolio is to invest at least 65% of the total value of its
assets in corporate and government bonds during normal market conditions. Debt
obligations acquired by the Portfolio will be rated investment grade at the time
of purchase. Debt obligations may also be unrated but deemed by
 
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the adviser to be comparable in quality to instruments that are so rated. The
Portfolio's dollar weighted average portfolio quality of the corporate bond
portion of the Portfolio's holdings is expected to be "A" or better. Obligations
rated in the lowest of the top four NRSRO rating categories are considered to
have speculative characteristics.
 
The Portfolio may also invest in obligations convertible into common stocks, and
may purchase common stocks, warrants or other rights to buy shares if they are
attached to a fixed income obligation. As a general matter, however, the
Portfolio will not invest in common stocks. Common stock received through the
conversion of convertible debt obligations will normally be sold in an orderly
manner as soon as possible.
 
Up to 20% of the total assets of the Portfolio may be invested directly in
dollar-denominated debt obligations of foreign issuers. These obligations may
include obligations of foreign corporations as well as obligations of foreign
governments and their political sub-divisions (which will be limited to direct
government obligations and government-guaranteed securities).
 
The value of the Portfolio's holdings can be expected to fall when interest
rates rise and vice-versa, according to changes in prevailing interest rates.
Zero coupon bonds (i.e., discount debt obligations that do not make periodic
interest payments) may be subject to greater market fluctuations from changing
interest rates than debt obligations having comparable maturities that pay
interest currently.
 
The Portfolio may also hold other types of securities, including money market
instruments, repurchase agreements, securities issued by other investment
companies within the limits prescribed by the 1940 Act, and cash, pending
investment, to meet anticipated redemption requests or if, in the opinion of the
adviser, suitable investments are unavailable. These investments may be made in
such proportions as, in the opinion of the adviser, existing circumstances
warrant, and may include obligations of foreign banks and foreign branches of
U.S. banks.
 
The Money Market Portfolio. The investment objective of the Money Market
Portfolio is to provide investors with current income and stability of
principal. In seeking to achieve its investment objective, this Portfolio
invests, under normal market conditions, at least 80% of its assets in "money
market" instruments. These securities will have remaining maturities of 13
months or less (although certain variable and floating rate instruments and
securities subject to collateralized repurchase agreements may have longer
maturities). The average weighted maturity of the securities held by the
Portfolio will not exceed 90 days.
 
In particular, the Portfolio may invest in:
 
     (A) Certificates of deposit and time deposits of U.S. banks or other U.S.
financial institutions which are members of the Federal Reserve System or the
Federal Deposit Insurance Corporation having total assets at the time of
purchase in excess of $1.5 billion (including up to 25% of its total assets in
obligations of foreign branches of such banks and institutions);
 
     (B) Bankers acceptances guaranteed by U.S. commercial banks having total
assets at the time of purchase in excess of $1.5 billion;
 
     (C) Interest-bearing savings deposits in commercial and savings banks (up
to 5% of its total assets);
 
     (D) Commercial paper (including variable and floating rate instruments) and
other short-term obligations and variable rate master demand notes, bonds,
debentures and notes issued or guaranteed by U.S. and foreign corporations;
 
     (E) Securities issued or guaranteed as to principal and interest by the
U.S. Government or by any of its agencies or instrumentalities;
 
     (F) "Stripped securities" which include participations in trusts that hold
U.S. Treasury obligations (including TIGRs and CATS) and interests in U.S.
Treasury obligations reflected in the Federal Reserve Book Entry System;
 
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     (G) Asset-backed securities (including interests in pools of assets such as
mortgages, installment purchase obligations and credit card receivables);
 
     (H) Unrated notes, paper and other instruments that are of comparable
quality as determined by the adviser under guidelines established by the Trust's
Board of Trustees; and
 
     (I) Repurchase agreements relating to the above instruments.
 
All securities acquired by the Portfolio will be determined by the adviser,
under guidelines established by the Trust's Board of Trustees, to present
minimal credit risks, and will be "First Tier Securities" as defined by the
Securities and Exchange Commission (the "SEC"). The Portfolio may purchase
commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933
(the "1933 Act") and securities that are not registered under the 1933 Act but
can be sold to "qualified institutional buyers" in accordance with Rule 144A
under the 1933 Act. See "Illiquid Securities" in the Appendix. First Tier
Securities are (a) securities that either (i) have short-term debt ratings at
the time of purchase in the highest rating category by at least two NRSROs (or
one NRSRO if the security is rated by only one NRSRO), or (ii) are comparable in
priority and security with an instrument issued by an issuer which has such
ratings, and (b) securities that are unrated (including securities of issuers
that have long-term but not short-term ratings) but are of comparable quality as
determined in accordance with guidelines approved by the Board of Trustees. The
purchase of single-rated and unrated securities will be ratified by the Board of
Trustees.
 
Securities in which the Portfolio may invest may not earn as high a level of
income as longer term or lower quality securities, which generally have greater
market risk and more fluctuation in market value.
 
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                             INVESTMENT LIMITATIONS
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Each Portfolio is subject to certain fundamental investment restrictions. A
Portfolio's investment objective may be changed by the Board of Trustees without
shareholder approval. Shareholders will, however, be notified of any changes.
Any such change may result in a Portfolio having an investment objective
different from the objective which the shareholder considered appropriate at the
time of investment in the Portfolio. No assurance can be provided that a
Portfolio will achieve its investment objective.
 
Each Portfolio has also adopted the fundamental investment restrictions stated
below that may be changed only with the approval of a majority of the
Portfolio's outstanding shares. Additional fundamental restrictions are set
forth in the Statement of Additional Information.
 
No Portfolio may:
 
1. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by the
Portfolio or the Trust, except that up to 25% of the value of the Portfolio's
total assets may be invested without regard to these limitations.
 
2. Purchase any securities that would cause 25% or more of the Portfolio's total
assets at the time of purchase to be invested in the securities of one or more
issuers conducting their principal business activities in the same industry,
provided that (a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or, with
respect to the Money Market Portfolio, obligations (other than commercial paper)
of domestic branches of U.S. banks, and repurchase agreements secured by such
instruments; (b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry.
 
3. Make loans, except that each Portfolio may purchase and hold debt
instruments, enter into repurchase agreements in accordance with its investment
objective and policies and lend portfolio securities.
 
If a percentage limitation is met at the time a Portfolio makes an investment, a
later change in that percentage due to a change in the value of the Portfolio's
holdings will not result in a violation of the limitation.
 
In order to permit the sale of a Portfolio's shares in certain states, the Trust
may agree to certain restrictions that may be stricter than the investment
policies and limitations described above. Should the Trust determine that any
such restriction is no longer in the Portfolio's best interest, it will revoke
its agreement by no longer selling Portfolio shares in the state involved.
 
In accordance with current SEC regulations, the Money Market Portfolio intends,
as a non-fundamental policy, to limit investments in the securities of any
single issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) to not more than 5% of the value
of its total assets at the time of purchase, except for 25% of the value of its
total assets which may be invested in any one issuer for a period of up to three
business days.
 
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                                    GENERAL
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                          MANAGEMENT OF THE PORTFOLIOS
 
The business and affairs of the Portfolios are managed under the direction of
the Trust's Board of Trustees. The Statement of Additional Information contains
information about the Board of Trustees.
 
THE ADVISER: FIRST INTERSTATE CAPITAL MANAGEMENT, INC.
 
First Interstate Capital Management, Inc., 7501 E. McCormick Parkway,
Scottsdale, Arizona 85258, serves as investment adviser to the Trust ("FICM" or
the "Adviser"). The Adviser manages the investment and reinvestment of the
assets of the Portfolios and continuously reviews, supervises and administers
the Portfolios' investments. The Adviser is responsible for placing orders for
the purchase and sale of the Portfolios' investments directly with brokers and
dealers selected by it in its discretion. Mr. David Underwood serves as the
Adviser's Director of Funds Management.
 
Mr. Underwood joined the Adviser in 1995. From 1993 to 1995 Mr. Underwood was
employed by Integra Trust Company as Director of Research. From 1990 to 1993 he
was Portfolio Manager with the firm of C.S. McKee Investment Advisors. Mr. G.
Edward Means serves as the Adviser's Director of Fixed Income Management. Mr.
Means joined the Adviser in January, 1995. From 1992 to 1994 he was employed by
Clayton Brown & Associates as Senior Vice President, Fixed Income Sales. From
1984 to 1992 he was employed by First National Bank of Chicago as Senior Vice
President.
 
     Mr. Leon Newcomb has been employed by First Interstate since 1994 and will
be responsible for the day-to-day management of the Equity Value Portfolio and
the equity portion of the Balanced Portfolio. From 1989 through 1993 Mr. Newcomb
was employed by Knights of Columbus, a Connecticut life insurance company, as an
equity portfolio manager. Mr. Michael Hughes will be responsible for the
day-to-day management of the fixed-income portion of the Balanced Portfolio. Mr.
Hughes has been employed by First Interstate since 1988. He currently serves as
a Fixed Income Fund Manager. Mr. Robert Daviduk will be responsible for the
day-to-day management of the Intermediate Bond Portfolio. Mr. Daviduk has been a
fixed-income portfolio manager with the First Interstate since April, 1993. From
1992 to 1993, Mr. Daviduk was employed by Payden & Rygel Investment Counselors
as a Fixed Income Portfolio Analyst. Mr. Richard A. Ferguson will be responsible
for the day-to-day management of the Emerging Growth Portfolio. Mr. Ferguson has
been employed in various managerial positions with First Interstate Bank of
Arizona, N.A. since 1974 and joined First Interstate in March, 1995.
 
The Adviser is a wholly-owned subsidiary of First Interstate Bank of California,
which is the largest banking subsidiary of First Interstate Bancorp, a
multi-bank holding company. First Interstate Bancorp provides financial products
and services marketed at the local level to nearly five million households in
over 500 communities and 13 western states.
 
The Adviser is entitled to receive an advisory fee, calculated daily and payable
monthly, at the annual rate of .75% of the average daily net assets of each of
the Emerging Growth, Equity Value and Balanced Portfolios; .65% of the average
daily net assets of the Intermediate Bond Portfolio; and .60% of the average
daily net assets of the Money Market Portfolio. The Adviser may from time to
time voluntarily waive all or any portion of its fees.
 
DISTRIBUTOR
 
Furman Selz LLC ("Furman Selz"), 230 Park Avenue, New York, New York 10169, acts
as distributor of the Portfolios. Furman Selz is primarily an institutional
brokerage firm with member-
 
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ship on the New York, American, Boston, Midwest, Pacific and Philadelphia Stock
Exchanges. The Distributor receives no distribution fees from the Portfolios for
its distribution services.
 
ADMINISTRATIVE SERVICES
 
Furman Selz also provides certain management and administrative services
necessary for the Portfolios' operations pursuant to an Administrative Services
Contract. These services include: (i) general supervision of the operation of
the Portfolios including coordination of the services performed by the
Portfolios' transfer agent, custodian, independent accountants and legal
counsel, regulatory compliance, including the compilation of information for
documents such as reports to, and filings with, the SEC and state securities
commissions and preparation of shareholder reports for the Portfolios; (ii)
general supervision relative to the compilation of data required for the
preparation of periodic reports distributed to the Trust's officers and Board of
Trustees; and (iii) furnishing office space and certain facilities required for
conducting the business of the Trust. For these services, Furman Selz is
entitled to receive a fee from each Portfolio, calculated daily and payable
monthly, at the annual rate of .15% of each Portfolio's average daily net
assets. In addition, pursuant to a Fund Accounting Agreement between the Trust
and Furman Selz, Furman Selz assists the Trust in calculating net asset values
and provides certain other accounting services for each Portfolio for an annual
fee of $30,000 per Portfolio plus out-of-pocket expenses.
 
CUSTODIAN AND TRANSFER AGENT
 
First Interstate Bank of California, 707 Wilshire Boulevard, Los Angeles,
California 90017, serves as Custodian for the Portfolios. Furman Selz serves as
Transfer Agent for the Portfolios.
 
OTHER EXPENSES
 
Except as noted below, the Adviser and Furman Selz bear all expenses in
connection with the performance of their services for the Portfolios. The Trust
bears the expenses in connection with the Portfolios' operations, whether
incurred directly or on its behalf by the Adviser, Furman Selz or the
Participating Insurance Company, including taxes; interest; fees (including fees
paid to its Trustees and officers who are not affiliated with Furman Selz); SEC
fees; state securities qualification fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory, administration, fund accounting and custody fees;
certain insurance premiums; outside auditing and legal expenses; costs of
shareholders' reports and shareholder meetings; and any extraordinary expenses.
The Portfolios also pay for brokerage fees and commissions in connection with
the purchase of portfolio securities.
 
                              FUND SHARE VALUATION
 
Net asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
a Portfolio, less liabilities, by the number of its outstanding shares. Net
asset value is determined as of the close of regular trading on the New York
Stock Exchange (the "Exchange"), currently 4:15 p.m. except for the Money Market
Fund which is 3:00 p.m. (Eastern Time), on each weekday that the Exchange is
open. Currently, the Exchange is closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day (observed), Labor Day, Thanksgiving Day
and Christmas Day (observed).
 
The investments of the Emerging Growth, Equity Value, Balanced and Intermediate
Bond Portfolios are valued at market value or, where market quotations are not
readily available, at fair value as determined in good faith by or under the
direction of the Board of Trustees. Debt securities with maturities of sixty
days or less are valued at amortized cost, unless the Board of Trustees
determines that this does not constitute fair value.
 
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The assets in the Money Market Portfolio are valued based upon the amortized
cost method. Although the Money Market Portfolio seeks to maintain net asset
value per share at $1.00, there can be no assurance that net asset value will
not vary.
 
For further information about valuing Portfolio investments, see the Statement
of Additional Information.
 
                          DIVIDENDS AND DISTRIBUTIONS
 
Each Portfolio expects to distribute substantially all of its net investment
income and capital gains each year. Dividends for the Money Market Portfolio are
declared daily and paid monthly. Dividends for the Intermediate Bond Portfolio
are declared and paid monthly. Dividends for the Emerging Growth, Equity Value
and Balanced Portfolios are declared and paid quarterly. Net capital gains, if
any, will be distributed at least annually. All dividends and capital gain
distributions of a Portfolio will be automatically reinvested in additional
shares of the same Portfolio at the net asset value of such shares on the
payment date.
 
                                     TAXES
 
Generally, each Portfolio will not be subject to Federal income taxes. Each
Portfolio intends to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), which generally will
relieve a Portfolio of liability for Federal income taxes to the extent the
Portfolio's earnings are distributed in accordance with the Code. In order to so
qualify, a Portfolio must comply with certain distribution, diversification,
source of income and other applicable requirements. If for any taxable year a
Portfolio does not qualify for the special Federal tax treatment afforded
regulated investment companies, all of the Portfolio's taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders. In such event, a Portfolio's distributions to
segregated asset accounts holding shares of the Portfolio would be taxable as
ordinary income to the extent of the Portfolio's current and accumulated
earnings and profits. A failure of a Portfolio to qualify as a regulated
investment company also could result in the loss of the tax-favored status of
variable annuity contracts based on a segregated asset account which invests in
the Portfolio.
 
Under Code Section 817(h), a segregated asset account upon which a variable
annuity contract is based must be "adequately diversified." A segregated asset
account will be adequately diversified if it complies with certain
diversification tests set forth in Treasury regulations. If a regulated
investment company satisfies certain conditions relating to the ownership of its
shares, a segregated asset account investing in such investment company will be
entitled to treat its pro rata portion of each asset of the investment company
as an asset for purposes of these diversification tests. The Portfolios intend
to meet these ownership conditions and to comply with the diversification tests
noted above. Accordingly, a segregated asset account investing solely in shares
of a Portfolio will be adequately diversified. However, a failure of the
Portfolio to meet such conditions and to comply with such tests could cause the
owners of variable annuity contracts based on such account to recognize ordinary
income each year in the amount of any net appreciation of such contract or
policy during the year (including the annual cost of life insurance, if any,
provided under such policy).
 
Provided that a Portfolio and a segregated asset account investing in a
Portfolio satisfy the above requirements, any distributions from the Portfolio
to such account will be exempt from current Federal income taxation to the
extent that such distributions accumulate in a variable annuity contract.
 
Persons investing in a variable annuity contract offered by a segregated asset
account investing in a Portfolio should refer to the prospectus with respect to
such contract for further tax information.
 
The foregoing discussion of Federal income tax consequences is based on tax laws
and regulations in effect on the date of this Prospectus and is subject to
change by legislative or administrative action.
 
                                       10
<PAGE>   11
 
Each prospective investor should consult his or her own tax adviser as to the
tax consequences of investments in the Portfolios.
 
                            PERFORMANCE INFORMATION
 
From time to time, in advertisements or in reports to shareholders, the
performance of the Portfolios may be quoted and compared to those of other
mutual funds with similar investment objectives and to stock or other relevant
bond indexes or to rankings prepared by independent services or other financial
or industry publications that monitor the performance of mutual funds. For
example, the performance of the Portfolios may be compared to data prepared by
Lipper Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds, the S&P 500, the Consumer Price Index,
the Dow Jones Industrial Average, a recognized unmanaged index of common stocks
of 30 industrial companies listed on the NYSE, the Small Company Index or the
U.S. Treasury Index.
 
Performance data as reported in national financial publications including, but
not limited to, Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or publications of a local or regional nature may also be
used in comparing the performance of the Portfolios.
 
The standardized yield of the Money Market Portfolio refers to the income
generated over a seven-day period. This income is annualized, i.e. the income
during the particular period is assumed to be generated each week over a 52-week
period, and is shown as a percentage of the investment. The Money Market
Portfolio may also advertise its effective yield which is calculated similarly
but, when annualized, the income from an investment in the Portfolio is assumed
to be reinvested. Consequently, the "effective yield" will be slightly higher
because of the compounding effect.
 
The standardized yield for the other Portfolios is computed by dividing a
Portfolio's average daily net investment income per share during a 30-day (or
one month) base period by the net asset value per share on the last day of the
period, and annualizing the result on a semi-annual basis. The Portfolios may
also advertise their "effective yield" which is calculated similarly but, when
annualized, the income earned by an investment in a Portfolio is assumed to be
reinvested.
 
The Portfolios may also advertise their performance using "average annual total
return" over various periods of time. Such total return figures reflect the
average percentage change in the value of an investment in a Portfolio from the
beginning date of the measuring period to the end of the measuring period.
Average total return figures will be given for the most recent one-, five- and
ten-year periods (if available), and may be given for other periods as well,
such as from the commencement of a Portfolio's operations, or on a year-by-year
basis. Each Portfolio may also use "aggregate total return" figures for various
periods, representing the cumulative change in the value of an investment in a
Portfolio for the specified period. Both methods of calculating total return
assume that dividends and capital gain distributions made by a Portfolio during
the period are reinvested in Portfolio shares.
 
Performance of the Portfolios will fluctuate and any quotation of performance
should not be considered as representative of future performance. Since yields
fluctuate, yield data cannot necessarily be used to compare an investment in a
Portfolio's shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions.
 
Yields and total returns quoted for the Portfolios include the effect of
deducting the Portfolios' expenses, but may not include charges and expenses
attributable to a particular variable annuity contract. Since shares of the
Portfolios can be purchased only through a variable annuity contract, you should
carefully review the prospectus of the variable annuity contract you have chosen
for information on relevant charges and expenses. Including these charges in the
quotations of the Portfolios' yield and total return would have the effect of
decreasing performance. Performance information for
 
                                       11
<PAGE>   12
 
the Portfolios must always be accompanied by, and be reviewed with, performance
information for the insurance product which invests in the Portfolios.
 
                            DESCRIPTION OF THE TRUST
 
The Trust was organized on August 26, 1994 as a Delaware business trust. The
Trust offers shares of beneficial interest, par value $.0001 per share, in five
separate Portfolios, each of which is classified as a diversified investment
company under the 1940 Act. Each share represents an equal proportionate
interest in a particular Portfolio with other shares of the same series, and is
entitled to such dividends and distributions out of the income earned on the
assets belonging to such Portfolio as are declared in the discretion of the
Board of Trustees. The Board of Trustees is authorized to classify or reclassify
any series of shares into one or more additional series of shares and to create
new investment portfolios.
 
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and will vote in
the aggregate and not by series, except as otherwise expressly required by law
or when the Board of Trustees determines that the matter to be voted on affects
only the interests of shareholders of a particular series. The rights
accompanying Portfolio shares are legally vested in the Separate Accounts
offered by the Participating Insurance Company. However, the Participating
Insurance Company will vote Portfolio shares held in its Separate Accounts in a
manner consistent with timely voting instructions received from the holders of
variable annuity contracts. The Participating Insurance Company will vote
Portfolio shares held in its Separate Accounts for which no timely instructions
are received from the holders of variable annuity contracts, as well as shares
it owns, in the same proportion as those shares for which voting instructions
are received. Additional information concerning voting rights of the
participants in the Separate Accounts are more fully set forth in the
prospectuses relating to those accounts issued by the Participating Insurance
Company.
 
The Trust is not required under Delaware law to hold annual shareholder meetings
and intends to do so only if required by the 1940 Act. Shareholders have the
right to call a meeting of shareholders to consider the removal of one or more
trustees and such meeting will be called when requested by the holders of record
of 10% or more of the Trust's outstanding shares. To the extent required by law,
the Trust will assist in shareholder communications in such matters.
 
- --------------------------------------------------------------------------------
 
                                 INVESTOR GUIDE
- --------------------------------------------------------------------------------
 
                       PURCHASE AND REDEMPTION OF SHARES
 
Investors may not purchase or redeem shares of the Portfolios directly, but only
through variable annuity contracts offered through the Separate Accounts of the
Participating Insurance Company. You should refer to the prospectus of the
Participating Insurance Company's Separate Account for information on how to
purchase a variable annuity contract, how to select specific Portfolios of the
Trust as investment options for your contract and how to redeem monies from the
Trust. The Trust assumes no responsibility for such prospectus.
 
The Separate Accounts of the Participating Insurance Company place orders to
purchase and redeem shares of the Portfolios based on, among other things, the
amount of premium payments to be invested and the amount of surrender and
transfer requests (as defined in the prospectus describing the variable annuity
contracts issued by the Participating Insurance Company) to be effected on that
day pursuant to variable annuity contracts. Orders received by the Trust are
effected on days on which the Exchange is open for trading. Orders for the
purchase of shares of a Portfolio are effected at the net asset value per share
next calculated after an order is received in good order by the Company from an
investor, provided the order is promptly transmitted by the Company to the
Portfolio. Similarly,
 
                                       12
<PAGE>   13
 
redemptions are effected at the net asset value per share next calculated after
a redemption request is received in good order by the Company from an investor,
provided the order is promptly transmitted by the Company to the Portfolio.
Payment for redemptions will be normally made by a Portfolio within 7 days after
the request is received. The Trust may suspend the right of redemption under
certain extraordinary circumstances in accordance with SEC rules.
 
The Portfolios do not assess any fees, either when they sell or redeem their
shares. Surrender charges, mortality and expense risk fees and other charges may
be assessed by the Participating Insurance Company under its variable annuity
contracts as described in the Participating Insurance Company's prospectus.
 
As of the date of this Prospectus, shares of the Trust are offered only to
Separate Accounts funding variable annuity contracts issued by Anchor National
Life Insurance Company.
 
                                 MISCELLANEOUS
 
The Trust Instrument provides that the obligations of the Trust entered into in
the name or on behalf thereof by any of the Trustees, representatives or agents
are made not individually, but in such capacities, and are not binding upon any
of the Trustees, shareholders or representatives of the Trust personally, but
bind only the property of the Portfolio to which the obligations relate. All
persons dealing with any Portfolio of the Trust must look solely to the Trust
property belonging to such Portfolio for the enforcement of any claims against
the Trust.
 
Inquiries regarding the Trust should be made to the Trust's office at 237 Park
Avenue, Suite 910, New York, New York 10017. Holders of variable annuity
contracts issued by the Participating Insurance Company for which shares of the
Portfolios are the investment vehicle will receive from the Participating
Insurance Company unaudited semi-annual financial statements and year-end
financial statements audited by the Portfolios' independent certified public
accountants. Each report will show the investments owned by the Portfolios and
the market values of the investments and will provide other information about
the Portfolios and their operations.
 
                                       13
<PAGE>   14
 
                              PROSPECTUS APPENDIX
 
                       INFORMATION ON INVESTMENT POLICIES
 
INVESTMENTS BY THE PORTFOLIOS
 
     The equity securities of smaller and unseasoned companies purchased by the
Emerging Growth, Equity Value and Balanced Portfolios may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies because such securities typically are traded in lower volume and the
issuers typically are subject to a greater degree to changes in earnings and
prospects. The net asset value per share of these Portfolios may, therefore, be
subject to rapid and substantial changes. Additionally, such securities may not
be traded every day or in the volume typical of trading on a national securities
exchange. As a result, the disposition by a Portfolio of portfolio securities,
to meet redemptions or otherwise, may require the Portfolio to sell these
securities at a discount from market prices, to sell during periods when such
disposition is not desirable or to make many small sales over a lengthy period
of time.
 
     Generally, the market value of fixed income securities held by the
Portfolios can be expected to vary inversely to changes in prevailing interest
rates. In periods of declining interest rates, the yields of a Portfolio
comprised primarily of fixed income securities will tend to be somewhat lower.
Debt securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Changes in financial strength of an issuer
or changes in the ratings of any particular security may also affect the value
of these investments. The Portfolios may purchase zero-coupon bonds (i.e.,
discount debt obligations that do not make periodic interest payments).
Zero-coupon bonds are subject to greater market fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
distributions of interest.
 
PORTFOLIO TRANSACTIONS AND TURNOVER
 
     All orders for the purchase or sale of securities on behalf of a Portfolio
are placed by the Adviser with broker/dealers that the Adviser selects. Although
the Trust cannot accurately predict a Portfolio's portfolio turnover rate, it
expects that the annual turnover rates of the Emerging Growth, Equity Value,
Balanced and Intermediate Bond Portfolios will not exceed 150%. Short-term
capital gains realized from portfolio transactions are taxable to shareholders
as ordinary income. In addition, high portfolio turnover rates can result in
corresponding increases in brokerage commissions and other transaction costs.
The Adviser will not consider portfolio turnover rate a limiting factor in
making investment decisions consistent with the Portfolios' respective
objectives and policies.
 
FOREIGN SECURITIES
 
     There are risks and costs involved in investing in securities of foreign
issuers, which are in addition to the usual risks inherent in U.S. investments.
Investments in foreign securities may involve higher costs than investments in
U.S. securities, including higher transaction costs as well as the imposition of
additional taxes for foreign governments. In addition, foreign investments may
involve further risks associated with the level of currency exchange rates, less
complete financial information about issuers, less market liquidity and
political instability. Future political and economic developments, the possible
imposition of withholding taxes on investment income, the possible seizure or
nationalization of foreign holdings, the possible establishment of exchange
controls or the adoption of other governmental restrictions might adversely
affect the payment of principal and interest on foreign obligations.
Additionally, foreign banks and foreign branches of domestic banks may be
subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements.
 
     Investments in foreign securities may be in the form of American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs") and similar securities.
These securities may not be denominated in the same currency as the securities
they represent. ADRs are receipts typically issued
 
                                       A-1
<PAGE>   15
 
by a United States bank or trust company, and EDRs are receipts issued by a
European financial institution evidencing ownership of the underlying foreign
securities. ADRs, in registered form, are designed for use in the United States
securities markets, while EDRs, in bearer form, are generally designed for use
in the European securities markets. Certain institutions issuing ADRs may not be
sponsored by the issuer. A non-sponsored depository may not provide the same
information that a sponsored depository is required to provide under its
contractual arrangements with the issuer.
 
     Although the Portfolios (except the Money Market and Intermediate Bond
Portfolios) may invest in securities denominated in foreign currencies,
portfolio securities and other assets are valued in U.S. dollars. Currency
exchange rates may fluctuate significantly over short periods of time causing,
together with other factors, a Portfolio's net asset value to fluctuate.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also may be affected unpredictably by the intervention or the failure to
intervene by U.S. or foreign governments or central banks, or by currency
controls or political developments in the U.S. or abroad. To the extent that a
Portfolio's total assets, adjusted to reflect the Portfolio's net position after
giving effect to currency transactions, are denominated in the currencies of
foreign countries, the Portfolio will be more susceptible to the risk of adverse
economic and political developments within those countries.
 
     The Equity Value and Balanced Portfolios may enter into forward foreign
currency exchange contracts in order to protect against uncertainty in the level
of future foreign exchange rates. See the Statement of Additional Information
for further information concerning foreign currency transactions.
 
U.S GOVERNMENT OBLIGATIONS
 
     Each Portfolio may invest in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Obligations of certain agencies
and instrumentalities of the U.S. Government, such as the Government National
Mortgage Association ("GNMA"), are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Export-Import Bank of the United
States, and supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association ("FNMA"), are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
 
STRIPPED SECURITIES
 
     The Portfolios may purchase "stripped securities," which include
participations in trusts that hold U.S. Treasury obligations (such as TIGRs and
CATS) and interests in U.S. Treasury obligations reflected in the Federal
Reserve-Book Entry System which represent ownership in either the future
interest payments or the future principal payments on U.S. Treasury obligations.
Stripped securities are issued at a discount to their "face value," and may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are paid to investors.
 
REPURCHASE AGREEMENTS
 
     Each Portfolio may agree to purchase U.S. Government obligations or other
debt securities subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price. A Portfolio will enter into such repurchase
agreements only with financial institutions that are deemed to be creditworthy
by the Adviser, pursuant to guidelines established by the Trust's Board of
Trustees. During the term of any repurchase agreement, the Adviser will continue
to monitor the creditworthiness of the seller. The Portfolios will not enter
into repurchase agreements with the Adviser or its affiliates. Although the
securities subject to repurchase agreements may bear maturities exceeding
 
                                       A-2
<PAGE>   16
 
397 days, the Portfolios do not presently intend to enter into repurchase
agreements with deemed maturities in excess of seven days. If a Portfolio enters
into repurchase agreements with deemed maturities in excess of seven days, such
agreements would be subject to the Portfolio's limitation on illiquid investment
discussed below.
 
     The seller under a repurchase agreement will be required to maintain the
value of the securities that are subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose a
Portfolio to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement.
 
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES
 
     The Portfolios may purchase rated and unrated variable and floating rate
instruments, which may have stated maturities in excess of 397 days but will, in
the case of the Money Market Portfolio, permit a Portfolio to demand payment of
the principal of the instrument at least once every 397 days upon not more than
30 days' notice (unless the instrument is guaranteed by the U.S. Government or
an agency or instrumentality thereof). Such instruments may include variable
amount master demand notes that permit periodic adjustments in the principal
amounts. Any such instruments which do not permit a Portfolio to demand payment
within seven days after notice will be subject to the Portfolio's limitation on
investments in illiquid securities discussed below (unless the Adviser
determines under the supervision of the Board of Trustees that a liquid trading
market exists). The absence of any active secondary market for a particular
variable and floating rate instrument could make it difficult for a Portfolio to
dispose of a variable or floating rate instrument if the issuer defaulted on its
payment obligation or during periods that the Portfolio is not entitled to
exercise its demand rights, and a Portfolio could, for these or other reasons,
suffer a loss with respect to such instruments.
 
MORTGAGE-RELATED SECURITIES
 
     The Portfolios may purchase mortgage-related securities. Mortgage
pass-through securities are securities representing interests in "pools" of
mortgages on which payments of both interest and principal on the securities are
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early repayment of
principal on mortgage pass-through 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, in the event of prepayment the value
of the premium would be lost. Like other fixed-income securities, when interest
rates rise, the value of a mortgage-related security generally will decline;
however, when interest rates decline, the value of mortgage-related securities
with prepayment features may not increase as much as other fixed-income
securities. In recognition of this prepayment risk to investors, the Public
Securities Association (the "PSA") has standardized the method of measuring the
rate of mortgage loan principal prepayments. The PSA formula, the Constant
Prepayment Rate (the "CPR") or other similar models that are standard in the
industry will be used by a Portfolio in calculating maturity for purposes of its
investment in mortgage-related securities. Because the average life of
mortgage-related securities may lengthen with increases in interest rates, the
portfolio-weighted average life of the securities in which a Portfolio is
invested may at times lengthen due to this effect. Under these circumstances,
the Adviser may, but is not required to, sell securities in order to maintain an
appropriate portfolio-weighted average life.
 
     Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through
 
                                       A-3
<PAGE>   17
 
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.
 
     A Portfolio may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semi-annually.
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. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding the longer maturity classes receive principal only
after the first class has been retired.
 
     Assumptions generally accepted by the industry concerning the probability
of early payment may be used in the calculation of maturities for debt
securities that contain put or call provisions, sometimes resulting in a
calculated maturity different than the stated maturity of the security.
 
     The Adviser expects that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. As new types of mortgage-related securities
are developed and offered to investors, the Adviser will, consistent with a
Portfolio's investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities.
 
OTHER ASSET-BACKED SECURITIES
 
     The Portfolios may also purchase other types of asset-backed securities,
unrelated to mortgage loans. These asset-backed securities may consist of
undivided fractional interests in pools of consumer loans (unrelated to mortgage
loans) or receivables held in a trust. Examples include certificates for
automobile receivables ("CARS") and credit card receivables ("CARDS"). Payments
of principal and interest on these asset-backed securities are "passed through"
on a monthly or other periodic basis to certificate holders and are typically
supported by some form of credit enhancement, such as a letter of credit,
surety-bond, limited guaranty or subordination. The extent of credit enhancement
varies, but usually amounts to only a fraction of the asset-backed security's
par value until exhausted. Ultimately, asset-backed securities are dependent
upon payment of the consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse to the entity that originated the
loans or receivables.
 
     The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by a Portfolio must be reinvested in securities
whose yields reflect interest rates prevailing at the time. Thus, a Portfolio's
ability to maintain an investment portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent reinvestments
are in lower yielding securities. The actual maturity and realized yield will
therefore vary based upon the prepayment experience of the underlying asset pool
and prevailing interest rates at the time of prepayment. Asset-backed securities
are relatively new instruments and may be subject to greater risk of default
during periods of economic downturn than other instruments. Also, the secondary
market for certain asset-backed securities may not be as liquid as the market
for other types of securities, which could result in a Portfolio's experiencing
difficulty in valuing or liquidating such securities. For asset-backed
securities, the industry standard uses a principal prepayment model, the "ABS
Model," which is similar to the PSA described previously under "Mortgage-Related
Securities."
 
                                       A-4
<PAGE>   18
 
Either the PSA model, the ABS model or other similar models that are standard in
the industry will be used by a Portfolio in calculating maturity for purposes of
its investment in asset-backed securities.
 
CONVERTIBLE SECURITIES
 
     The Equity Value, Balanced and Intermediate Bond Portfolios intend to
purchase only those convertible securities that are "investment grade" at the
time of purchase. Although the Emerging Growth Portfolio may acquire convertible
securities that are rated below investment grade by an NRSRO, the Portfolio
expects that investments in lower-rated convertible securities will not exceed
10% of the value of its total assets at the time of purchase. Securities that
are rated Ba or BB have speculative characteristics with respect to the capacity
to pay interests and repay principal. Securities that are rated B generally lack
characteristics of a desirable investment, and assurance of interest and
principal payments over any long period of time may be small. Securities that
are rated Caa or CCC are of poor standing. These issues may be in default or
present elements of danger that may exist with respect to principal or interest.
In light of the risks, the Adviser, in evaluating the creditworthiness of an
issue, will take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the ability of the issuer's management and regulatory
matters. To the extent a Portfolio purchases convertibles rated below investment
grade or convertibles that are not rated, a greater risk exists as to the timely
repayment of the principal of, and the timely payment of interest or dividends
on, such securities. Particular risks include (a) the sensitivity of such
securities to interest rate and economic changes, (b) the lower degree of
protection of principal and interest payments, (c) the relatively low trading
market liquidity for the securities, (d) the impact that legislation may have on
the market for these securities (and, in turn, on the Portfolio's net asset
value) and (e) the creditworthiness of the issuers of such securities. During an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would negatively affect
their ability to meet their principal and interest payment obligations, to meet
projected business goals and to obtain additional financing. An economic
downturn could also disrupt the market for lower rated convertible securities
and negatively affect the value of outstanding securities and the ability of the
issuers to repay principal and interest. If the issuer of a convertible security
held by a Portfolio defaulted, the Portfolio could incur additional expenses to
seek recovery. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may also decrease the values and liquidity of
lower-rated convertible securities held by the Portfolio, especially in a thinly
traded market. These high yield, high risk securities are commonly referred to
as junk bonds.
 
ILLIQUID SECURITIES
 
     The Portfolios will not knowingly invest more than 15% of the value of
their net assets (10% for the Money Market Portfolio) in securities that are
illiquid because of restrictions on transferability or other reasons. If, after
the time of acquisition, events cause its limit to be exceeded, the Portfolio
involved will take steps to reduce the amount of illiquid securities as soon as
reasonably practicable in accordance with the policies of the SEC. Repurchase
agreements and time deposits with deemed maturities in excess of seven days,
Section 4(2) commercial paper and securities that are not registered under the
Securities Act of 1933 but that may be purchased by institutional buyers under
SEC Rule 144A are subject to this limit (unless such securities are variable
amount master demand notes with maturities of nine months or less or unless the
Adviser determines that a liquid trading market exists).
 
     SEC Rule 144A allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public. SEC
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act of 1933 for resales of certain securities to qualified
institutional buyers. The Trust believes that the market for certain restricted
securities such as institutional commercial paper may expand further as a result
of this regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic
 
                                       A-5
<PAGE>   19
 
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. ("NASD").
 
     The Adviser monitors the liquidity of restricted securities held by the
Portfolios under the supervision of the Board of Trustees. In reaching liquidity
decisions, the Adviser will consider such factors as: (a) the frequency of
trades and quotes for the security; (b) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (c)
dealer undertakings to make a market in the security; and (d) the nature of the
security and the nature of the marketplace trades (the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). The purchase of securities which can be sold only under SEC Rule 144A
could have the effect of increasing the level of illiquidity in a Portfolio
during any period that qualified institutional buyers become uninterested in
purchasing these restricted securities.
 
SECURITIES LENDING
 
     To increase return on portfolio securities, each Portfolio may lend its
portfolio securities to broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Such loans will not be made if, as a result, the aggregate of
all outstanding loans exceeds 30% of the value of a Portfolio's total assets in
the case of the Emerging Growth, Intermediate Bond and Money Market Portfolios
and 5% in the case of the Balanced and Equity Value Portfolios. There may be
risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. However, loans are made only to borrowers
deemed by the Adviser to be of good standing and when, in its judgment, the
income to be earned from the loan justifies the attendant risks.
 
OPTIONS
 
     The Emerging Growth, Equity Value, Balanced and Intermediate Bond
Portfolios may purchase put and call options listed on a national securities
exchange and issued by the Options Clearing Corporation in an amount not
exceeding 5% of their respective net assets as described further in the
Statement of Additional Information. Purchasing options is a specialized
investment technique that entails a substantial risk of a complete loss of the
amounts paid as premiums to the writer of the option.
 
     These Portfolios may also engage in writing call options from time to time.
A Portfolio will write only covered call options (options on securities owned by
the Portfolio). A Portfolio will forego any capital appreciation above the
exercise price on securities on which it has written a call option. In order to
close out a call option it has written, a Portfolio will enter into a "closing
purchase transaction," the purchase of a call option on the same security with
the same exercise price and expiration date as the call option which the
Portfolio previously wrote. When a portfolio security subject to a call option
is sold, a Portfolio will effect a closing purchase transaction to close out any
existing call option on that security. If a Portfolio is unable to effect a
closing purchase transaction, it will not be able to sell the underlying
security until the option expires or the Portfolio delivers the underlying
security upon exercise. Under normal conditions, it is not expected that the
underlying value of portfolio securities subject to such options would exceed
25% of the net assets of a Portfolio.
 
     A Portfolio will realize a gain (or loss) on a closing purchase transaction
with respect to a call previously written by that Portfolio if the premium, plus
commission costs, paid to purchase the call is less (or greater) than the
premium, less commission costs, received on the sale of the call. A gain also
will be realized if a call which a Portfolio has written lapses unexercised,
because the Portfolio would retain the premium.
 
     The use of covered call options will not be a primary investment technique
of the Portfolios, and they are expected to be used infrequently. If the Adviser
is incorrect in its forecast of market value or other factors when writing the
foregoing options, a Portfolio would be in a worse position than it would have
been had the foregoing investment techniques not been used.
 
                                       A-6
<PAGE>   20
 
STOCK INDEX FUTURE CONTRACTS AND RELATED OPTIONS
 
     The Equity Value and Balanced Portfolios may enter into stock index futures
contracts in order to protect the value of common stock investments, provided
that not more than 5% of a Portfolio's assets are committed to such
transactions. These Portfolios may purchase put options on stock index futures
as another method of protecting their assets against market declines.
 
     There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there is
no assurance that an active secondary market will develop or continue to exist.
Lack of a liquid market for any reason may prevent a Portfolio from liquidating
an unfavorable position and the Portfolio would remain obligated to meet margin
requirements until the position is closed.
 
     The use of the techniques listed above which involve the segregation of
assets to cover future obligations may impair the liquidity of a Portfolio's
assets and its ability to operate as an open-end investment company. The Adviser
will monitor the use of such techniques and report to the Trustees concerning
their impact, if any, on liquidity and a Portfolio's ability to meet
redemptions.
 
     For additional information relating to futures trading, including
particular risks thereof, see Appendix B to the Statement of Additional
Information.
 
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
 
     A Portfolio may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transactions,
which involve a commitment by the Portfolio to purchase or sell particular
securities with payment and delivery taking place at a future date (perhaps one
or two months later), permit the Portfolio to lock-in a price or yield on a
security it owns or intends to purchase, regardless of future changes in
interest rates. When-issued and forward commitment transactions involve the
risk, however, that the yield obtained in a transaction may be less favorable
than the yield available in the market when delivery of the security takes
place. A Portfolio's forward commitments and when-issued purchases are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions. The Portfolios do not intend to engage in when-issued purchases and
forward commitments for speculative purposes.
 
SECURITIES ISSUED BY OTHER INVESTMENT COMPANIES
 
     The Portfolios may invest in securities issued by other investment
companies within the limits prescribed by the 1940 Act. Each Portfolio currently
intends to limit its investments so that, as determined immediately after a
securities purchase is made: (a) not more than 5% of the value of its total
assets will be invested in the securities of any one investment company; (b) not
more than 10% of the value of its total assets will be invested in the aggregate
in securities of investment companies as a group; (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio; and (d) not more than 10% of the outstanding voting stock of any one
investment company will be owned in the aggregate by the Portfolio and other
investment companies advised by the Adviser or its affiliates. As a shareholder
of another investment company, a Portfolio would bear, along with other
shareholders, its proportionate share of the expenses of such other investment
company, including advisory fees. These expenses would be in addition to the
advisory and other expenses that the Portfolio bears directly in connection with
its own operations. A Portfolio will invest in securities issued by other
investment companies to increase its yield when its excess cash might otherwise
remain idle or produce non-competitive returns.
 
                                       A-7
<PAGE>   21
 
BORROWINGS
 
     Each Portfolio may borrow funds for temporary purposes and may enter into
reverse repurchase agreements in accordance with the investment restrictions as
described in the Statement of Additional Information. Pursuant to such
agreements, a Portfolio would sell portfolio securities to financial
institutions and agree to purchase them at an agreed upon date and price. A
Portfolio would consider entering into reverse repurchase agreements to avoid
otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by a Portfolio may decline below the
price of the securities the Portfolio is obligated to repurchase.
 
                                       A-8
<PAGE>   22






                            PACIFICA VARIABLE TRUST

                      Statement of Additional Information
                                      for
                           Emerging Growth Portfolio
                             Equity Value Portfolio
                               Balanced Portfolio
                          Intermediate Bond Portfolio
                             Money Market Portfolio

                                December 1, 1995


                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                           Page
                                                                                                           ----
<S>                                                                                                         <C>
THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    3

INVESTMENT OBJECTIVES AND POLICIES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    3

NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   24

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   26

DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   26

ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   28

MANAGEMENT OF THE PORTFOLIOS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   30

AUDITORS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   36

COUNSEL   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   36

ADDITIONAL INFORMATION ON PERFORMANCE CALCULATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . .   36

MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   39

APPENDIX A  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1

APPENDIX B  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1
</TABLE>

                 This Statement of Additional Information is meant to be read
in conjunction with the Prospectus dated December 1, 1995, as the same may be
revised from time to time, and is incorporated by reference in its entirety
into the related Prospectus.  Because this Statement of Additional Information
is not itself a
<PAGE>   23
prospectus, no investment in shares of the Portfolios should be made solely
based upon the information contained herein.  Copies of the Portfolios'
Prospectus may be obtained by calling 1-800-FIB-1223 or by writing Furman Selz
Incorported, 237 Park Avenue, New York, New York 10017, or by contacting the
Participating Insurance Company.  Capitalized terms used but not defined herein
have the same meanings as in the Prospectus.





                                      -2-
<PAGE>   24
                                   THE TRUST

                 Pacifica Variable Trust (the "Trust") is a Delaware business
trust which was organized on August 26, 1994 as an open-end management
investment company.  The Trust offers shares representing interests in the
following five separate, diversified investment portfolios:  Emerging Growth
Portfolio, Equity Value Portfolio, Balanced Portfolio, Intermediate Bond
Portfolio and Money Market Portfolio.


                       INVESTMENT OBJECTIVES AND POLICIES

                 The following policies supplement the discussion of the
Portfolios' respective investment objectives and policies as set forth in the
Prospectus.

Portfolio Transactions

                 First Interstate Capital Management, Inc. ("FICM" or the
"Adviser") serves as the investment adviser to the Portfolios.  Subject to the
general supervision of the Trust's Board of Trustees and the provisions of the
Trust's Advisory Agreement relating to the Portfolios, the Adviser is
responsible for making decisions with respect to, and placing orders for, all
purchases and sales of portfolio securities.

                 The annualized portfolio turnover rate for each Portfolio
(other than the Money Market Portfolio) is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly average
value of the portfolio securities.  The calculation excludes all securities,
including options, that have maturities or expiration dates at the time of
acquisition of one year or less.  Portfolio turnover may vary greatly from year
to year as well as within a particular year, and may be affected by cash
requirements for redemption of shares and by requirements which enable the
Portfolios to receive favorable tax treatment.  Portfolio turnover will not be
a limiting factor in making portfolio decisions, and each Portfolio may engage
in short-term trading to achieve its investment objective.

                 The Money Market Portfolio does not intend to seek profits
from short-term trading.  Its annual portfolio turnover rate will be relatively
high, but brokerage commissions are normally not paid on money market
instruments, and portfolio turnover is not expected to have a material effect
on the Portfolio's net income.  For regulatory purposes the portfolio turnover
rate for the Portfolio is expected to be zero.

                 Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions.  On exchanges on





                                      -3-
<PAGE>   25
which commissions are negotiated, the cost of transactions may vary among
different brokers.  Transactions in the over-the-counter market are generally
principal transactions with dealers and the costs of such transactions involve
dealer spreads rather than brokerage commissions.  With respect to
over-the-counter transactions, the Adviser will normally deal directly with the
dealers who make a market in the securities involved, except in those
circumstances where better prices and execution terms are available elsewhere
or as described below.  The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down.

                 The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group.  A Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
a Portfolio's interests.

                 The Advisory Agreement for the Portfolios provide that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available.  In assessing the best
overall terms available for any transaction, the Adviser will consider factors
it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any, both for
the specific transaction and on a continuing basis.  In addition, the Agreement
authorizes the Adviser to cause any of the Portfolios to pay a broker-dealer
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker-dealer for effecting the same
transaction, provided that they determine in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the overall responsibilities of the Adviser to the Portfolios.
Such brokerage and research services might consist of reports and statistics of
specific companies or industries, general summaries of groups of stocks or
bonds and their comparative earnings and yields, or broad overviews of the
stock, bond and government securities markets and the economy.

                 Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Portfolios.  The Trustees will
periodically review the commissions paid by the Portfolios to consider whether
the commissions paid over representative periods of time appear to be





                                      -4-
<PAGE>   26
reasonable in relation to the benefits inuring to the Portfolios.  It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other accounts
for which investment discretion is exercised.  Conversely, a Portfolio may be
the primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.

                 The Portfolios may from time to time purchase securities
issued by the Trust's regular broker/dealers.  Portfolio securities will not,
however, be purchased from or sold to (and savings deposits will not be made in
and repurchase and reverse repurchase agreements will not be entered into with)
the Adviser, Furman Selz Incorporated, the Participating Insurance Company or
an affiliated person (as such term is defined in the Investment Company Act of
1940 (the "1940 Act")) of any of them acting as principal, except to the extent
permitted by the Securities and Exchange Commission.  In addition, the
Portfolios will not purchase securities during the existence of any
underwriting or selling group relating thereto of which Furman Selz
Incorporated, the Adviser, the Participating Insurance Company or an affiliated
person of any of them, is a member, except to the extent permitted by the
Securities and Exchange Commission.

                 Investment decisions for each Portfolio are made independently
from those for the other Portfolios and from those made for other investment
companies and accounts advised or managed by the Adviser.  Such other
investment companies and accounts may also invest in the same securities as the
Portfolios.  When a purchase or sale of the same security is made at
substantially the same time on behalf of a Portfolio and another investment
company or account, those transactions will be averaged as to price, and
available securities will be allocated between the Portfolio and the other
purchaser in a manner which the Adviser believes to be equitable to the
Portfolio and such other investment company or account.  In some instances,
this investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained by the Portfolio.  To the extent
permitted by law, the Adviser may aggregate the securities to be sold or
purchased for a Portfolio with those to be sold or purchased for other
investment companies or accounts in executing transactions.

Debt Ratings

                 The ratings of Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps Credit Rating Co. ("D&P"),
Fitch Investors Service, Inc. ("Fitch"), Thomson Bank Watch ("Thomson") and
IBCA Inc. ("IBCA") represent their opinions as to the quality of debt
securities.





                                      -5-
<PAGE>   27
It should be emphasized, however, that ratings are general and are not absolute
standards of quality, and debt securities with the same maturity, interest rate
and rating may have different yields while debt securities of the same maturity
and interest rate with different ratings may have the same yield.  Subsequent
to purchase by a Portfolio, an issue of debt securities may cease to be rated
or its rating may be reduced below the minimum rating required for purchase by
a Portfolio.  The Adviser will consider such an event in determining whether
the Portfolio involved should continue to hold the obligation.

                 The payment of principal and interest on most securities
purchased by the Portfolios will depend upon the ability of the issuers to meet
their obligations.  An issuer's obligations under its debt securities are
subject to the provisions of bankruptcy, insolvency, and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, which may be enacted by Federal or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or, in the case of
governmental entities, upon the ability of such entities to levy taxes.  The
power or ability of an issuer to meet its obligations for the payment of
interest and principal of its debt securities may be materially adversely
affected by litigation or other conditions.

Options Trading

                 As stated in the Prospectus, the Emerging Growth, Equity
Value, Balanced and Intermediate Bond Portfolios may purchase put and call
options listed on a national securities exchange and issued by the Options
Clearing Corporation.  This is a highly specialized activity which may entail
greater than ordinary investment risks.  Regardless of how much the market
price of the underlying security increases or decreases, the option buyer's
risk is limited to the amount of the original investment for the purchase of
the option.  However, options may be more volatile than their underlying
securities and, therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in their underlying
securities.  A listed call option gives the purchaser of the option the right
to buy from a clearing corporation, and a writer has the obligation to sell to
the clearing corporation, the underlying security at the stated exercise price
at any time prior to the expiration of the option, regardless of the market
price of the security.  The premium paid to the writer is in consideration for
undertaking the obligations under the option contract.  A listed put option
gives the purchaser the right to sell to a clearing corporation the underlying
security at the stated exercise price at any time prior to the expiration date
of the option, regardless of the market price of the security.





                                      -6-
<PAGE>   28
                 The Portfolios will write only "covered" call options on
securities.  The option is "covered" if a Portfolio owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, cash or cash equivalents in such amount as are held
in a segregated account by its custodian) upon conversion or exchange of other
securities held by it.  A call option is also covered if a Portfolio holds a
call on the same security as the call written where the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written provided the
difference is maintained by the Portfolio in cash or cash equivalents in a
segregated account with its custodian.

                 A Portfolio's obligation to sell a security subject to a
covered call option written by it, or to purchase a security subject to a
secured put option written by it, may be terminated prior to the expiration
date of the option by the Portfolio's executing a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e., same underlying security, exercise price and expiration date) as the
option previously written.  Such a purchase does not result in the ownership of
an option.  A closing purchase transaction will ordinarily be effected to
realize a profit on an outstanding option, to prevent an underlying security
from being called, to permit the sale of the underlying security or to permit
the writing of a new option containing different terms on such underlying
security.  The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Portfolio will have incurred a loss in the transaction.  An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series.  There is no assurance that a liquid secondary
market on an exchange will exist for any particular option.  A covered call
option writer, unable to effect a closing purchase transaction, will not be
able to sell the underlying security until the option expires or the underlying
security is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline in the underlying
security during such period.  A Portfolio will write an option on a particular
security only if the Adviser believes that a liquid secondary market will exist
on an exchange for options of the same series which will permit the Portfolio
to make a closing purchase transaction in order to close out its position.

                 When a Portfolio purchases a put or call option, the premium
paid by it is recorded as an asset of the Portfolio.  When a Portfolio writes
an option, an amount equal to the net premium (the premium less the commission)
received by the Portfolio is included in the liability section of the
Portfolio's





                                      -7-
<PAGE>   29
statement of assets and liabilities as a deferred credit.  The amount of this
asset or deferred credit will be subsequently marked-to-market to reflect the
current value of the option purchased or written.  The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices.  If an option purchased by a Portfolio
expires unexercised the Portfolio realizes a loss equal to the premium paid.
If a Portfolio enters into a closing sale transaction on an option purchased by
it, the Portfolio will realize a gain if the premium received by the Portfolio
on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less.  If an option written by a Portfolio expires
on the stipulated expiration date or if a Portfolio enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold)
and the deferred credit related to such option will be eliminated.  If an
option written by a Portfolio is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Portfolio will realize
a gain or loss.

                 As noted previously, there are several risks associated with
transactions in options on securities.  For example, there are significant
differences between the securities and options markets which could result in an
imperfect correlation between the markets, causing a given transaction not to
achieve its objectives.  In addition, a liquid secondary market for particular
options, whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following:  there may
be insufficient trading interest in certain options; restrictions may be
imposed by an Exchange on opening transactions, closing transactions or both;
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades
on that Exchange would continue to be exercisable in accordance with their
terms.  A Portfolio will likely be unable to control losses by closing its
position where a liquid secondary market does not exist.  A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be





                                      -8-
<PAGE>   30
unsuccessful to some degree because of market behavior or unexpected events.

Futures Contracts and Related Options

                 The Equity Value and Balanced Portfolios may invest in futures
contracts and options thereon as described in Appendix B to this Statement of
Additional Information.


Warrants

                 To the extent described in the Prospectus, the Emerging
Growth, Equity Value, Balanced and Intermediate Bond Portfolios may purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time.  The purchase of warrants
involves the risk that a Portfolio could lose the purchase value of a warrant
if the right to subscribe to additional shares is not exercised prior to the
warrant's expiration.  Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.  A
Portfolio will not invest more than 5% of its total assets, taken at market
value, in warrants, or more than 2% of its total assets, taken at market value,
in warrants not listed on the New York or American Stock Exchanges.  Warrants
acquired by a Portfolio in units or attached to other securities are not
subject to this restriction.

Foreign Currency Exchange Transactions

                 The Equity Value and Balanced Portfolios may enter into
foreign currency exchange transactions to convert United States currency to
foreign currency and foreign currency to United States currency as well as
convert foreign currency to other foreign currencies.  Each Portfolio will
either enter into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or use forward
contracts to purchase or sell foreign currencies.

                 A forward foreign currency exchange contract is an obligation
by a Portfolio to purchase or sell a specific currency at a specified price and
future date, which may be any fixed number of days from the date of the
contract.  Forward foreign currency exchange contracts establish an exchange
rate at a future date.  These contracts are transferable in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers.  A forward foreign currency exchange contract
generally has no deposit requirement,





                                      -9-
<PAGE>   31
and is traded at a net price without commission.  Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the
prices of a Portfolio's securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.

                 The Equity Value and Balanced Portfolios may enter into
foreign currency hedging transactions in an attempt to protect against changes
in foreign currency exchange rates between the trade and settlement dates of
specific securities transactions or changes in foreign currency exchange rates
that would adversely affect a portfolio position or an anticipated portfolio
position.  Since consideration of the prospect for currency parities will be
incorporated into a Portfolio's long-term investment decisions, the Portfolio
will not routinely enter into foreign currency hedging transactions with
respect to portfolio security transactions; however, it is important to have
the flexibility to enter into foreign currency hedging transactions when it is
determined that the transactions would be in a Portfolio's best interest.
Although these transactions tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of the hedged currency
increase.  The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible because the future
value of these 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.  The projection of currency
market movements is extremely difficult, and the successful execution of a
hedging strategy is highly uncertain.

Lending Securities

                 Collateral for securities loans may include cash, securities
of the U.S. Government, its agencies or instrumentalities, or an irrevocable
letter of credit issued by a bank that meets the investment standards for the
Money Market Portfolio, or any combination thereof.  When a Portfolio lends its
securities, it continues to receive interest or dividends on the securities
loaned and may simultaneously earn interest on the collateral received from the
borrower or from the investment of cash collateral in readily marketable,
high-quality, short-term obligations.  Although voting rights, or rights to
consent, attendant to securities on loan pass to the borrower, such loans may
be called at any time and will be called so that the securities may be voted by
a Portfolio if a material event affecting the investment is to occur.





                                      -10-
<PAGE>   32
Repurchase Agreements

                 The repurchase price under repurchase agreements described in
the Portfolios' Prospectus generally equals the price paid by a Portfolio plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Portfolios'
custodian (or a sub-custodian) or in the Federal Reserve/Treasury book-entry
system.  Repurchase agreements are considered to be loans under the 1940 Act.

Bank Obligations

                 For purposes of each Portfolio's investment policies with
respect to bank obligations, the assets of a bank will be deemed to include the
assets of its domestic and foreign branches.  Each Portfolio's investments in
the obligations of foreign branches of U.S. banks and of foreign banks may
subject the Portfolio to investment risks that are different in some respects
from those of investments in obligations of U.S. domestic issuers.  Such risks
include future political and economic developments, the possible imposition of
withholding taxes on interest income, 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 principal and interest on such obligations.  In addition,
foreign branches of U.S. banks and foreign banks may be subject to less
stringent reserve requirements and to different accounting, auditing, reporting
and recordkeeping standards than those applicable to domestic branches of U.S.
banks.  Each Portfolio will acquire securities issued by foreign branches of
U.S. banks or foreign banks only when the Adviser believes that the risks
associated with such instruments are minimal.

Government Obligations

                 The Portfolios may invest in obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities.  Examples of the
types of U.S. Government obligations that may be held by the Portfolios include
U.S. Treasury bonds, notes and bills and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks and Maritime Administration.  Obligations of certain agencies and
instrumentalities of the U.S.





                                      -11-
<PAGE>   33
Government, such as those of the Government National Mortgage Association, are
supported by the full faith and credit of the U.S.  Treasury; others, such as
the Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.  No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.

American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs")

                 The Emerging Growth, Equity Value, Intermediate Bond and
Balanced Portfolios may invest their assets in ADRs, which are receipts issued
by a U.S. bank or trust company evidencing ownership of underlying securities
issued by a foreign issuer, and, except for the Intermediate Bond Portfolio,
EDRs, which are receipts issued by European financial institutions evidencing
ownership of underlying securities issued by a foreign issuer.  ADRs may be
listed on a national securities exchange or may trade in the over-the-counter
market.  ADR prices are denominated in United States dollars while EDR prices
are generally denominated in foreign currencies.  The securities underlying an
ADR or EDR will also normally be denominated in a foreign currency.  The
underlying security may be subject to foreign government taxes which could
reduce the yield on such securities.

Foreign Securities

                 The Portfolios have undertaken to comply with California
Department of Insurance guidelines relating to investments in foreign
securities, which provide as follows:  To the extent consistent with its
investment objective, a Portfolio will be invested in a minimum of five
different foreign countries at all times, provided that this minimum is reduced
to four when foreign country investments comprise less than 80% of the
Portfolio's net asset value; to three when less than 60% of the Portfolio's net
asset value; to two when less than 40% of the Portfolio's net asset value; and
to one when less than 20%.  In addition, a Portfolio will invest no more than
20% of its net asset value in the securities of issuers located in any one
country, except that a Portfolio may have an additional 15% of its value
invested in securities of issuers in any one of Australia, Canada, France,
Japan, the United Kingdom or West Germany.  A Portfolio's investments in United
States issuers are not subject to the above guidelines.





                                      -12-
<PAGE>   34
Exchange Rate-Related Securities

                 The Balanced Fund may invest in securities for which the
principal repayment at maturity, while paid in U.S.  dollars, is determined by
reference to the exchange rate between the U.S. dollar and the currency of one
or more foreign countries ("Exchange Rate-Related Securities").  The interest
payable on these securities is denominated in U.S. dollars and is not subject
to foreign currency risk and, in most cases, is paid at rates higher than most
other similarly rated securities in recognition of the foreign currency risk
component of Exchange Rate-Related Securities.

                 Investments in Exchange Rate-Related Securities entail certain
risks.  There is the possibility of significant changes in rates of exchange
between the U.S. dollar and any foreign currency to which an Exchange
Rate-Related Security is linked.  In addition, there is no assurance that
sufficient trading interest to create a liquid secondary market will exist for
a particular Exchange Rate-Related Security due to conditions in the debt and
foreign currency markets.  Illiquidity in the forward foreign exchange market
and the high volatility of the foreign exchange market may, from time to time,
combine to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.  The Balanced Fund does
not intend to invest more than 5% of its net assets in Exchange Rate-Related
Securities.

Borrowing

                 At the time a Portfolio enters into a reverse repurchase
agreement (an agreement under which the Portfolio sells portfolio securities
and agrees to repurchase them at an agreed-upon date and price), it will place
in a segregated custodial account liquid assets such as U.S. Government
securities or other liquid high-grade debt securities having a value equal to
or greater than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price at which the
Portfolio it is obligated to repurchase the securities.  Reverse repurchase
agreements are considered to be borrowings under the 1940 Act.  Each Portfolio
intends to limit its borrowings (including reverse repurchase agreements)
during the current fiscal year to not more than 5% of its net assets.

When-Issued Purchases and Forward Commitments

                 When a Portfolio agrees to purchase securities on a
when-issued basis or enters into a forward commitment to purchase securities,
its custodian will set aside cash, U.S. government





                                      -13-
<PAGE>   35
securities or other liquid high grade debt obligations equal to the amount of
the purchase or the commitment in a separate account.  Normally, the custodian
will set aside portfolio securities to meet this requirement.  The market value
of the separate account will be monitored and if such market value declines,
the Portfolio will be required to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Portfolio's commitment.  Because a Portfolio will set aside cash
or liquid high grade debt securities in the manner described, the Portfolio's
liquidity and ability to manage its portfolio might be affected in the event
its when-issued purchases or forward commitments ever exceeded 25% of the value
of its assets.  In the case of a forward commitment to sell portfolio
securities, the Portfolios' custodian will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding.

                 A Portfolio will generally make commitments to purchase
securities on a when-issued basis or to purchase or sell securities on a
forward commitment basis only with the intention of completing the transaction
and actually purchasing or selling the securities.  If deemed advisable as a
matter of investment strategy, however, a Portfolio may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the
Portfolio on the settlement date.  In these cases the Portfolio may realize a
capital gain or loss.

                 When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade.  Failure of
such party to do so may result in the Portfolio's incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.

                 The value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their value, is taken into account when determining a Portfolio's net asset
value starting on the day the Portfolio agrees to purchase the securities.  The
Portfolio does not earn interest on the securities it has committed to purchase
until they are paid for and delivered on the settlement date.  When a Portfolio
makes a forward commitment to sell securities it owns, the proceeds to be
received upon settlement are included in the Portfolio's assets, and
fluctuations in the value of the underlying securities are not reflected in the
Portfolio's net asset value as long as the commitment remains in effect.





                                      -14-
<PAGE>   36
Convertible Securities

                 Convertible securities entitle the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
convertible securities mature or are redeemed, converted or exchanged.  Prior
to conversion, convertible securities have characteristics similar to ordinary
debt securities in that they normally provide a stable stream of income with
generally higher yields than those of common stock of the same or similar
issuers.  Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security
sells above its value as a fixed income security.

                 In selecting convertible securities for a Portfolio, the
Adviser will consider, among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common stocks;
whether the securities are entitled to the benefits of sinking funds or other
protective conditions; the diversification of the Portfolio as to issuers; and
whether the securities are rated by a rating agency and, if so, the ratings
assigned.

                 The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying common stock).  The investment value of
convertible securities is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as
interest rates decline, and by the credit standing of the issuer and other
factors.  The conversion value of convertible securities is determined by the
market price of the underlying common stock.  If the conversion value is low
relative to the investment value, the price of the convertible securities is
governed principally by their investment value.  To the extent the market price
of the underlying common stock approaches or exceeds the conversion price, the
price of the convertible securities will be increasingly influenced by their
conversion value.  In addition, convertible securities generally sell at a
premium over their conversion value determined by the extent to which investors
place value on the right to acquire the underlying common stock while holding
fixed income securities.

                 Capital appreciation for a Portfolio may result from an
improvement in the credit standing of an issuer whose securities





                                      -15-
<PAGE>   37
are held in the Portfolio or from a general lowering of interest rates, or a
combination of both.  Conversely, a reduction in the credit standing of an
issuer whose securities are held by a Portfolio or a general increase in
interest rates may be expected to result in capital depreciation to the
Portfolio.

                 In general, investments in non-investment grade convertible
securities are subject to a significant risk of a change in the credit rating
or financial condition of the issuing entity.  Investments in convertible
securities of medium or lower quality are also likely to be subject to greater
market fluctuation and to greater risk of loss of income and principal due to
default than investments in higher rated fixed-income securities.  Such
lower-rated securities generally tend to reflect short-term corporate and
market developments to a greater extent than higher rated securities, which
react more to fluctuations in the general level of interest rates.  A Portfolio
will generally reduce risk to the investor by diversification, credit analysis
and attention to current developments in trends of both the economy and
financial markets.  However, while diversification reduces the effect on a
Portfolio of any single investment, it does not reduce the overall risk of
investing in lower-rated securities.

                 While any investment carries some risk, certain risks
associated with lower-rated securities are different than those for
investment-grade securities.  The risk of loss through default is greater
because lower-rated securities are usually unsecured and are often subordinate
to an issuer's other obligations.  Additionally, the issuers of these
securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions, individual corporate developments and rising
interest rates. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations of a Portfolio's net asset value
per share.

                 There remains some uncertainty about the performance level of
the market for lower-rated securities under adverse market and economic
environments.  An economic downturn or increase in interest rates could have a
negative impact on both the markets for lower-rated securities (resulting in a
greater number of bond defaults) and the value of lower-rated securities held
in the portfolio of investments.

                 The economy and interest rates can affect lower-rated
securities differently than other securities.  For example, the prices of
lower-rated securities are more sensitive to adverse economic changes or
individual corporate developments than are the prices of higher-rated
investments.  In addition, during an economic downturn or period in which
interest rates are rising significantly, highly leveraged issuers may
experience financial difficulties, which, in turn, would adversely affect their





                                      -16-
<PAGE>   38
ability to service their principal and interest payment obligations, meet
projected business goals and obtain additional financing.

                 If an issuer of a security defaults, a Portfolio may incur
additional expenses to seek recovery.  In addition, periods of economic
uncertainty would likely result in increased volatility for the market prices
of lower-rated securities as well as a Portfolio's net asset value.  In
general, both the prices and yields of lower-rated securities will fluctuate.

                 In certain circumstances it may be difficult to determine a
security's fair value due to a lack of reliable objective information.  Such
instances occur where there is not an established secondary market for the
security or the security is lightly traded.  As a result, a Portfolio's
valuation of a security and the price it is actually able to obtain when it
sells the security could differ.

                 Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the value and liquidity of
lower-rated convertible securities held by a Portfolio, especially in a thinly
traded market.  Illiquid or restricted securities held by a Portfolio may
involve special registration responsibilities, liabilities and costs, and could
involve other liquidity and valuation difficulties.

                 Current laws, such as those requiring federally-insured
savings and loan associations to remove investments in lower-rated securities
from their portfolios, as well as other pending proposals, may have a material
impact on the market for lower-rated securities.

                 The rating assigned by a rating agency evaluates the safety of
a lower-rated security's principal and interest payments, but does not address
market value risk.  Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, the Adviser performs its own analysis of the
issuers whose lower-rated securities a Portfolio holds.  Because of this, a
Portfolio's performance may depend more on the Adviser's credit analysis than
is the case of mutual funds investing in higher-rated securities.

Restricted Securities

                 The purchase of securities which are traded pursuant to Rule
144A, as described in the Portfolios' Prospectus, could have the effect of
increasing the level of illiquidity of a Portfolio during periods when
qualified institutional buyers become uninterested in purchasing restricted
securities.





                                      -17-
<PAGE>   39
Variable and Floating Rate Instruments

                 With respect to the variable and floating rate instruments
that may be acquired by the Portfolios as described in the Prospectus, the
Adviser will consider the earning power, cash flows and other liquidity ratios
of the issuers and guarantors of such instruments and, if the instruments are
subject to demand features, will monitor their financial status to meet payment
on demand.  In determining weighted average portfolio maturity, an instrument
will usually be deemed to have a maturity equal to the longer of the period
remaining until the next interest rate adjustment or the time a Portfolio can
recover payment of principal as specified in the instrument.  Variable rate
U.S. Government obligations held by the Portfolios, however, will be deemed to
have maturities equal to the period remaining until the next interest rate
adjustment.  Where necessary to ensure that a variable or floating rate
instrument is of the minimum required credit quality for a Portfolio, the
issuer's obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.

Municipal Obligations

                 Municipal obligations that may be acquired by the Intermediate
Bond Portfolio include debt obligations issued by governmental entities to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities.

                 The two principal classifications of municipal obligations
which may be held by the Intermediate Bond Portfolio are "general obligation"
securities and "revenue" securities.  General obligation securities are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest.  Revenue securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as the issuer of the facility being financed.  The Portfolio may
also hold "moral obligation" securities, which are normally issued by special
purpose public authorities.  If the issuer of moral obligation securities is
unable to meet its debt service obligations from current revenues, it may draw
on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.

                 Further, the Intermediate Bond Portfolio may purchase
municipal obligations known as "certificates of participation" which represent
undivided proportional interests in lease





                                      -18-
<PAGE>   40
payments by a governmental or nonprofit entity.  The lease payments and other
rights under the lease provide for and secure the payments on the certificates.
Lease obligations may be limited to applicable municipal charter provisions or
the nature of the appropriation for the lease.  In particular, lease
obligations may be subject to periodic appropriation.  If the entity does not
appropriate funds for future lease payments, the entity cannot be compelled to
ake such payments.  Furthermore, a lease may or may not provide that the
certificate trustee can accelerate lease obligations upon default.  If the
trustee could not accelerate lease obligations upon default, the trustee would
only be able to enforce lease payments as they became due.  In the event of a
default or failure of appropriation, it is unlikely that the trustee would be
able to obtain an acceptable substitute source of payment.  Certificates of
participation are generally subject to redemption by the issuing municipal
entity under specified circumstances.  If a specified event occurs, a
certificate is callable at par either at any interest payment date or, in some
cases, at any time.  As a result, certificates of participation are not as
liquid or marketable as other types of municipal obligations and are generally
valued at par or less than par in the open market.

                 There are, of course, variations in the quality of municipal
obligations both within a particular classification and between
classifications, and the yields on municipal obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the
issue.

                 Private activity bonds are issued to obtain funds to provide
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain local facilities for water supply, gas, electricity or sewage or solid
waste disposal.  Private activity bonds are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities.  State and local governments are authorized in most states to issue
private activity bonds for such purposes in order to encourage corporations to
locate within their communities.  Private activity bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer.  The credit quality of such bonds is usually directly related to the
credit standing of the corporate user of the facility involved.

                 Certain of the municipal obligations held by the Intermediate
Bond Portfolio may be insured as to the timely payment of principal and
interest.  The insurance policies will usually be obtained by the issuer of the
municipal obligation at





                                      -19-
<PAGE>   41
the time of its original issuance.  In the event that the issuer defaults on
interest or principal payment, the insurer will be notified and will be
required to make payment to the bondholders.  There is, however, no guarantee
that the insurer will meet its obligations.  In addition, such insurance will
not protect against market fluctuations caused by changes in interest rates and
other factors.

Stripped Government Obligations

                 Within the past several years, the Treasury Department has
facilitated transfers of ownership of zero coupon securities by accounting
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve
book-entry record-keeping system.  The Federal Reserve program as established
by the Treasury Department is known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities."  The Portfolios may purchase
securities registered in the STRIPS program.  Under the STRIPS program, the
Portfolios will be able to have their beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.

                 In addition, the Portfolios may acquire U.S. Government
obligations and their unmatured interest coupons that have been separated
("stripped") by their holder, typically a custodian bank or investment
brokerage firm.  Having separated the interest coupons from the underlying
principal of the U.S. Government obligations, the holder will resell the
stripped securities in custodial receipt programs with a number of different
names, including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate
of Accrual on Treasury Securities" ("CATS").  The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments.  The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are ostensibly owned by the
bearer or holder), in trust on behalf of the owners.  Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for Federal tax purposes.  The Trust is
unaware of any binding legislative, judicial or administrative authority on
this issue.  Investments by a Portfolio in these securities will not exceed 5%
of the value of the Portfolio's total assets.





                                      -20-
<PAGE>   42
                 The Prospectus discusses other types of stripped securities
that may be purchased by the Portfolios.

Asset-Backed Securities

                 To the extent described in the Prospectus, the Portfolios may
purchase asset-backed securities, which are securities backed by mortgages,
installment contracts, credit card receivables or other assets.  Asset-backed
securities represent interests in "pools" of assets in which payments of both
interest and principal on the securities are made monthly, thus in effect
"passing through" monthly payments made by the individual borrowers on the
assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities.  The average life of asset-backed securities
varies with the maturities of the underlying instruments, and the average life
of a mortgage-backed instrument, in particular, is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities
as a result of mortgage prepayments.  For this and other reasons, an
asset-backed security's stated maturity may be shortened, and the security's
total return may be difficult to predict precisely.  Asset-backed securities
acquired by the Portfolios may include collateralized mortgage obligations
("CMOs") issued by private companies.

                 There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-related
securities and among the securities that they issue.  Mortgage-related
securities guaranteed by the GNMA include GNMA Mortgage Pass-Through
Certificates (also known as "Ginnie Maes") which are guaranteed as to the
timely payment of principal and interest by GNMA and backed by the full faith
and credit of the United States.  GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development.  GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee.  Mortgage-backed
securities issued by the FNMA include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations of
the FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
Treasury.  FNMA is a government-sponsored organization owned entirely by
private stockholders.  Fannie Maes are guaranteed as to timely payment of the
principal and interest by FNMA.  Mortgage-related securities issued by the
FHLMC include FHLMC Mortgage Participation Certificates (also known as "Freddie
Macs" or "PCs").  FHLMC is a corporate instrumentality of the United States,
created pursuant to an Act of Congress, which is owned entirely by Federal Home
Loan Banks.  Freddie Macs are not guaranteed and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank.  Freddie Macs
entitle the holder to





                                      -21-
<PAGE>   43
timely payment of interest, which is guaranteed by FHLMC.  FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans.  When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.

Additional Investment Limitations

                 In addition to the investment limitations disclosed in the
Prospectus, the Portfolios are subject to the investment limitations enumerated
below which may be changed with respect to a particular Portfolio only by a
vote of a majority of the holders of such Portfolio's outstanding shares (as
defined under "Miscellaneous" below).

                 No Portfolio may:

                 1.       Purchase or sell real estate, except that each
Portfolio may purchase securities of issuers which deal in real estate and may
purchase securities which are secured by interests in real estate.

                 2.       Purchase securities of companies for the purpose of
exercising control.

                 3.       Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets or where otherwise permitted by the
Investment Company Act of 1940.

                 4.       Act as an underwriter of securities within the
meaning of the Securities Act of 1933 except insofar as a Portfolio might be
deemed to be an underwriter upon disposition of portfolio securities acquired
within the limitation on purchases of restricted securities and except to the
extent that the purchase and sale of obligations in accordance with the
Portfolio's investment objective, policies and limitations may be deemed to be
underwriting.

                 5.       Write or sell put options, call options, straddles,
spreads, or any combination thereof, except for transactions in options on
securities, financial instruments, currencies and indices of securities;
futures contracts and options on futures contracts; and forward currency
exchange contracts.

                 6.       Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to a Portfolio's transactions in futures contracts
and related options, and (b) a





                                      -22-
<PAGE>   44
Portfolio may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.

                 7.       Purchase or sell commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that the
Portfolio may, to the extent appropriate to its investment objective, purchase
publicly traded securities of companies engaging in whole or in part in such
activities and may enter into futures contracts and related options.

                 8.       Borrow money (other than pursuant to reverse
repurchase agreements), except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of a Portfolio's total assets or (b) from
banks, provided that immediately after any such borrowing all borrowings of the
Portfolio do not exceed one-third of the Portfolio's total assets.  The
exceptions in (a) and (b) to this restriction are not for investment leverage
purposes but are solely for extraordinary or emergency purposes or to
facilitate management of a Portfolio by enabling the Portfolio to meet
redemption requests when the liquidation of portfolio instruments is deemed to
be disadvantageous or not possible.  If due to market fluctuations or other
reasons the total assets of a Portfolio fall below 300% of its borrowings, the
Trust will reduce the borrowings of such Portfolio in accordance with the 1940
Act.  In addition, as a matter of fundamental policy, the Portfolios may not
enter into reverse repurchase agreements exceeding in the aggregate one-third
of their respective total assets.

                 9.       Mortgage, pledge or hypothecate any assets (other
than pursuant to reverse repurchase agreements) except to secure permitted
borrowings.

                 In order to comply with California Department of Insurance
guidelines, as a non-fundamental investment restriction, a Portfolio may not
borrow money in excess of (i) 10% of its net asset value when borrowing for any
general purpose or (ii) 25% of its net asset value when borrowing as a
temporary measure to facilitate redemptions.

                 Securities held in escrow or separate accounts in connection
with the Portfolios' investment practices described in this Statement of
Additional Information and in the Prospectus are not deemed to be mortgaged,
pledged or hypothecated for purposes of the foregoing Investment Limitations.

                 Any restriction which involves a maximum percentage will not
be considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, the Portfolio.





                                      -23-
<PAGE>   45
                 In order to permit the sale of the Portfolios' shares in
certain states, the Trust may make commitments with respect to the Portfolios
more restrictive than the investment policies listed above and in the
Prospectus.  Should the Trust determine that any commitment made to permit the
sale of a Portfolio's shares in any state is no longer in the best interests of
the Portfolio, it will revoke the commitment by terminating sales of a
Portfolio's shares in the state involved.

                                NET ASSET VALUE

                 The net asset value per share of a Portfolio is calculated by
adding the value of all portfolio securities and other assets belonging to the
Portfolio, subtracting the liabilities charged to the Portfolio, and dividing
the result by the number of shares of the Portfolio outstanding.  "Assets
belonging to" a Portfolio consists of the consideration received upon the
issuance of shares of the Portfolio together with all income, earnings, profits
and proceeds derived from the investment thereof, including any proceeds from
the sale, exchange or liquidation of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Trust not belonging to a particular investment portfolio that are
allocated to that portfolio by the Trust's Board of Trustees.  The Board of
Trustees may allocate such general assets in any manner it deems fair and
equitable.  It is anticipated that the general assets will normally be
allocated to particular portfolios based on their relative net asset values at
the time of allocation.  Assets belonging to a particular portfolio are charged
with the direct liabilities and expenses of that portfolio and with a share of
the general liabilities and expenses of the Trust which are normally allocated
in proportion to the relative net asset values of all of the Trust's investment
portfolios at the time of allocation.  The allocations of general assets and
general liabilities and expenses of the Trust to particular portfolios will be
determined in accordance with generally accepted accounting principles.
Subject to the provisions of the Trust Instrument, determinations by the Board
of Trustees as to the direct and allocable liabilities and the allocable
portion of any general assets with respect to the Portfolio are conclusive.

Emerging Growth, Equity Value, Balanced and Intermediate Bond Portfolios

                 Securities which are traded on a recognized stock exchange are
valued at the last sale price occurring prior to the close of regular trading
on the securities exchange on which such securities are primarily traded or at
the last sale price occurring prior to the close of regular trading on the
national securities market.  Securities traded on only over-the-counter





                                      -24-
<PAGE>   46
markets are valued on the basis of closing over-the-counter bid prices. 
Securities for which there were no transactions are valued at the average of the
current bid and asked prices.  Restricted securities, securities for which
market quotations are not readily available, and other assets are valued at fair
value under the supervision of the Board of Trustees.  In computing net asset
value, the current value of a Portfolio's open futures contracts and options
will be "marked to market."

Money Market Portfolio

                 The Trust uses the amortized cost method of valuation to value
the Money Market Portfolio's portfolio securities, pursuant to which an
instrument is valued at its cost initially and thereafter a constant
amortization to maturity of any discounts or premium is assumed, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
This method may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Portfolio would receive
if it sold the instrument.  The market value of portfolio securities held by
the Portfolio can be expected to vary inversely with changes in prevailing
interest rates.

                 The Money Market Portfolio maintains a dollar-weighted average
portfolio maturity appropriate to its policy of maintaining a stable net asset
value per share.  In this regard, the Portfolio will neither purchase any
security deemed to have a remaining maturity of more than 13 months (397 days)
within the meaning of the 1940 Act nor maintain a dollar-weighted average
maturity which exceeds 90 days.  The Trust's Board of Trustees has also
established procedures that are intended to stabilize the net asset value per
share of the Portfolio for purposes of sales and redemptions at $1.00.  These
procedures include the determination, at such intervals as the trustees deem
appropriate, of the extent, if any, to which the net asset value per share of
the Portfolio calculated by using available market quotations deviates from
$1.00 per share.  In the event such deviation exceeds one-half of one percent,
the Board will promptly consider what action, if any, should be initiated.  If
the Board believes that the extent of any deviation from a $1.00 amortized cost
price per share may result in material dilution or other unfair results to new
or existing investors, it has agreed to take such steps as it considers
appropriate to eliminate or reduce to the extent reasonably practicable any
such dilution or unfair results.  These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming shares in kind; reducing the
number of outstanding shares without monetary consideration; or utilizing a net
asset value per share determined by using available market quotations.





                                      -25-
<PAGE>   47
                 Net income of the Money Market Portfolio for dividend purposes
consists of (i) interest accrued and discount earned on the Portfolio's assets,
less (ii) amortization of market premium on such assets, accrued expenses
directly attributable to the Portfolio, and the Portfolio's allocable share of
the general expenses.


                 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

                 Shares of the Portfolios are sold on a continuous basis by
Furman Selz Incorporated ("Furman Selz").  Each purchase is confirmed to the
Separate Account in a written statement of the number of shares purchased and
the aggregate number of shares currently held.

                 The Trust may suspend the right of redemption or postpone the
date of payment for shares of any Portfolio for more than seven days during any
period when (a) trading in the markets the Portfolio normally utilizes is
restricted, or an emergency, as defined by the rules and regulations of the
SEC, exists making disposal of the Portfolio's investments or determination of
its net asset value not reasonably practicable; (b) the New York Stock Exchange
is closed (other than customary weekend and holiday closings); or (c) the SEC
has by order permitted such suspension.


                             DESCRIPTION OF SHARES

                 The Trust is a Delaware business trust.  Under the Trust
Instrument, the beneficial interest in the Trust may be divided into an
unlimited number of full and fractional transferable shares.  The Trust
Instrument authorizes the Board of Trustees to classify or reclassify any
unissued shares of the Trust into one or more additional series by setting or
changing in any one or more respects, their respective designations,
preferences, voting powers, rights and privileges.  Pursuant to such authority,
the Board of Trustees has authorized the issuance of five series of shares,
each series representing interests in a separate investment portfolio.  The
Trustees may similarly classify or reclassify any particular series of shares
into one or more classes.

                 Each share of the Trust has a par value of $0.0001, represents
an equal proportionate interest in a Portfolio, and is entitled to such
dividends and distributions of the income earned on the Portfolio's assets as
are declared at the discretion of the Trustees.  Shares of the Portfolios have
no preemptive rights and only such conversion or exchange rights as the Board
of Trustees may grant in its discretion.  When issued for payment as described
in the Prospectus, a Portfolio's shares will be fully





                                      -26-
<PAGE>   48
paid and non-assessable by the Trust.  In the event of the termination of the
Trust or an individual Portfolio, shareholders of a particular Portfolio would
be entitled to receive the assets available for distribution belonging to such
Portfolio.  Shareholders of a Portfolio are entitled to participate in the net
distributable assets of the particular Portfolio involved on termination, based
on the number of shares of the Portfolio that are held by each of them,
respectively.

                 Unless the Board of Trustees determines otherwise,
shareholders of the Portfolios, as well as those of the other investment
portfolios offered by the Trust, will vote together in the aggregate and not
separately on a Portfolio-by-Portfolio basis, except as otherwise required by
law or when the Board of Trustees determines that the matter to be voted upon
affects only the interests of the shareholders of a particular Portfolio.  Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
Portfolio affected by the matter.  A Portfolio is affected by a matter unless
it is clear that the interests of each Portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
Portfolio.  Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Portfolio only if approved by a majority of the outstanding
shares of such Portfolio.  However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts and the election of trustees may be
effectively acted upon by shareholders of the Trust voting without regard to
particular Portfolios.

                 There will normally be no meetings of shareholders for the
purpose of electing trustees unless and until such time as less than a majority
of the trustees holding office have been elected by shareholders, at which time
the trustees then in office will call a shareholders meeting for the election
of trustees.  Shares of the Trust have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Trust's outstanding shares
(irrespective of class) may elect all of the Trustees.  The Board of Trustees
will call meetings of the shareholders of the Trust upon the written request of
shareholders owning at least 10% of the outstanding shares entitled to vote.
Except as set forth above, the Trustees will continue to hold office and may
appoint successor trustees.

                 The Trust Instrument authorizes the Board of Trustees, without
shareholder approval, to issue shares to a party or parties and for such amount
and type of consideration and on such





                                      -27-
<PAGE>   49
terms, subject to applicable law, as the Trustees may deem appropriate.  The
Board of Trustees may issue fractional shares and shares held in the treasury.
The Board of Trustees has full power and authority, in their sole discretion,
and without obtaining shareholder approval, to divide or combine the shares or
any class or series thereof into a greater or lesser number, to classify or
reclassify any issued shares or any class or series thereof into one or more
classes or series of shares, and to take such other action with respect to the
Trust's shares as the Board of Trustees may deem desirable.

                 The Trust Instrument provides that the Trustees, when acting
in their capacity as such, will not be personally liable to any person other
than the Trust or a beneficial owner for any act, omission or obligation of the
Trust or any Trustee.  A Trustee shall not be liable for any act or omission in
his capacity as Trustee, or for any act or omission of any officer or employee
of the Trust or of any other person or party, provided that nothing contained
in the Trust Instrument or in the Delaware Business Trust Act shall protect any
Trustee against any liability to the Trust or to shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee.

                    ADDITIONAL INFORMATION CONCERNING TAXES

                 Shares of the Portfolios are offered only to Separate Accounts
that fund variable annuity contracts.  See the prospectus for the variable
annuity contracts for a discussion of the special taxation of insurance
companies with respect to the Separate Accounts and the variable annuity
contracts, and the holders thereof.

                 The following is only a summary of certain tax considerations
generally affecting the Portfolios that are not described in the Portfolios'
Prospectus.  No attempt is made to present a detailed explanation of the tax
treatment of the Portfolios, and the discussions here and in the Prospectus are
not intended as a substitute for careful tax planning.  This discussion is
based on tax laws and regulations which are in effect on the date hereof; such
laws and regulations may be changed by legislative or administrative action.
Investors are urged to consult their tax advisors with reference to their own
situation.

Federal

                 Each Portfolio is treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company.  In order to
so qualify, each Portfolio must satisfy certain requirements with respect to
the distribution and





                                      -28-
<PAGE>   50
sources of its income for a taxable year.  At least 90% of the gross income of
each Portfolio must be derived from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stocks,
securities or foreign currencies, and other income (including, but not limited
to, gains from options, futures, or forward contracts) derived with respect to
the Portfolio's business of investing in such stock, securities or currencies.
The Treasury Department may by regulation exclude from qualifying income
foreign currency gains which are not directly related to the Portfolio's
principal business of investing in stock or securities, or options and futures
with respect to stock or securities.  Any income derived by a Portfolio from a
partnership or trust is treated for this purpose as derived with respect to the
Portfolio's business of investing in stock, securities or currencies only to
the extent that such income is attributable to items of income which would have
been qualifying income if realized by the Portfolio in the same manner as by
the partnership or trust.

                 Qualification as a regulated investment company under the Code
also requires that in each taxable year a Portfolio distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income for such year.  In general, a Portfolio's investment
company taxable income will be its taxable income, subject to certain
adjustments and excluding the excess of any net long-term capital gain for the
taxable year over the net short-term capital loss, if any, for such year.  Each
Portfolio intends to distribute as dividends substantially all of its
investment company taxable income each year.

                 Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Portfolio's gross
income for a taxable year must be derived from gains realized on the sale or
other disposition of the following investments held for less than three months:
(1) stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Portfolio's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities).  Interest (including original issue discount
and accrued market discount) received by a Portfolio upon maturity or
disposition of a security held for less than three months will not be treated
as gross income derived from the sale or other disposition of such security
within the meaning of this requirement.  However, any other income which is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.  See
Appendix B -- "Accounting and Tax Treatment" -- for a general discussion of the
Federal tax treatment of





                                      -29-
<PAGE>   51
futures contracts, related options thereon and other financial instruments,
including their treatment under the 30% test.

                 As noted in the Prospectus, each Portfolio must, and intends
to, comply with the diversification requirements imposed by Section 817(h) of
the Code and the regulations thereunder.  For information concerning the
consequences of failure to meet the requirements of Section 817(h), see the
prospectus for the variable contracts.

                 A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses).  Each Portfolio intends
to make sufficient distributions or deemed distributions of its ordinary
taxable income and any capital gain net income prior to the end of each
calendar year to avoid liability for this excise tax.

                 If for any taxable year a Portfolio does not qualify for tax
treatment as a regulated investment company, all of the taxable income of the
Portfolio will be subject to tax at regular corporate rates, without any
deduction for distributions to shareholders, and the Portfolio's distributions
to shareholders will be taxable as ordinary dividends to the extent of the
current and accumulated earnings and profits of the particular Portfolio.

State

                 Depending upon the extent of the Portfolios' activities in
states and localities in which their offices are maintained, in which their
agents or independent contractors are located or in which they are otherwise
deemed to be conducting business, the Portfolios may be subject to the tax laws
of such states or localities.  In addition, in those states and localities
which have income tax laws, the treatment of the Portfolios and their
shareholders under such laws may differ from their treatment under federal
income tax laws.


                          MANAGEMENT OF THE PORTFOLIOS

Trustees and Officers

                 The trustees and officers of the Trust, their addresses, ages,
principal occupations during the past five years and other affiliations are as
follows:





                                      -30-
<PAGE>   52
<TABLE>
<CAPTION>
===================================================================================================================
      NAME, ADDRESS, AND AGE         POSTITION(S)         PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
                                    HELD WITH THE
                                        TRUST
- -------------------------------------------------------------------------------------------------------------------
   <S>                            <C>                  <C>
   Dennis W. Draper; School of    Trustee              Dr. Draper is an Associate Professor of Finance, at
   Business, Hoffman 701-F,                            University of Southern California since 1978;
   University of Southern                              Director of Data Analysis, Inc. (financial services);
   Californi, Los Angeles,                             and Editorial Board Member of Chicago Board of Trade.
   California 90089; 47.
- -------------------------------------------------------------------------------------------------------------------
   Joseph N. Hankin;              Trustee              Mr. Hankin is President, Westchester Community
   Westchester Community                               College since 1971; President of Hartford Junior
   College, 75 Grasslands                              College from 1967 to 1971; Adjunct Professor of
   Road, Valhalla, New York                            Columbia University Teachers College since 1976.
   10595; 47.
- -------------------------------------------------------------------------------------------------------------------
   John E. Heilmann; Old          Trustee              Mr. Heilmann is retired and the former Chairman,
   Norwood Plantation, Route                           President and Chief Executive Officer of Distillers
   1, Box II A, Wingina,                               Somerset, Inc. and Norwood Enterprises, Inc. from
   Virginia 24599; 64.                                 1987-1992.
- -------------------------------------------------------------------------------------------------------------------
   Jack D. Henderson; 1600        Trustee              Mr. Henderson is a sole-practioner in his own law
   Broadway, Denver, Colorado                          firm; Partner of the law firm of Clanahan, Tanner,
   80202; 68.                                          Downing & Knowlton, P.C. until November, 1995.  He is
                                                       a Trustee of Westcore Trust (a mutual fund family).
- -------------------------------------------------------------------------------------------------------------------
   Richard A. Wedemeyer; 17       Trustee              Mr. Wedemeyer is Vice President of Performance
   High Street, Norwalk,                               Advantage, Inc., since 1992; Vice President of Jim
   Connecticut 06851; 59.                              Henson Productions from 1979 to 1992; Author of In
                                                       Transition (Harper Collins); co-founder and
                                                       co-conductor of Harvard Business School Club of New
                                                       York Career Seminar; Trustee of Jim Henson Legacy
                                                       Trust.
- -------------------------------------------------------------------------------------------------------------------
   Michael C. Petrycki; 230       President of the     President and Director of Furman Selz since 1984.
   Park Avenue, New York, NY      Trust
   10169; 52.
- -------------------------------------------------------------------------------------------------------------------
   Steven D. Blecher;  230        Executive Vice       President and Director of Furman Selz since 1983;
   Park Avenue, New York, NY      President            Vice President, Secretary and Treasurer of Furman
   10169; 52.                                          Selz Capital Management, Inc. since 1984.
- -------------------------------------------------------------------------------------------------------------------
   John J. Pileggi; 230 Park      Vice President       Managing Director of Furman Selz, from 1984 to 1992;
   Avenue, New York, NY           and Treasurer        Senior Managing Director since 1992 and Director of
   10169; 36.                                          Furman Selz since 1994.
- -------------------------------------------------------------------------------------------------------------------
   Joan V. Fiore; 230 Park        Vice President       Managing Director and Counsel of Furman Selz since
   Avenue, New York, NY           and Secretary        1991; Staff Attorney at the U.S. Securities and
   10169; 39.                                          Exchange Commission, Division of Investment
                                                       Management, from 1986 to 1991.
===================================================================================================================
</TABLE>





                                      -31-
<PAGE>   53
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
   <S>                            <C>                  <C>
   Donald E. Brostrom; 237        Assistant            Director, Fund Services, Furman Selz Incorporated
   Park Avenue, New York, NY      Treasurer            since 1986.
   10169; 36
- -------------------------------------------------------------------------------------------------------------------
   Eric Rubin;                    Assistant            Mr. Rubin joined Furman Selz as a Managing Director
   7501 East McCormick            Secretary            in the Mutual Fund Division in June of 1995.
   Parkway, 110N Scottsdale,                           Previous to that, Mr. Rubin was a Vice President and
   AZ 85258; 29                                        Managing Director at Banc One Investment Advisers in
                                                       Columbus, Ohio.  In that role, he was responsible for
                                                       sales, marketing, product development and
                                                       administration for Banc One's proprietary Fund
                                                       family.  From January 1989 to November 1993 Mr. Rubin
                                                       was employed by Furman Selz as an Associate Director.
                                                       Throughout those years he was responsible for the
                                                       administration and fund accounting of several
                                                       proprietary bank mutual fund groups.  He also served
                                                       as an officer or several of those fund complexes.
===================================================================================================================
</TABLE>



                 Each trustee receives an annual fee of $1000 plus $250 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings.

                 For the last fiscal year, the Trustees will receive the
following compensation from the Trust and from certain other investment
companies (as indicated) that have the same investment adviser as the Trust or
an investment adviser that is an affiliate person of the Trust's investment
adviser:


<TABLE>
<CAPTION>
========================================================================================================================
                                                         PENSION OR                                            
                                                         RETIREMENT                                   TOTAL    
                                                          BENEFITS            ESTIMATED            COMPENSATION
                                    AGGREGATE            ACCRUED AS             ANNUAL                 FROM    
                                   COMPENSATION            PART OF             BENEFITS             REGISTRANT 
                                     FROM THE               TRUST                UPON                AND FUND  
        NAME OF TRUSTEE               TRUST                EXPENSE            RETIREMENT             COMPLEX   
- ------------------------------------------------------------------------------------------------------------------------
    <S>                             <C>                      <C>                  <C>               <C>
    Dennis W. Draper                $2000*                   $0                   $0                $12,500**
- ------------------------------------------------------------------------------------------------------------------------
    Joseph N. Hankin                $2000*                   $0                   $0                $12,500**
- ------------------------------------------------------------------------------------------------------------------------
    John E. Heilmann                $2000*                   $0                   $0                $12,500**
- ------------------------------------------------------------------------------------------------------------------------
    Jack D. Henderson               $2000*                   $0                   $                 $11,707**
- ------------------------------------------------------------------------------------------------------------------------
    Richard A. Wedemeyer            $2000*                   $0                   $0                $11,707**
========================================================================================================================
</TABLE>

*        Estimated compensation for the Trust's 1996 fiscal year.

**       Includes amounts received for service as a member of the Board of
         Trustees of Pacific Funds Trust which is also advised by FICM.

                 As of the date of this Statement of Additional Information,
the Trust's Trustees and officers as a group own less than 1% of the
outstanding shares of each Portfolio.





                                      -32-
<PAGE>   54
Adviser

                 FICM serves as Adviser to the Portfolios.  In the Advisory
Agreement, the Adviser has agreed to provide a continuous investment program
for the respective Portfolios and to pay all expenses it incurs in connection
with its advisory activities, other than the cost of securities and other
investments, including brokerage commissions and other transaction charges, if
any, purchased or sold for the Portfolios.

                 The Adviser has agreed that if, in any fiscal year, the
expenses borne by a Portfolio exceed the applicable expense limitations imposed
by the securities regulations of any state in which shares of a Portfolio are
registered or qualified for sale to the public, it will reimburse the Portfolio
for any excess to the extent required by such regulations.  To the Trust's
knowledge, as of the date of this Statement of Additional Information the most
restrictive expense limitations for any fiscal year imposed by state securities
regulations which were applicable to the Portfolios were as follows:  two and
one-half percent of the first $30 million of a Portfolio's average net assets,
two percent of the next $70 million of average net assets, and one and one-half
percent of a Portfolio's remaining average net assets.

                 The Advisory Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Portfolios in connection with the performance of such agreements, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of its
duties or from its reckless disregard of its duties and obligations under the
agreements.

Authority to Act as Adviser

                 Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, presently (a) prohibit a bank holding company registered under the
Federal Bank Holding Company Act of 1956 or any bank or non-bank affiliate
thereof from sponsoring, organizing, controlling or distributing the shares of
a registered, open-end investment company continuously engaged in the issuance
of its shares, and prohibit banks generally from underwriting securities, but
(b) do not prohibit such a bank holding company or affiliate or banks generally
from acting as investment adviser, transfer agent or custodian to such an
investment company or from purchasing shares of such a company as agent and
upon order of a customer.  The Adviser is subject to such banking laws and
regulations.





                                      -33-
<PAGE>   55
                 The Adviser believes that it may perform the services for the
Portfolios contemplated by the Portfolios' Advisory Agreement without violation
of the Glass-Steagall Act or other applicable banking laws or regulations.  It
should be noted, however, that future changes in either Federal or state
statutes and regulations relating to permissible activities of banks or trust
companies and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent the Adviser from continuing to perform such services
for the Portfolios.  If the Adviser were prohibited from continuing to perform
advisory and sub-advisory services for the Portfolios, it is expected that the
Board of Trustees would recommend that the Portfolios enter into new agreements
or would consider the possible dissolution of the Portfolios.  Any new advisory
agreement would be subject to shareholder approval.

                 On the other hand, legislation has been proposed in Congress
from time to time, which, if enacted, would permit a bank holding company
subsidiary to organize, sponsor and distribute shares of an investment company
such as the Trust notwithstanding present banking law restrictions.  As
described herein, the Portfolios are currently distributed by Furman Selz,
which also provides certain administrative services.  If the current
restrictions preventing a bank holding company subsidiary from legally
sponsoring, organizing, controlling and distributing shares of an investment
company were relaxed, the Trust expects that the Adviser or any of its
affiliates would consider the possibility of offering to perform additional
services for the Trust.  It is not possible to predict whether or in what form
such legislation might be enacted or the terms upon which the Adviser might
offer to provide such services for consideration by the Trust's Board of
Trustees.

                 State securities laws on the aforementioned issue may differ
from the interpretations of federal laws expressed herein, and banks and
financial institutions such as the Adviser may be required to register as
dealers pursuant to state law.

Distribution of Shares

                 The Trust retains Furman Selz to serve as principal
underwriter for the shares of the Portfolios pursuant to a Distribution
Contract.  The Distribution Contract provides that the Furman Selz will
maintain the distribution of the Portfolios' shares to bona fide investors.
Furman Selz is not obligated to sell any specific amount of shares.

Administrative Services

                 Furman Selz also provides management and administrative
services necessary for the operation of the Portfolios, including





                                      -34-
<PAGE>   56
among other things, (i) preparation of shareholder reports and communications,
(ii) regulatory compliance, such as reports to and filings with the Securities
and Exchange Commission ("SEC") and state securities commissions and (iii)
general supervision of the operation of the Portfolios, including coordination
of the services performed by the Portfolios' Adviser, distributor, transfer
agent, custodian, independent accountants, legal counsel and others.  In
addition, Furman Selz furnishes office space and facilities required for
conducting the business of the Portfolios and pays the compensation of the
Trust's officers affiliated with Furman Selz.  For these services, Furman Selz
is entitled to receive from the Portfolios a fee, payable monthly, at the
annual rate of .15% of each Portfolio's average daily net assets.

                 The Administrative Services Contract between Furman Selz and
the Trust is terminable with respect to any Portfolio without penalty, at any
time, by vote of a majority of the Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the
operation of the Administrative Services Contract upon not more than 60 days
written notice to Furman Selz or by vote of the holders of a majority of the
shares of the Portfolio involved, or, upon 60 days notice, by Furman Selz.  The
Administrative Services Contract will terminate automatically in the event of
its assignment.

Custodian and Transfer Agent

                 First Interstate Bank of California (the "Custodian") serves
as custodian of the Portfolios' assets pursuant to the Custody Agreement.
Under the Custody Agreements, the Custodian has agreed to (a) maintain a
separate account in the name of each Portfolio; (b) make receipts and
disbursements of money on behalf of each Portfolio; (c) collect and receive all
income and other payments and distributions on account of each Portfolio's
portfolio securities; (d) respond to correspondence from shareholders, security
brokers and others relating to its duties; and (e) make periodic reports to the
Trust's Board of Trustees concerning each Portfolio's operations.  The
Custodian may, at its own expense, open and maintain a custody account or
accounts on behalf of any Portfolio with other banks or trust companies,
provided that the Custodian shall remain liable for the performance of all of
its duties under the Custody Agreement notwithstanding any delegation.  For its
services as custodian, the Custodian is entitled to receive compensation from
each Portfolio based on the aggregate market value of the portfolio securities
of the Portfolio as follows:  0.0210% on the first $5 billion of the average
net assets; 0.0175% on the next $5 billion; and 0.0150% on assets in excess of
$10 billion.  The minimum annual custody fee payable by each Portfolio is $500.
In addition, the Custodian is entitled to certain transaction charges at the
rate of $20 for each transaction involving a





                                      -35-
<PAGE>   57
domestic security, $25 for each transaction involving a foreign security, and
$45 per option (including issuance of an escrow receipt), and to reimbursement
for its out-of-pocket expenses in connection with the above services.

                 Furman Selz acts as the Trust's transfer agent.  The Trust
compensates Furman Selz for providing personnel and facilities to perform
transfer agency related services for the Trust at a rate intended to represent
the cost of providing such services.

                                    AUDITORS

                 Ernst & Young LLP, 515 South Flower Street, Los Angeles,
California, have been selected to serve as the Portfolios' independent
auditors.


                                    COUNSEL

                 Drinker Biddle & Reath, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496, serves as counsel
to the Trust and will pass upon certain legal matters relating to the
Portfolios.

               ADDITIONAL INFORMATION ON PERFORMANCE CALCULATIONS

Yield Quotations -- Money Market Portfolio

                 The standardized annualized seven-day yield for the Money
Market Portfolio is computed by: (1) determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account in the
Portfolio having a balance of one share at the beginning of a seven-day period,
for which the yield is to be quoted, (2) dividing the net change in account
value by the value of the account at the beginning of the base period to obtain
the base period return, and (3) annualizing the results (i.e., multiplying the
base period return by (365/7)).  The net change in the value of the account in
the Portfolio includes the value of additional shares purchased with dividends
from the original share and dividends declared on both the original share and
any such additional shares, and all fees that are charged by the Portfolio to
all shareholder accounts in proportion to the length of the base period, other
than nonrecurring account and sales charges.  For any account fees that vary
with the size of the account, the amount of fees charged is computed with
respect to the Portfolio's mean (or median) account size.  The capital changes
to be excluded from the calculation of the net change in account value are
realized gains and losses from the sale of securities and unrealized
appreciation and depreciation.  The effective compound yield





                                      -36-
<PAGE>   58
quotation for the Portfolio is computed by adding 1 to the unannualized base
period return (calculated as described above), raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result.

Yield and Total Return of the Emerging Growth, Equity Value, Balanced and
Intermediate Bond Portfolios

                 The 30-day (or one month) standard yield of the Balanced and
Intermediate Bond Portfolios described in the Prospectus is calculated for each
Portfolio in accordance with the method prescribed by the SEC for mutual funds:

                                        a - b      6
                          YIELD = 2[( - - - - +1 )   - 1]
                                         cd

Where:           a =      dividends and interest earned by a Portfolio during
                          the period;                 

                 b =      expenses accrued for the period (net of
                          reimbursements);

                 c =      average daily number of shares outstanding during the
                          period, entitled to receive dividends; and

                 d =      maximum offering price per share on the last day of
                          the period.

For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Portfolio is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the Portfolio.  Except as noted
below, interest earned on debt obligations held by a Portfolio is calculated by
computing the yield to maturity of each obligation based on the market value of
the obligation (including actual accrued interest) at the close of business on
the last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is held by the Portfolio.  For purposes of this calculation, it is
assumed that each month contains 30 days.  The maturity of an obligation with a
call provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date.  With respect to debt
obligations purchased at a discount or premium, the formula





                                      -37-
<PAGE>   59
generally calls for amortization of the discount or premium.  The amortization
schedule will be adjusted monthly to reflect changes in the market value of
such debt obligations.  Expenses accrued for the period (variable "b" in the
formula) include all recurring fees charged by a Portfolio to all shareholder
accounts in proportion to the length of the base period and the Portfolio's
mean (or median) account size.  Undeclared earned income will be subtracted
from the offering price per share (variable "d" in the formula).

                 With respect to mortgage or other receivables-backed
obligations which are expected to be subject to monthly payments of principal
and interest ("pay-downs") (i) gain or loss attributable to actual monthly pay
downs are accounted for as an increase or decrease to interest income during
the period and (ii) each Portfolio may elect either (a) to amortize the
discount and premium on the remaining security, based on the cost of the
security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if any, if the weighted
average date is not available or (b) not to amortize discount or premium on the
remaining security.

                 Each Portfolio that advertises its "average annual total
return" computes such return by determining the average annual compounded rate
of return during specified periods that equates the initial amount invested to
the ending redeemable value of such investment according to the following
formula:

                                                  ERV  1/n
                                           T = [(-----) - 1]
                                                   P

         Where:           T =     average annual total return;

                        ERV =     ending redeemable value of a hypothetical
                                  $1,000 payment made at the beginning of the
                                  l, 5 or 10 year (or other) periods at the end
                                  of the applicable period (or a fractional
                                  portion thereof);

                          P =     hypothetical initial payment of $1,000; and

                          n =     period covered by the computation, expressed
                                  in years.

                 Each Portfolio that advertises its "aggregate total return"
computes such returns by determining the aggregate compounded rates of return
during specified periods that likewise equate the initial amount invested to
the ending redeemable value of such investment.  The formula for calculating
aggregate total return is as follows:





                                      -38-
<PAGE>   60
                             ERV
Aggregate Total Return =  [(-----) - 1]
                              P

                 The calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, (2) all recurring fees
charged to all shareholder accounts are included, and (3) for any account fees
that vary with the size of the account, a mean (or median) account size in the
Portfolio during the periods is reflected.  The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption
of the hypothetical investment after deduction of all nonrecurring charges at
the end of the measuring period.

                                 MISCELLANEOUS

                 As used in this Statement of Additional Information and the
Portfolios' Prospectus, a "majority of the outstanding shares" of a Portfolio
or a series of shares, with respect to the approval of an investment advisory
agreement or a change in a fundamental investment policy, means the lesser of
(1) 67% of the shares of the particular Portfolio or series represented at a
meeting at which the holders of more than 50% of the outstanding shares of such
Portfolio or series are present in person or by proxy, or (2) more than 50% of
the outstanding shares of such Portfolio or series.

                 As of the date of this Statement of Additional Information all
of the issued and outstanding shares of each Portfolio were owned by Anchor
National Life Insurance Company, a California corporation with principal
offices at 1 SunAmerica Center, Century City, Los Angeles, California
90067-6022 and held in Separate Accounts pursuant to variable annuity
contracts.





                                      -39-
<PAGE>   61
                                   APPENDIX A

                       DESCRIPTION OF SECURITIES RATINGS


Commercial Paper Ratings

                 S&P's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.  The following summarizes the rating categories used by Standard and
Poor's for commercial paper:

                 "A-1" - Issue's degree of safety regarding timely payment is
strong.  Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."

                 "A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."

                 "A-3" - Issue has an adequate capacity for timely payment.  It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.

                 "B" - Issue has only a speculative capacity for timely
payment.

                 "C" - Issue has a doubtful capacity for payment.

                 "D" - Issue is in payment default.


                 Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months.  The following summarizes the rating categories
used by Moody's for commercial paper:

                 "Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations.  Principal repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning 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.





                                      A-1
<PAGE>   62
                 "Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations.  This will normally be evidenced by many of the characteristics
cited above but to a lesser degree.  Earnings trends and coverage ratios, while
sound, will be more subject to variation.  Capitalization characteristics,
while still appropriate, may be more affected by external conditions.  Ample
alternative liquidity is maintained.

                 "Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations.  The
effects of industry characteristics and market composition may be more
pronounced.  Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage.  Adequate alternate liquidity is maintained.

                 "Not Prime" - Issuer does not fall within any of the Prime
rating categories.


                 The three rating categories of D&P for investment grade
commercial paper and short-term debt are "Duff 1," "Duff 2" and "Duff 3."  D&P
employs three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the
highest rating category.  The following summarizes the rating categories used
by D&P for commercial paper:

                 "Duff 1+" - Debt possesses highest certainty of timely
payment.  Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations.

                 "Duff 1" - Debt possesses very high certainty of timely
payment.  Liquidity factors are excellent and supported by good fundamental
protection factors.  Risk factors are minor.

                 "Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors.  Risk factors are very small.

                 "Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound.  Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.

                 "Duff 3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade.  Risk





                                      A-2
<PAGE>   63
factors are larger and subject to more variation.  Nevertheless, timely payment
is expected.

                 "Duff 4" - Debt possesses speculative investment
characteristics.  Liquidity is not sufficient to insure against disruption in
debt service.  Operating factors and market access may be subject to a high
degree of variation.

                 "Duff 5" - Issuer has failed to meet scheduled principal
and/or interest payments.


                 Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years.  The
following summarizes the rating categories used by Fitch for short-term
obligations:

                 "F-1+" - Securities possess exceptionally strong credit
quality.  Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.

                 "F-1" - Securities possess very strong credit quality.  Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."

                 "F-2" - Securities possess good credit quality.  Issues
carrying this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.

                 "F-3" - Securities possess fair credit quality.  Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.

                 "F-S" - Securities possess weak credit quality.  Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.

                 "D" - Securities are in actual or imminent payment default.

                 Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.


                 Thomson BankWatch commercial paper ratings assess the
likelihood of an untimely or incomplete payment of principal or interest of
unsubordinated instruments having a maturity of one





                                      A-3
<PAGE>   64
year or less which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers.  The following
summarizes the ratings used by Thomson BankWatch:

                 "TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.

                 "TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."

                 "TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.

                 "TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.


                 IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries.  The following summarizes the
rating categories used by IBCA for short-term debt ratings:

                 "A1" - Obligations are supported by the highest capacity for
timely repayment.  Where issues possess a particularly strong credit feature, a
rating of A1+ is assigned.

                 "A2" - Obligations are supported by a good capacity for timely
repayment.

                 "A3" - Obligations are supported by an satisfactory capacity
for timely repayment.

                 "B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.

                 "C" - Obligations for which there is a high risk of default or
which are currently in default.

Corporate and Municipal Long-Term Debt Ratings

                 The following summarizes the ratings used by S&P's for
corporate and municipal debt:





                                      A-4
<PAGE>   65
                 "AAA" - This designation represents the highest rating
assigned by S&P's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.

                 "AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from "AAA" issues only in small
degree.

                 "A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.

                 "BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal.  Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.

                 "BB," "B", "CCC," "CC," "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.  "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation.  While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

                 "BB" - Debt has less near-term vulnerability to default than
other speculative issues.  However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BBB -" rating.

                 "B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.  The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.

                 "CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.  In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.  The "CCC"
rating





                                      A-5
<PAGE>   66
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "B" or "B-" rating.

                 "CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.

                 "C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating.  The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.

                 "CI" - This rating is reserved for income bonds on which no
interest is being paid.

                 "D" - Debt is in payment default.  This rating is used when
interest payments or principal payments 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 is also used
upon the filing of a bankruptcy petition 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 categories.


         The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

                 "Aaa" - Bonds are judged to be of the best quality.  They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge."  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 are judged to be of high quality by all
standards.  Together with the "Aaa" group they comprise what are generally
known as high grade bonds.  They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.

                 "A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium grade obligations.  Factors giving
security to principal and interest





                                      A-6
<PAGE>   67
are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.

                 "Baa" - Bonds considered 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," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.

                 Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally.  These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches.  Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.

                 Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" to B."  The modifier 1 indicates that
the issuer ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the issuer
ranks in the lower end of the generic category.

                 The following summarizes the long-term debt ratings used by
D&P for corporate and municipal long-term debt:

                 "AAA" - Debt is considered to be of the highest credit
quality.  The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.

                 "AA" - Debt is considered of high credit quality.  Protection
factors are strong.  Risk is modest but may vary slightly from time to time
because of economic conditions.

                 "A" - Debt possesses protection factors which are average but
adequate.  However, risk factors are more variable and greater in periods of
economic stress.





                                      A-7
<PAGE>   68
                 "BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.

                 "BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade.  Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due.  Debt rated "B" possesses the risk that obligations will not be met when
due.  Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.

                 To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.


                 The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:

                 "AAA" - Bonds considered to be investment grade and of the
highest credit quality.  The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.

                 "AA" - Bonds considered to be investment grade and of very
high credit quality.  The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."  Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."

                 "A" - Bonds considered to be investment grade and of high
credit quality.  The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.

                 "BBB" - Bonds considered to be investment grade and of
satisfactory credit quality.  The obligor's ability to pay interest and repay
principal is considered to be adequate.  Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment.  The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.





                                      A-8
<PAGE>   69
                 "BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments.  The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default.  For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.

                 To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.


                 IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries.  The following summarizes the
rating categories used by IBCA for long-term debt ratings:

                 "AAA" - Obligations for which there is the lowest expectation
of investment risk.  Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.

                 "AA" - Obligations for which there is a very low expectation
of investment risk.  Capacity for timely repayment of principal and interest is
substantial.  Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.

                 "A" - Obligations for which there is a low expectation of
investment risk.  Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.

                 "BBB" - Obligations for which there is currently a low
expectation of investment risk.  Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories.

                 "BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present.  "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing.  "C" represents the highest degree
of





                                      A-9
<PAGE>   70
speculation and indicates that the obligations are currently in default.

                 IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.


                 Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-banks; non-United States banks; and broker-dealers.  The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:

                 "AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is very high.

                 "AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.

                 "A" - This designation indicates that the ability to repay
principal and interest is strong.  Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.

                 "BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest.  Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.

                 "BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt.  Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest.  "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.

                 "D" - This designation indicates that the long-term debt is in
default.

                 PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.





                                      A-10
<PAGE>   71
Municipal Note Ratings

                 A S&P rating reflects the liquidity concerns and market access
risks unique to notes due in three years or less.  The following summarizes the
ratings used by S&P for municipal notes:

                 "SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest.  Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.

                 "SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.

                 "SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.


                 Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG").  Such ratings recognize the differences between short-term credit
risk and long-term risk.  The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:

                 "MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.

                 "MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.

                 "MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but 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.

                 "MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.

                 "SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.


                 Fitch and D&P use the short-term ratings described under
Commercial Paper Ratings for municipal notes.





                                      A-11
<PAGE>   72
                                   APPENDIX B

                 As stated in the Prospectus, the Equity Value and Balanced
Portfolios may enter into futures contracts and options for hedging purposes.
Such transactions are described in this Appendix.

I.       Stock Index Futures Contracts.

                 General.  A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market
values of the stocks included.  A stock index futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the stock index value (which assigns relative values to the common stocks
included in the index) at the close of the last trading day of the contract and
the price at which the futures contract is originally struck.  No physical
delivery of the underlying stocks in the index is made.  Some stock index
futures contracts are based on broad market indexes, such as the Standard &
Poor's 500 or the New York Stock Exchange Composite Index.  In contrast,
certain exchanges offer futures contracts on narrower market indexes, such as
the Standard & Poor's 100 or indexes based on an industry or market segment,
such as oil and gas stocks.  Futures contracts are traded on organized
exchanges regulated by the Commodity Futures Trading Commission.  Transactions
on such exchanges are cleared through a clearing corporation, which guarantees
the performance of the parties to each contract.  The price of a single futures
contract is determined by multiplying the relevant index's value by $500.  For
example, if the value of an index were 125, one contract would be worth $62,500
(125 x $500).  If the value of such index increased to 130, the value of one
contract would increase by $2,500 (5 x $500) to $65,000.  Conversely, if the
value of such index dropped to 115, the value of one contract bought at the
original value of 125 would fall by $5,000 (10 x $500) to $57,500.

                 Examples of Stock Index Futures Transactions.  The following
are examples of transactions in stock index futures (net of commissions and
premiums, if any).





                                      B-1
<PAGE>   73
                  ANTICIPATORY PURCHASE HEDGE:  Buy the Future
               Hedge Objective:  Protect Against Increasing Price

<TABLE>
<CAPTION>
            Portfolio                                  Futures
            ---------                                  -------
<S>                                                <C>
                                                   -Day Hedge is Placed-

Anticipate Buying $62,500                          Buying 1 Index Futures at 125
     in Equity Securities                                Value of Futures =
                                                         $62,500/Contract

                                                   -Day Hedge is Lifted-

Buy Equity Securities                              Sell 1 Index Futures at 130
with Actual Cost =                                       Value of Futures =
     $65,000 Increase in                                 $65,000/Contract
     Purchase Price =                              Gain on Futures = $2,500      
     $2,500                                              
</TABLE>


                  HEDGING A STOCK PORTFOLIO:  Sell the Future
                  Hedge Objective:  Protect Against Declining
                             Value of the Portfolio

Factors:

Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0

<TABLE>
<CAPTION>
         Portfolio                                           Futures
         ---------                                           -------
<S>                                                <C>
                                                   -Day Hedge is Placed-

Anticipate Selling $1,000,000                            Sell 16 Index Futures at 125
     in Equity Securities                                Value of Futures = $1,000,000

                                                   -Day Hedge is Lifted-

Equity Securities-Own                                    Buy 16 Index Futures at 120
     Stock with Value = $960,000                         Value on Futures = $960,000
     Loss in Portfolio Value =                           Gain on Futures = $40,000
          $40,000
</TABLE>

                 If, however, the market moved in the opposite direction, that
is, market value decreased and the Portfolio had entered into an anticipatory
purchase hedge, or market value increased and the Portfolio had hedged its
stock portfolio, the results of the Portfolio's transactions in stock index
futures would be as set forth below.





                                      B-2
<PAGE>   74
                  ANTICIPATORY PURCHASE HEDGE:  Buy the Future
               Hedge Objective:  Protect Against Increasing Price


<TABLE>
<CAPTION>
         Portfolio                                           Futures
         ---------                                           -------
<S>                                                <C>
                                                   -Day Hedge is Placed-

Anticipate Buying $62,500                                   Buying 1 Index Futures
    in Equity Securities                                            at 125
                                                            Value of Futures =
                                                                    $62,500/Contract

                                                   -Day Hedge is Lifted-

Buy Equity Securities                                       Sell 1 Index Futures at 120
    Actual Cost = $60,000                                   Value of Futures =
Decrease in Purchase Price =                                        $60,000/Contract
    $2,500                                                  Loss on Futures = $2,500
</TABLE>

                  HEDGING A STOCK PORTFOLIO:  Sell the Future
                  Hedge Objective:  Protect Against Declining
                             Value of the Portfolio

Factors:

Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0

<TABLE>
<CAPTION>
         Portfolio                                           Futures
         ---------                                           -------
<S>                                                <C>
                                                   -Day Hedge is Placed-

Anticipate Selling $1,000,000                               Sell 16 Index Futures at 125
    in Equity Securities                                    Value of Futures = $1,000,000

                                                   -Day Hedge is Lifted-

Equity Securities-Own                                       Buy 16 Index Futures at 130
    Stock with Value =                                      Value on Futures = $1,040,000
          $1,040,000                                        Loss on Futures = $40,000
    Gain in Portfolio =
          $40,000
</TABLE>


II.      Margin Payments.

                 Unlike when a Portfolio purchases or sells a security, no
price is paid or received by a Portfolio upon the purchase or sale of a futures
contract.  Initially, a Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's custodian an amount of cash or
cash




                                      B-3
<PAGE>   75
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract.  This amount is known as initial margin.  The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Portfolio upon termination of
the futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instrument fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market."  For example, when a
Portfolio has purchased a futures contract and the price of the contract has
risen in response to a rise in the underlying instruments, that position will
have increased in value and the Portfolio will be entitled to receive from the
broker a variation margin payment equal to that increase in value.  Conversely,
where a Portfolio has purchased a futures contract and the price of the futures
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker.  At any time prior to expiration of
the futures contract, the Adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which
will operate to terminate the Portfolio's position in the futures contract.  A
final determination of variation margin is then made, additional cash is
required to be paid by or released to the Portfolio, and the Portfolio realizes
a loss or gain.

III.     Risks of Transactions in Futures Contracts.

                 There are several risks in connection with the use of futures
by a Portfolio as a hedging device.  One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge.  The price of the
future may move more than or less than the price of the securities being
hedged.  If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all.  If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future.  If the price of the future moves more than the price of the hedged
securities, the Portfolio involved will experience either a loss or gain on the
future which will not be completely offset by movements in the price of the
securities which are the









                                      B-4
<PAGE>   76
subject of the hedge.  To compensate for the imperfect correlation of movements
in the price of securities being hedged and movements in the price of futures
contracts, a Portfolio may buy or sell futures contracts in a greater dollar
amount than the dollar amount of securities being hedged if the volatility over
a particular time period of the prices of such securities has been greater than
the volatility over such time period of the future, or if otherwise deemed to
be appropriate by the Adviser.  Conversely, a Portfolio may buy or sell fewer
futures contracts if the volatility over a particular time period of the prices
of the securities being hedged is less than the volatility over such time
period of the futures contract being used, or if otherwise deemed to be
appropriate by the Adviser.  It is also possible that, where a Portfolio has
sold futures to hedge its portfolio against a decline in the market, the market
may advance and the value of securities held by the Portfolio may decline.  If
this occurred, the Portfolio would lose money on the future and also experience
a decline in value in its portfolio securities.

                 Where futures are purchased to hedge against a possible
increase in the price of securities before a Portfolio is able to invest its
cash (or cash equivalents) in securities (or options) in an orderly fashion, it
is possible that the market may decline instead; if the Portfolio then
concludes not to invest in securities or options at that time because of
concern as to possible further market decline or for other reasons, the
Portfolio will realize a loss on the futures contract that is not offset by a
reduction in the price of securities purchased.

                 In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions.  Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets.  Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery.  To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market.  Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions.  Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the price
of futures, a correct forecast of general market trends or interest







                                      B-5
<PAGE>   77
rate movements by the Adviser may still not result in a successful hedging
transaction over a short time frame.

                 Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures.  Although
the Equity Value and Balance Portfolios intend to purchase or sell futures only
on exchanges or boards of trade where there appear to be active secondary
markets, there is no assurance that a liquid secondary market on any exchange
or board of trade will exist for any particular contract or at any particular
time.  In such event, it may not be possible to close a futures investment
position, and in the event of adverse price movements, the Portfolios would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated.  In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.

                 Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day.  Once
the daily limit has been reached in the contract, no trades may be entered into
at a price beyond the limit, thus preventing the liquidation of open futures
positions.  The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.

                 Successful use of futures by a Portfolio is also subject to
the ability of the Adviser to predict correctly movements in the direction of
the market.  For example, if a Portfolio has hedged against the possibility of
a decline in the market adversely affecting securities held in its portfolio
and securities prices increase instead, the Portfolio will lose part or all of
the benefit to the increased value of its securities which it has hedged
because it will have offsetting losses in its futures positions.  In addition,
in such situations, if a Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements.  Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market.  A Portfolio may have to






                                      B-6
<PAGE>   78
sell securities at a time when it may be disadvantageous to do so.

IV.      Put Options on Stock Index Futures Contracts.

                 The Equity Value and Balanced Portfolios may purchase put
options on stock index futures contracts that would give the Portfolio, in
return for the premium paid, the right to sell (put) to the writer of the
option a stock index futures contract at a specified price at any time during
the period of the option.  Upon exercise, the writer of the option is obligated
to pay the difference between the cash value of the futures contract and the
exercise price.  Like the buyer of a futures contract, the holder of a put
option has the right to terminate its position prior to the scheduled
expiration of the option by selling an option of the same series, at which time
the person entering into the closing transaction will realize a gain or loss.

                 Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market).  The
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.  Depending on the pricing of the option compared to either
the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities.  In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract.  Compared to the sale of futures contracts,
however, the purchase of put options on futures contracts may frequently
involve less potential risk to a Portfolio because the maximum amount at risk
is the premium paid for the options (plus transaction costs).

V.        Other Hedging Transactions.

                 The Equity Value and Balanced Portfolios may use stock index
futures contracts (and related options) in connection with their hedging
activities.  The Portfolios also are authorized to enter into hedging
transactions in any other futures or options contracts which are currently
traded or which may subsequently become available for trading.  Such
instruments may be employed in connection with the Portfolios' hedging
strategies if, in the judgment of the Adviser, transactions therein are
necessary or advisable.

VI.      Accounting and Tax Treatment.

                 Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.






                                      B-7
<PAGE>   79
                 Generally, futures contracts held by a Portfolio at the close
of the Portfolio's taxable year will be treated for federal income tax purposes
as sold for their fair market value on the last business day of such year, a
process known as "marking-to-market."  Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time the Portfolio holds the
futures contract ("the 40-60 rule").  The amount of any capital gain or loss
actually realized by a Portfolio in a subsequent sale or other disposition of
those futures contracts will be adjusted to reflect any capital gain or loss
taken into account by the Portfolio in a prior year as a result of the
constructive sale of the contracts.  With respect to futures contracts to sell,
which will be regarded as parts of a "mixed straddle" because their values
fluctuate inversely to the values of specific securities held by the Portfolio,
losses as to such contracts to sell will be subject to certain loss deferral
rules which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any)
with respect to the other part of the straddle, and to certain wash sales
regulations.  Under short sales rules, which will also be applicable, the
holding period of the securities forming part of the straddle will (if they
have not been held for the long-term holding period) be deemed not to begin
prior to termination of the straddle.  With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Portfolio may make an election
which will exempt (in whole or in part) those identified futures contracts from
being treated for federal income tax purposes as sold on the last business day
of the Portfolio's taxable year, but gains and losses will be subject to such
short sales, wash sales, loss deferral rules and the requirement to capitalize
interest and carrying charges.  Under temporary regulations, a Portfolio would
be allowed (in lieu of the foregoing) to elect either (1) to offset gains or
losses from portions which are part of a mixed straddle by separately
identifying each mixed straddle to which such treatment applies, or (2) to
establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year.  Under
either election, the 40-60 rule will apply to the net gain or loss attributable
to the futures contracts, but in the case of a mixed straddle account election,
not more than 50% of any net gain may be treated as long-term and no more than
40% of any net loss may be treated as short-term.  Options on futures contracts
generally receive federal tax treatment similar to that described above.

                 Under the federal income tax provisions applicable to
regulated investment companies, less than 30% of a company's









                                      B-8
<PAGE>   80
gross income must be derived from gains realized on the sale or other
disposition of securities held for less than three months.  With respect to
futures contracts and other financial instruments subject to the
"marking-to-market" rules, the Internal Revenue Service has ruled in private
letter rulings that a gain realized from such a futures contract or financial
instrument will be treated as being derived from a security held for three
months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale under
the "marking-to-market" rules, and will be treated as being derived from a
security held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
marking-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date.  In determining
whether the 30% test is met for a taxable year, increases and decreases in the
value of a Portfolio's futures contracts and other investments that qualify as
part of a "designated hedge," as defined in the Code, may be netted.




                                      B-9



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