WNL SERIES TRUST
5555 SAN FELIPE, SUITE 900
HOUSTON, TEXAS 77056
WNL Series Trust (the "Trust") is an open-end, diversified series
management investment company that currently offers shares of beneficial
interest of eight series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. The Portfolios are: BEA Growth and Income Portfolio,
BlackRock Managed Bond Portfolio, Credit Suisse International Equity
Portfolio, EliteValue Asset Allocation Portfolio, Global Advisors Growth
Equity Portfolio, Global Advisors Money Market Portfolio, Salomon Brothers
U.S. Government Securities Portfolio, and Van Kampen American Capital Emerging
Growth Portfolio. These Portfolios are currently available to the public only
through variable annuity contracts ("VA Contracts") issued by Western National
Life Insurance Company (the "Life Company").
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing. Please read it carefully
and retain it for future reference. A Statement of Additional Information
("SAI") dated May 1, 1997, is available without charge upon request, and may
be obtained by calling the Life Company at 1-800-910-4455 or by writing to the
Life Company, Attention: Variable Annuity Service Center, P.O. Box 290721,
Wethersfield, CT 06129-0721. Some of the discussions contained in this
Prospectus refer to the more detailed descriptions contained in the SAI, which
is incorporated by reference into this Prospectus and has been filed with the
Securities and Exchange Commission (the "SEC").
INVESTMENTS IN THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. SHARES OF THE TRUST ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE TRUST IS SUBJECT TO RISK THAT MAY
CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS
REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED
BY THE INVESTOR.
PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE GLOBAL ADVISORS MONEY
MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THERE CAN BE NO ASSURANCE THAT THE GLOBAL ADVISORS MONEY MARKET PORTFOLIO WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus Dated May 1, 1997
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TABLE OF CONTENTS
Page
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SUMMARY 1
The Trust 1
Investment Adviser and Sub-advisers 1
The Portfolios 1
BEA Growth and Income Portfolio 1
BlackRock Managed Bond Portfolio 1
Credit Suisse International Equity Portfolio 1
EliteValue Asset Allocation Portfolio 2
Global Advisors Growth Equity Portfolio 2
Global Advisors Money Market Portfolio 2
Salomon Brothers U.S. Government Securities Portfolio 2
Van Kampen American Capital Emerging Growth Portfolio 2
Investment Risks 3
Sales and Redemptions 3
FINANCIAL HIGHLIGHTS 3
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS 5
BEA Growth and Income Portfolio 6
BlackRock Managed Bond Portfolio 7
Credit Suisse International Equity Portfolio 9
EliteValue Asset Allocation Portfolio 10
Global Advisors Growth Equity Portfolio 12
Global Advisors Money Market Portfolio 12
Salomon Brothers U.S. Government Securities Portfolio 13
Van Kampen American Capital Emerging Growth Portfolio 14
MANAGEMENT OF THE TRUST 15
Investment Adviser 15
Advisory Fee Waiver and Expense Cap 16
Advisory Fees Waived 16
Expenses of the Trust 17
Sub-Advisers 17
Sub-Advisory Fees 20
SALES AND REDEMPTIONS 20
<PAGE> ii
NET ASSET VALUE 20
PERFORMANCE INFORMATION 21
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS 21
ADDITIONAL INFORMATION 22
APPENDIX 22
SECURITIES AND INVESTMENT PRACTICES 22
American Depository Receipts and European Depository Receipts 22
Asset-Backed Securities 22
Bank Obligations 23
Borrowing 23
Common Stock and Other Equity Securities 23
Convertible Securities 24
Currency Management 24
Dollar Roll Transactions 24
Equity and Debt Securities Issued or Guaranteed by Supranational Organizations 24
Exchange Rate-Related Securities 25
Fixed-Income Securities 25
Foreign Currency Exchange Transactions 25
Foreign Investments 26
Futures and Options on Futures 27
Geographical and Industry Concentration 28
Government Stripped Mortgage-Backed Securities 28
Interest Rate Transactions 28
Illiquid Securities 29
Investment Companies 29
Lease Obligation Bonds 29
Lending of Securities 29
Lower-Rated Securities 29
Mortgage-Backed Securities 29
Collateralized Mortgage Obligation and Multi-Class Pass-Through Securities 30
New Issuers 31
Options on Securities 31
Options on Foreign Currencies 32
Options on Indexes 32
Over-the-Counter Options 33
<PAGE> iii
Repurchase Agreements 34
Reverse Repurchase Agreements 34
Small Companies 34
Strategic Transactions 34
U.S. Government Securities 35
When-Issued Securities and Delayed-Delivery Transactions 35
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<PAGE> iv
SUMMARY
THE TRUST
The Trust is an open-end diversified management investment company
established as a Massachusetts business trust under a Declaration of Trust
dated December 12, 1994, as amended April 19, 1995. Each Portfolio issues a
separate class of shares. The Declaration of Trust permits the Trustees to
issue an unlimited number of full or fractional shares of each class of stock.
Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future.
INVESTMENT ADVISER AND SUB-ADVISERS
Subject to the authority of the Board of Trustees of the Trust, WNL
Investment Advisory Services, Inc. (the "Adviser") serves as the Trust's
investment adviser and has responsibility for the overall management of the
investment strategies and policies of the Portfolios. The Adviser has engaged
Sub-Advisers for each Portfolio to make investment decisions and place orders.
The Sub-Advisers for the Portfolios are:
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Sub-Adviser Name of Portfolio
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BEA Associates BEA Growth and Income
BlackRock Financial Management BlackRock Managed Bond
Credit Suisse Asset Management Ltd. Credit Suisse International Equity
OpCap Advisors EliteValue Asset Allocation
State Street Global Advisors Global Advisors Growth Equity
Global Advisors Money Market
Salomon Brothers Asset Management Inc Salomon Brothers U.S. Government
Securities
Van Kampen American Capital Asset Van Kampen American Capital
Management, Inc. Emerging Growth
</TABLE>
For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see "Management of
the Trust."
THE PORTFOLIOS
BEA GROWTH AND INCOME PORTFOLIO
The Portfolio's fundamental investment objective is to provide long-term
capital growth, current income, and growth of income, consistent with
reasonable investment risk. The Portfolio invests primarily in domestic equity
as well as domestic debt securities. The proportion of the Portfolio's assets
to be invested in each type of security will vary from time to time in
accordance with the Sub-Adviser's assessment of economic conditions and
investment opportunities. The asset allocation strategy is based on the
premise that, from time to time, certain asset classes are more attractive
long term than others. The Sub-Adviser anticipates that, under normal market
conditions, between 35% and 65% of the Portfolio's total assets will be
invested in equity securities, and between 35% and 65% will be invested in
debt securities.
BLACKROCK MANAGED BOND PORTFOLIO
The Portfolio's fundamental investment objective is to provide a high
total return consistent with moderate risk of capital and maintenance of
liquidity. Total return will consist of income, plus realized and unrealized
capital gains and losses. Although the net asset value of the Portfolio will
fluctuate, the Portfolio attempts to preserve the value of its investments to
the extent consistent with its objective. The Sub-Adviser actively manages the
Portfolio's duration, the allocation of securities acrosssectors, and the
selection of specific securities within sectors. The Sub-Adviser also actively
allocates the Portfolio's assets among the broad sectors of the fixed-income
market, including, but not limited to, U.S. government and agency securities,
corporate securities, private placements, and asset-backed and
mortgage-related securities, including residential and commercial
mortgage-backed securities. Under normal circumstances, the Sub-Adviser
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's assets invested in bonds.
<PAGE> 1
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's fundamental investment objective is long-term capital
appreciation. The Portfolio seeks to achieve its objective primarily by
investing in equity and equity-related securities of companies from at least
five different countries, excluding the United States. This Portfolio is
intended for investors who can accept the risks involved in investments in
equity and equity-related securities of non-U.S. issuers, as well as foreign
currencies, and in the active management techniques that the Portfolio
generally employs. Under normal conditions, the Portfolio will invest at least
65% of its total assets in equity securities of issuers whose principal places
of business (as determined by location of the issuer's principal headquarters)
are located in countries other than the United States. The balance of the
Portfolio, up to 35% of its total assets, may be invested in equity or debt
securities of U.S. issuers or foreign entities. Investing in foreign
securities generally involves risks not ordinarily associated with investing
in securities of domestic issuers. (See "Appendix - Foreign Investments" and
the SAI for a discussion of the risks involved in foreign investing.)
ELITEVALUE ASSET ALLOCATION PORTFOLIO
The Portfolio's fundamental investment objective is to achieve growth of
capital over time through investment in a portfolio consisting of common
stocks, bonds, and cash equivalents, the percentages of which will vary based
on the Sub-Adviser's assessments of the relative outlook for such investments.
In seeking to achieve its investment objective, the types of equity securities
in which the Portfolio may invest are likely to be primarily those of
companies that are believed by the Sub-Adviser to be undervalued in the
marketplace in relation to factors such as the companies' assets or earnings.
Debt securities are expected to be predominantly investment-grade,
intermediate to long-term U.S. government, and corporate debt, although the
Portfolio will also invest in high-quality, short-term money market and cash
equivalent securities, and may invest almost all of its assets in such
securities when the Sub-Adviser deems it advisable in order to preserve
capital. In addition, the Portfolio may also purchase foreign securities,
provided they are listed on a domestic or foreign securities exchange or
represented by American Depository Receipts ("ADRs") listed on a domestic
securities exchange or traded in domestic or foreign over-the-counter markets.
Investing in foreign securities generally involves risks not ordinarily
associated with investing in securities of domestic issuers. (See "Appendix -
Foreign Investments" and the SAI for a discussion of the risks involved in
foreign investing.) The allocation of the Portfolio's assets among the
different types of permitted investments will vary from time to time, based
upon the Sub-Adviser's evaluation of economic and market trends and its
perception of the relative values available from such types of securities at
any given time. There is neither a minimum nor a maximum percentage of the
Portfolio's assets that, at any given time, may be invested in any of the
types of investments identified above.
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
The Portfolio's fundamental investment objective is to provide total
returns that exceed, over time, the Standard & Poor's 500 Composite Stock
Price Index through investment in equity securities. Equity securities are
selected on the basis of a proprietary analytical model of the Portfolio's
Sub-Adviser. Each security is ranked according to two separate and
uncorrelated measures: value and the momentum of Wall Street sentiment. The
Portfolio invests at least 65% of its total assets in equity securities.
However, the Portfolio may invest temporarily for defensive purposes, without
limitation, in certain short-term, fixed-income securities. Such securities
may be used to invest uncommitted cash balances or to maintain liquidity.
GLOBAL ADVISORS MONEY MARKET PORTFOLIO
The Portfolio's fundamental investment objective is to maximize current
income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in dollar-denominated securities with remaining maturities of one
year or less. The Portfolio attempts to meet its investment objective by
investing in high-quality money market instruments. An investment in this
Portfolio is neither insured nor guaranteed by the U.S. government.
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO
The Portfolio's fundamental investment objective is to seek a high level
of current income. The Portfolio seeks to attain its objective by investing a
substantial portion of its assets in debt obligations and mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and collateralized mortgage obligations backed by such
securities. The Portfolio may also invest a portion of its assets in U.S.
dollar-denominated corporate debt securities.
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO
The Portfolio's investment objective is to seek to provide capital
appreciation; any ordinary income received from portfolio securities is
entirely incidental. The Portfolio will, under normal conditions, invest at
least 65% of its total assets in common stocks of small and medium-sized
companies, both domestic and foreign, in the early stages of their life cycles
that the Sub-Adviser believes have the potential to become major enterprises.
While the Portfolio invests primarily in common stocks, to a limited extent,
it may invest in other securities such as preferred stocks, convertible
securities, and warrants. The Portfolio may invest up to 20% of its assets in
securities of foreign issuers. Investing in foreign securities generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. (See "Appendix - Foreign Investments" and the SAI for a
discussion of the risks involved in foreign investing.)
<PAGE> 2
The investment objectives, policies, and restrictions of a Portfolio
specifically cited as fundamental may not be changed without the approval of a
majority of the outstanding shares of that Portfolio. Other investment
policies and practices described in this Prospectus and the SAI are not
fundamental, and the Board of Trustees may change these investment policies
and practices without shareholder approval. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. There is no assurance that a
Portfolio will meet its stated objective.
INVESTMENT RISKS
The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities,
with the general level of interest rates. When interest rates decline, the
value of an investment portfolio invested in fixed-income securities can be
expected to rise. Conversely, when interest rates rise, the value of an
investment portfolio invested in fixed-income securities can be expected to
decline. In the case of foreign currency-denominated securities, these trends
may be offset or amplified by fluctuations in foreign currencies. Investments
by a Portfolio in foreign securities may be affected by adverse political,
diplomatic, and economic developments; changes in foreign currency exchange
rates, taxes, or other assessments imposed on distributions with respect to
those investments; and other factors generally affecting foreign investments.
High-yielding, high-risk, fixed-income securities, which are commonly known as
"junk bonds," are subject to greater market fluctuations and risk of loss of
income and principal than investments in lower-yielding, fixed-income
securities. The Emerging Growth, Growth Equity, and Money Market Portfolios
will not invest in "junk bonds," while each of the other Portfolios may invest
up to 5% of their respective total assets in "junk bonds." Certain Portfolios
intend to employ, from time to time, certain investment techniques that are
designed to enhance income or total return or hedge against market or currency
risks, but which themselves involve additional risks. These techniques include
options on securities, futures, options on futures, options on indexes,
options on foreign currencies, foreign currency exchange transactions, lending
of securities, and when-issued securities and delayed-delivery transactions.
The Portfolios may have higher-than-average portfolio turnover, which may
result in higher-than-average brokerage commissions and transaction costs.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company
as a funding vehicle for the VA Contracts offered by the Life Company. No fee
is charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will ultimately be borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
FINANCIAL HIGHLIGHTS
The following tables include selected data, derived from the financial
statements, for a share outstanding throughout the period shown for each of
the Portfolios. The tables should be read in conjunction with the financial
statements and notes thereto included in the Trust's Annual Report to
Shareholders, which are included in the SAI in reliance upon the report of
Coopers & Lybrand L.L.P., independent auditors.
Further information about the performance of the Trust is contained in the
Trust's Annual Report dated December 31, 1996, which may be obtained without
charge by calling the Life Company at 1-800-910-4455.
<PAGE> 3
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WNL SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
BEA BlackRock Credit Suisse
Growth and Income Managed Bond International Equity
Year Ended Period Ended Period Ended Year Ended Period Ended
Dec. 31, 1996 Dec. 31, 1995* Dec. 31, 1996* Dec. 31, 1996 Dec. 31, 1995*
<S> <C> <C> <C> <C> <C>
Net Asset Value
Net asset value, beginning of period $ 10.46 $ 10.00 $ 10.00 $ 10.33 $ 10.00
Investment Operations
Net investment income (1) 0.47 0.14 0.58 0.15 0.06
Net realized and unrealized gain (loss) 0.96 0.51 (0.22) 1.56 0.33
Total from investment operations 1.43 0.65 0.36 1.71 0.39
Distributions to Shareholders From:
Net investment income (0.47) (0.14) (0.58) (0.15) (0.06)
In excess of net investment income gains - - - - -
Net realized gains (0.38) - - (0.98) -
In excess of net realized gains - (0.05) - (0.24) -
Total distributions to shareholders (0.85) (0.19) (0.58) (1.37) (0.06)
Net asset value, end of period $ 11.04 $ 10.46 $ 9.78 $ 10.67 $ 10.33
Total Return 13.82% 6.57% (2) 3.76% (2) 16.50% 3.93% (2)
Ratios and Supplemental Data
Expenses to average net assets (3) 0.49% 0.12% (4) 0.28% (4) 0.60% 0.12% (4)
Net investment income to average net assets 4.65% 6.99% (4) 6.02% (4) 1.09% 2.89% (4)
Portfolio turnover rate 217% 75% 488% 79% 2%
Average commission rate (5) $ 0.0600 $ 0.0623 - $ 0.0134 $ 0.0371
Net assets, end of period (000s) $ 3,145 $ 2,135 $ 3,376 $ 2,727 $ 2,083
EliteValue
Asset Allocation
Period Ended
Dec. 31, 1996*
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Net Asset Value
Net asset value, beginning of period $ 10.00
Investment Operations
Net investment income (1) 0.18
Net realized and unrealized gain (loss) 2.48
Total from investment operations 2.66
Distributions to Shareholders From:
Net investment income (0.18)
In excess of net investment income gains -
Net realized gains (0.16)
In excess of net realized gains -
Total distributions to shareholders (0.34)
Net asset value, end of period $ 12.32
Total Return 26.70% (2)
Ratios and Supplemental Data
Expenses to average net assets (3) 0.36% (4)
Net investment income to average net assets 1.74% (4)
Portfolio turnover rate 21%
Average commission rate (5) $0.0545
Net assets, end of period (000s) $ 2,307
<FN>
* The Growth and Income and International Equity Portfolios commenced investment operations on October 20, 1995, and the
Managed Bond and Asset Allocation Portfolios commenced investment operations on January 2, 1996.
1. Net investment income is after waiver of fees and reimbursement of certain expenses by the Investment Adviser, the
Sub-Administrator, the Custodian, and Western National Life Insurance Company, an affiliate of the Adviser (see Note 2 to the
financial statements). If the Investment Adviser, the Sub-Administrator, and the Custodian had not waived fees, and Western
National Life Insurance Company had not reimbursed expenses for the periods ended December 31, 1996, and December 31, 1995, net
investment income (loss) per share would have been $0.00 and $(0.06) for the Growth and Income Portfolio, respectively, and
$(1.25) and $(0.18) for the International Equity Portfolio, respectively. For the period ended December 31, 1996, the net
investment income (loss) per share would have been $0.23 and $(0.54), respectively, for the Managed Bond and Asset Allocation
Portfolios.
2. Total return represents aggregate total return for the period indicated and is not annualized.
3. If the Investment Adviser, the Sub-Administrator, and the Custodian had not waived fees and Western National Life
Insurance Company had not reimbursed expenses for the periods ended December 31, 1996, and December 31, 1995, the ratio of
operating expenses to average net assets would have been 5.15% and 9.95% for the Growth and Income Portfolio, respectively, and
6.41% and 11.83% for the International Equity Portfolio, respectively. For the period ended December 31, 1996, the ratio of
operating expenses to average net assets would have been 3.93% and 7.45% for the Managed Bond and Asset Allocation Portfolios.
4. Annualized.
5. Represents the average commission rate paid on equity security transactions on which commissions are charged.
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WNL SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Global Advisors Global Advisors
Growth Equity Money Market
Year Ended Period Ended Year Ended Period Ended
Dec. 31, 1996 Dec. 31, 1995* Dec. 31, 1996 Dec. 31, 1995*
<S> <C> <C> <C> <C>
Net Asset Value
Net asset value, beginning of period $ 10.31 $ 10.00 $ 1.00 $ 1.00
Investment Operations
Net investment income (1) 0.20 0.05 0.05 0.01
Net realized and unrealized gain (loss) 1.99 0.31 - -
Total from investment operations 2.19 0.36 0.05 0.01
Distributions to Shareholders From:
Net investment income (0.20) (0.05) (0.05) (0.01)
Net realized gains (0.45) - - -
Total distributions to shareholders (0.65) (0.05) (0.05) (0.01)
Net asset value, end of period $ 11.85 $ 10.31 $ 1.00 $ 1.00
Total Return 21.36% 3.57% (2) 5.19% 1.17% (2)
Ratios and Supplemental Data
Expenses to average net assets (3) 0.39% 0.12% (4) 0.29% 0.12% (4)
Net investment income to average net assets 1.80% 2.46% (4) 5.23% 5.25% (4)
Portfolio turnover rate 89% 9% N/A N/A
Average commission rate (5) $ 0.0326 $ 0.0226 - -
Net assets, end of period (000s) $ 3,420 $ 2,073 $ 1,291 $ 126
Salomon Brothers Van Kampen
U.S. Government. American Capital
Securities Emerging Growth
Period Ended Period Ended
Dec. 31, 1996* Dec. 31, 1996*
<S> <C> <C>
Net Asset Value
Net asset value, beginning of period $ 10.00 $ 10.00
Investment Operations
Net investment income (1) 0.53 0.05
Net realized and unrealized gain (loss) (0.21) 1.86
Total from investment operations 0.32 1.91
Distributions to Shareholders From:
Net investment income (0.53) (0.05)
Net realized gains - (0.32)
Total distributions to shareholders (0.53) (0.37)
Net asset value, end of period $ 9.79 $ 11.54
Total Return 3.40% (2) 19.06% (2)
Ratios and Supplemental Data
Expenses to average net assets (3) 0.22% (4) 0.46% (4)
Net investment income to average net assets 5.91% (4) 0.40% (4)
Portfolio turnover rate 297% 154%
Average commission rate (5) - $ 0.0419
Net assets, end of period (000s) $ 2,347 $ 1,882
<FN>
* The Growth Equity Portfolio, Money Market Portfolio, U.S. Government Securities Portfolio, and Emerging
Growth Portfolio commenced operations on October 20, 1995, October 10, 1995, February 6, 1996, and January 2, 1996,
respectively.
(1) Net investment income is after waiver of fees and reimbursement of certain expenses by the Investment
Adviser, the Sub-Administrator, the Custodian, and Western National Life Insurance Company, an affiliate of the
Advisor (see Note 2 to the financial statements). If the Investment Adviser, the Sub-Administrator, and the Custodian
had not waived fees, and Western National Life Insurance Company had not reimbursed expenses for the periods ended
December 31, 1996, and December 31, 1995, net investment income (loss) per share would have been $(0.29) and $(0.15)
for the Growth Equity Portfolio, respectively, and $(0.08) and $(0.35) for the Money Market Portfolio, respectively.
For the period ended December 31, 1996, the net investment income (loss) per share would have been $0.10 and $(1.29)
for the U.S. Government Securities and Emerging Growth Portfolios, respectively.
(2) Total return represents aggregate total return for the period indicated and is not annualized.
(3) If the Investment Advisor, the Sub-Administrator, and the Custodian had not waived fees, and Western
National Life Insurance Company had not reimbursed expenses for the periods ended December 31, 1996, and December 31,
1995, the ratio of operating expenses to average net assets would have been 4.83% and 9.94%, respectively, for the
Growth Equity Portfolio, and 14.15% and 161.83%, respectively, for the Money Market Portfolio. For the period ended
December 31, 1996, the ratio of operating expenses to average net assets would have been 5.26% and 11.22% for the
U.S. Government Securities and Emerging Growth Portfolios.
(4) Annualized.
(5) Represents the average commission rate paid on equity security transactions on which commissions are
charged.
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<PAGE> 5
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each Portfolio of the Trust has a different investment objective or
objectives that it pursues through separate investment policies as described
below. The differences in objectives and policies among the Portfolios can be
expected to affect the return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject. An investment in a single
Portfolio should not be considered a complete investment program. The
investment objective(s) and policies of each Portfolio, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that any
Portfolio will achieve its objective(s). United States Treasury Regulations
applicable to portfolios that serve as the funding vehicles for variable
annuity and variable life insurance contracts generally require that such
portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolios intend to comply with the requirements of these
regulations.
To comply with regulations that may be issued by the U.S. Treasury, the Trust
may be required to limit the availability, or change the investment policies
of one or more Portfolios, or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by a Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objectives and policies, each Portfolio uses a
variety of instruments, strategies, and techniques, which are described in
more detail in the Appendix and the SAI. With respect to each Portfolio's
investment policies, use of the term "primarily" means that under normal
circumstances, at least 65% of such Portfolio's assets will be invested as
indicated. A description of the ratings systems used by the following
nationally recognized statistical rating organizations ("NRSROs") is also
contained in the SAI: Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors
Service, Inc. ("Fitch"), Thomson Bankwatch, Inc., IBCA Limited, and IBCA Inc.
New instruments, strategies, and techniques, however, are evolving continually
and the Trust reserves authority to invest in or implement them to the extent
consistent with its investment objectives and policies. If new instruments,
strategies, or techniques would involve a material change to the information
contained herein, they will not be purchased or implemented until this
Prospectus is appropriately supplemented.
BEA GROWTH AND INCOME PORTFOLIO
Investment Objective
The Portfolio's goal is to provide long-term capital growth, current
income, and growth of income, consistent with reasonable investment risk. This
investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the Investment Company Act of 1940, as amended ("the 1940 Act")).
Management Policies
The Portfolio will invest primarily in domestic equity and debt
securities and cash equivalent instruments. The Portfolio may also invest in
securities of foreign issuers. The proportion of the Portfolio's assets to be
invested in each type of security will vary from time to time in accordance
with the Sub-Adviser's assessment of economic conditions and investment
opportunities. The asset allocation strategy is based on the premise that,
from time to time, certain asset classes are more attractive long-term
investments than others. Timely shifts among equity securities, debt
securities, and cash equivalent instruments, as determined by their relative
over-valuation or under-valuation, should produce superior investment returns
over the long term. In general, the Portfolio will not attempt to predict
short-term market movements or interest rate changes, focusing instead upon a
long-term outlook. The Sub-Adviser anticipates that, under normal market
conditions, between 35% and 65% of the Portfolio's total assets will be
invested in equity securities, and between 35% and 65% will be invested in
debt securities.
In selecting equity securities in which to invest, the Sub-Adviser generally
employs a value-oriented approach that combines "top-down" and "bottom-up"
elements. The process begins with a top-down thematic approach, by which the
Sub-Adviser attempts to identify the three or four macroeconomic variables
most likely to drive equity returns in the medium term, and the sectors,
industries, and stocks most likely to benefit as those themes are played out.
This is combined with a bottom-up approach to stock selection, which
identifies value through the application of "cash-on-cash analysis." The
Sub-Adviser looks at the free cash flow produced by a company within the
context of the total cash value of the enterprise. This ratio of cash flow to
"enterprise value" permits a comparative analysis of companies across
industries and sectors, and provides a tool with which to analyze the quality
and priorities of the company's management. The Portfolio's approach is based
upon the observation that a company focusing upon cash flow will generally be
one in which management's overarching concern is the maximization of
shareholder value. Equity securities may include common stocks, preferred
stocks, and securities that are convertible into common stock and readily
marketable securities, such as rights and warrants, that derive their value
from common stock.
<PAGE> 6
In selecting debt securities in which to invest, the Sub-Adviser generally
employs an approach that focuses on the exploitation of market inefficiencies,
which exist primarily due to the differing objectives of various investors and
to the varying restrictions that limit their investment choices. In
determining whether the Portfolio should invest in a particular debt security,
the Sub-Adviser reviews the terms of the instrument and evaluates the
creditworthiness of the issuer of the instrument, considering short-term debt,
leverage, capitalization, the quality and depth of management, profitability,
return on assets, and economic factors relative to the issuer's industry or
market sector. The Sub-Adviser then performs relative valuation analysis,
comparing the value in sectors and securities with regard to price as well as
yield. The Sub-Adviser generally does not rely on its ability to correctly
predict movements in the direction of interest rates. Debt securities may
include bonds, debentures, notes, equipment lease and trust certificates,
mortgage-related securities, and obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities. The Sub-Adviser's
Fixed-Income Management Team will manage the Fixed-Income portion of the
Portfolio, which will invest primarily in domestic fixed-income securities
consistent with comparable broad market fixed-income indexes, such as the
Lehman Brothers Aggregate Bond Index. The Sub-Adviser estimates that the
average weighted maturity of the debt securities held by the Portfolio will
range between five and 15 years. Depending on prevailing market conditions,
the Portfolio may purchase debt securities at a discount from face value,
which produces a yield greater than the coupon rate. Conversely, if debt
securities are purchased at a premium over-face value, the yield will be lower
than the coupon rate. An increase in interest rates will generally reduce the
value of the fixed-income investments in the Portfolio, and a decline in
interest rates will generally increase the value of those investments.
The cash equivalent instruments in which the Portfolio may invest consist of
U.S. government securities, certificates of deposit, time deposits, bankers'
acceptances, short-term investment-grade corporate bonds and short-term debt
instruments, and repurchase agreements. While the Portfolio does not intend to
limit the amount of its assets invested in cash equivalent instruments, except
to the extent believed necessary to achieve its investment objective, it does
not expect, under normal market conditions, to have a substantial portion of
its assets invested in money market instruments. However, when the Sub-Adviser
determines that adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest entirely in cash equivalent
instruments. In addition, the Portfolio may invest in cash equivalent
instruments in anticipation of investing cash positions. To the extent the
Portfolio is so invested, the Portfolio's investment objective may not be
achieved. (See the Appendix and the SAI for a discussion of these and other
investment policies and strategies with respect to this Portfolio.)
High rates of Portfolio turnover necessarily result in correspondingly greater
brokerage and portfolio trading costs, which are paid by the Portfolio. The
Portfolio turnover rate for the Portfolio for the period ended December 31,
1996, was 217%. (See "Portfolio Turnover" in the SAI.)
BLACKROCK MANAGED BOND PORTFOLIO
The Portfolio's investment objective is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. This
investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the 1940 Act). Total return will consist of income, plus realized
and unrealized capital gains and losses. Although the net asset value of the
Portfolio will fluctuate, the Portfolio attempts to preserve the value of its
investments to the extent consistent with its objective. The Portfolio is
designed for investors who seek a total return over time that is higher than
that generally available from a portfolio of shorter-term obligations, while
recognizing the greater price fluctuation of longer-term instruments. It may
also be a convenient way to add fixed-income exposure to diversify an existing
portfolio.
The Sub-Adviser actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within sectors. The Sub-Adviser also actively allocates the Portfolio's assets
among the broad sectors of the fixed-income market including, but not limited
to, U.S. government and agency securities, corporate securities, private
placements, and asset-backed and mortgage-related securities, including
residential and commercial mortgage-backed securities. Specific securities
that the Sub-Adviser believes are undervalued are selected for purchase within
the sectors using advanced quantitative tools, analysis of credit risk, the
expertise of a dedicated trading desk, and the judgment of fixed-income
portfolio managers and analysts. Under normal circumstances, the Sub-Adviser
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's assets invested in bonds.
Duration is a measure of the weighted average maturity of the bonds held in
the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. Under normal market
conditions, the Portfolio's duration will range between one year shorter and
one year longer than the duration of the U.S. investment-grade, fixed-income
universe, as represented by Salomon Brothers Broad Investment Grade Bond
Index, the Portfolio's benchmark. Currently, the benchmark's duration is
approximately 4.6 years. However, the maturities of the individual securities
in the Portfolio may vary widely.
<PAGE> 7
The Sub-Advisor intends to manage its Portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio may also engage in
short-term trading consistent with its objective. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
High rates of Portfolio turnover necessarily result in correspondingly greater
brokerage and Portfolio trading costs, which are paid by the Portfolio. The
Portfolio turnover rate for the period ended December 31, 1996, was 488%. (See
"Portfolio Turnover" in the SAI.)
Corporate Bonds, etc. The Portfolio may invest in a broad range of debt
securities of domestic and foreign issuers. These include debt securities of
various types and maturities (e.g., debentures, notes, mortgage securities,
equipment trust certificates, and other collateralized securities and
zero-coupon securities). Collateralized securities are backed by a pool of
assets, such as loans or receivables, which generate cash flow to cover the
payments due on the securities. Collateralized securities are subject to
certain risks, including a decline in the value of the collateral backing the
security, failure of the collateral to generate the anticipated cash flow, or
in certain cases, more rapid prepayment because of events affecting the
collateral, such as accelerated prepayment of mortgages or other loans backing
these securities, or destruction of equipment subject to equipment trust
certificates. In the event of any such prepayment, the Portfolio will be
required to reinvest the proceeds of prepayments at interest rates prevailing
at the time of reinvestment, which may be lower. In addition, the value of
zero-coupon securities, that do not pay interest, is more volatile than that
of interest-bearing debt securities with the same maturity. The Portfolio does
not intend to invest in common stock, but may invest, to a limited extent, in
convertible debt or preferred stock. The Portfolio does not expect to invest
more than 25% of its assets in securities of foreign issuers. If the Portfolio
invests in non-U.S. dollar-denominated securities, it hedges the foreign
currency exposure into the U.S. dollar. (See the Appendix and the SAI for
further information on foreign investments and convertible securities,
including a discussion of risks.)
Government Obligations, etc. The Portfolio may invest in obligations issued or
guaranteed by the U.S. government and backed by the full faith and credit of
the United States. These securities include Treasury securities, obligations
of the Government National Mortgage Association ("GNMA Certificates"), the
Farmers Home Administration, and the Export Import Bank. GNMA Certificates are
mortgage-backed securities which evidence an undivided interest in mortgage
pools. These securities are subject to more rapid repayment than their stated
maturity would indicate because prepayments of principal on mortgages in the
pool are passed through to the holder of the securities. During periods of
declining interest rates, prepayments of mortgages in the pool can be expected
to increase. The pass-through of these prepayments would have the effect of
reducing the Portfolio's positions in these securities and requiring the
Portfolio to reinvest the prepayments at interest rates prevailing at the time
of reinvestment. The Portfolio may also invest in obligations issued or
guaranteed by U.S. government agencies or instrumentalities where the
Portfolio must look principally to the issuing or guaranteeing agency for
ultimate repayment; some examples of agencies or instrumentalities issuing
these obligations are the Federal Farm Credit System, the Federal Home Loan
Banks, the Federal National Mortgage Association ("FNMA"), and the Federal
Home Loan Mortgage Corporation ("FHLMC"). Although these governmental issuers
are responsible for payments on their obligations, they do not guarantee their
market value.
The Portfolio may invest in debt securities of foreign governments and
governmental entities. International investing may involve greater risks than
U.S. investments. (See "Appendix - Foreign Investments" and the SAI for a
discussion of the risks involved in foreign investing.)
Money Market Instruments. The Portfolio may purchase money market instruments
to invest temporary cash balances or to maintain liquidity to meet
withdrawals. However, the Portfolio may also invest up to 100% of its total
assets in money market instruments as a temporary defensive measure taken
during, or in anticipation of, adverse market conditions. To the extent that
the Portfolio is invested in temporary defensive instruments, it will not be
pursuing its investment objective. The money market investments permitted for
the Portfolio include obligations of the U.S. government and its agencies and
instrumentalities, other debt securities, commercial paper, bank obligations,
and repurchase agreements. For more detailed information about these money
market investments, see "Investment Objectives and Policies" in the SAI.
<PAGE> 8
Quality Information. It is a current policy of the Portfolio that, under
normal circumstances, at least 65% of its total assets will consist of
securities that are rated at least "A" by Moody's or S&P or that are unrated,
and, in the Sub-Adviser's opinion, are of comparable quality. In the case of
30% of the Portfolio's investments, the Portfolio may purchase debt securities
that are rated "Baa" or better by Moody's or "BBB" or better by S&P or are
unrated and, in the Sub-Adviser's opinion, are of comparable quality. The
remaining 5% of the Portfolio's assets may be invested in debt securities that
are rated "Ba" or better by Moody's or "BB" or better by S&P or are unrated
and, in the Sub-Adviser's opinion, are of comparable quality. Securities rated
"Baa" by Moody's or "BBB" by S&P, although considered investment-grade, have
some speculative characteristics, and such bonds, along with bonds rated below
these ratings, are commonly referred to as "junk bonds." "Investment-grade"
debt securities are those receiving one of the four highest ratings from
Moody's, S&P, or another NRSRO or, if unrated by any NRSRO, deemed comparable
by the Sub-Adviser to such rated securities under guidelines established by
the Board of Trustees of the Trust. Bonds in the lowest rating categories may
involve a substantial risk of default or may be in default. Changes in
economic conditions or developments regarding the individual issuer are more
likely to cause price volatility and weaken the capacity of the issuers of
such securities to make principal and interest payments than is the case for
higher-grade debt securities. An economic downturn affecting the issuer may
result in an increased incidence of default. The market for lower-rated
securities may be thinner and less active than for higher-rated securities.
The Sub-Adviser will invest in such securities only when it concludes that the
anticipated return to the Portfolio on such an investment warrants exposure to
the additional level of risk. Rating standards must be satisfied at the time
an investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment. (See the SAI for more detailed
information on these ratings.)
The Portfolio may also purchase obligations on a when-issued or
delayed-delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities, and enter into certain hedging transactions that may involve
options on securities and securities indexes, futures contracts, and options
on futures contracts. (For a discussion of these investments and investment
techniques, see the Appendix and the SAI.)
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's investment objective is long-term capital appreciation.
This investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the 1940 Act). The Portfolio seeks to achieve its objective
primarily by investing in equity and equity-related securities of companies
from at least five different countries, excluding the United States.
The Portfolio is intended for investors who can accept the risks involved in
investments in equity and equity-related securities of non-U.S. issuers, as
well as in foreign currencies, and in the active management techniques that
the Portfolio generally employs.
Under normal conditions, the Portfolio will invest at least 65% of its total
assets in equity securities of issuers whose principal places of business (as
determined by the location of the issuer's principal headquarters) are located
in countries other than the United States.
Foreign Equity Securities. The Portfolio will invest, under normal conditions,
at least 65% of its total assets in issuers located in at least five different
countries, excluding the United States. The Sub-Adviser expects that the
majority of the Portfolio's investments will be in issuers in the following
markets: United States, Canada, Japan, the United Kingdom, Germany, France,
Malaysia, the Netherlands, Italy, Singapore, Switzerland, Spain, Mexico,
Australia, New Zealand, Hong Kong, and Sweden. However, the Portfolio will
also invest in other European, Pacific Rim, African, and Latin American
markets. As market and global conditions change, the Portfolio will change its
allocations among the countries of the world and nothing herein will limit the
Portfolio's ability to invest in or avoid any particular countries or regions.
The Portfolio may also invest in the securities of issuers traded on quoted
markets of other countries.
The equity and equity-related securities in which the Portfolio will primarily
invest are common stock, preferred stock, convertible debt obligations,
convertible preferred stock and warrants, or other rights to acquire stock
that the Sub-Adviser believes offer the potential for long-term capital
appreciation. The Portfolio also may invest in securities of foreign issuers
in the form of sponsored and unsponsored ADRs, Global Depository Receipts
("GDRs"), European Depository Receipts ("EDRs"), International Depository
Receipts ("IDRs"), or other similar instruments representing securities of
foreign issuers. (See the Appendix and the SAI for a description of these
investments.)
While the investment policy of the Portfolio is to be diversified as to both
countries and individual issuers, the Sub-Adviser selects individual countries
and securities on the basis of several factors. In allocating the Portfolio's
assets among various countries, the Sub-Adviser will seek economic and market
environments favorable for capital appreciation and, with respect to
developing countries, those with economic, political, and stock market
environments with prospects of stabilizing or improving.
In analyzing foreign companies for investment, the Sub-Adviser will ordinarily
look for one or more of the following characteristics in relation to the
prevailing prices of the securities of such companies: prospects for
above-average earnings growth per share; high return on invested capital;
sound balance sheet, financial, and accounting policies, and overall financial
strength; strong competitive advantages; effective research, product
development, and marketing; efficient service; pricing flexibility; strength
of management; and general operating characteristics that will enable the
companies to compete successfully in their respective marketplaces. The
Sub-Adviser will aim to invest in companies that have growth prospects or
whose value it believes is not fully reflected in the relevant markets.
<PAGE> 9
Temporary Investments. The Portfolio may, when the Sub-Adviser determines that
market conditions warrant, adopt a temporary defensive position and may hold
cash (U.S. dollars or foreign currencies) and may invest up to 100% of its
assets in money market instruments or debt securities of U.S. or foreign
issuers. The Portfolio may also invest cash held to meet redemption requests
and expenses in such money market instruments and debt securities. For these
purposes, such money market instruments are banker's acceptances, certificates
of deposit, time deposits, commercial paper, short-term government, and
corporate obligations. The debt securities of U.S. issuers or foreign entities
in which the Portfolio will invest primarily will be investment-grade debt
securities, except that the Portfolio may invest up to 5% of its total assets
in non-investment-grade debt securities. Investment-grade debt securities
include: (a) bonds rated in one of the four highest rating categories by any
NRSRO (e.g., "BBB" or higher by S&P); (b) U.S. government securities; (c)
commercial paper rated in one of the two highest rating categories of any
NRSRO (e.g., "A-2" or higher by S&P); (d) bank obligations (certificates of
deposit, bankers' acceptances, and time deposits) with a long-term rating in
one of the four highest categories by any NRSRO (e.g., "BBB" or higher by
S&P), with respect to bank obligations of more than one year, or in one of the
three highest categories by any NRSRO (e.g., "A-3" or higher by S&P), with
respect to bank obligations maturing in one year or less; (e) repurchase
agreements involving these securities; or (f) unrated debt securities that are
deemed by the Sub-Adviser to be of comparable quality. All ratings are
determined at the time of investment. Securities rated in the fourth-highest
category, although considered investment grade, have speculative
characteristics and may be subject to greater fluctuations in value than
higher-rated securities. Non-investment-grade debt securities include: (a)
securities rated as low as "C" by S&P, or their equivalents, which are
commonly known as "junk bonds"; (b) commercial paper rated as low as "A-3" by
S&P, or their equivalents; and (c) unrated debt securities determined to be of
comparable quality by the Sub-Adviser. (See "Appendix - Lower-Rated
Securities" and the SAI for a discussion of the risks involved in investing in
non-investment-grade securities.) U.S. government securities are securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
The Portfolio may enter into repurchase agreements to earn a return on
temporarily available cash. The Portfolio will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by the Portfolio, exceeds 10% of the
value of the Portfolio's net assets. The Portfolio may also lend portfolio
securities to unaffiliated brokers, dealers, and financial institutions
provided that: (a) immediately after any such loan, the value of the
securities loaned does not exceed 15% of the total value of the Portfolio's
assets and (b) any securities loan is collateralized in accordance with
applicable regulatory requirements.
The Portfolio may invest in restricted securities and other illiquid assets.
(See the Appendix and the SAI for further information relating to restricted
and illiquid securities.)
The Portfolio may purchase and sell foreign currencies on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currencies. The Portfolio may enter into forward foreign currency
contracts and foreign currency futures and option contracts primarily for
hedging purposes. This includes entering into forward foreign currency
contracts and foreign currency futures contracts in anticipation of
investments in companies whose securities are denominated in those currencies.
International investing, in general, may involve greater risks than U.S.
investments. These risks may be intensified in the case of investments in
emerging markets or countries with limited or developing capital markets. (See
"Appendix - Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing.)
ELITEVALUE ASSET ALLOCATION PORTFOLIO
The investment objective of the Portfolio is to achieve growth of capital
over time through investment in a portfolio consisting of common stocks,
bonds, and cash equivalents, the percentages of which will vary based on the
Sub-Adviser's assessments of the relative outlook for such investments. This
investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the 1940 Act). In seeking to achieve its investment objective, the
types of equity securities in which the Portfolio may invest are likely to be
primarily equity securities of companies that are believed by the Sub-Adviser
to be undervalued in the marketplace in relation to factors such as the
companies' assets or earnings. It is the Sub-Adviser's intention to invest in
securities of companies which, in the Sub-Adviser's opinion, possess one or
more of the following characteristics: undervalued assets, valuable consumer
or commercial franchises, securities valuation below peer companies,
substantial and growing cash flow, and/or a favorable price to book value
relationship. Investments for the equity portion of the Portfolio will
primarily consist of equity securities, such as common stocks, preferred
stocks, convertible securities, and rights and warrants, in proportions that
will vary from time to time. The equity portion of the Portfolio is invested
primarily in stocks listed on the New York Stock Exchange ("NYSE"). In
addition, the Portfolio may also purchase securities listed on other domestic
securities exchanges, securities traded in the domestic over-the-counter
market and foreign securities, provided they are listed on a domestic or
foreign securities exchange, or represented by ADRs listed on a domestic
securities exchange, or traded in domestic or foreign over-the-counter
markets.
<PAGE> 10
To a lesser extent, the equity portion of the Portfolio will be invested in
equity securities of companies with market capitalizations of less than $1
billion. Smaller-capitalization companies are often underpriced for the
following reasons: (a) institutional investors, which currently represent a
majority of the trading volume in the shares of publicly traded companies, are
often less interested in such companies, because in order to acquire an equity
position that is large enough to be meaningful to an institutional investor,
such an investor may be required to buy a large percentage of the company's
outstanding equity securities and (b) such companies may not be regularly
researched by stock analysts, thereby resulting in greater discrepancies in
valuation. The Portfolio may also purchase securities in initial public
offerings, or shortly after such offerings have been completed, when the
Sub-Adviser believes that such securities have greater-than-average market
appreciation potential. Debt securities invested in by the Portfolio are
expected to be predominantly investment-grade intermediate to long-term U.S.
government and corporate debt, although the Portfolio will also invest in
high-quality, short-term money market and cash equivalent securities, and may
invest almost all of its assets in such securities when the Sub-Adviser deems
it advisable in order to preserve capital.
The allocation of the Portfolio's assets among the different types of
permitted investments will vary from time to time based on the Sub-Adviser's
evaluation of economic and market trends and its perception of the relative
values available from such types of securities at any given time. There is
neither a minimum nor a maximum percentage of the Portfolio's assets that may,
at any given time, be invested in any of the types of investments identified
above. Consequently, while the Portfolio will earn income to the extent it is
invested in bonds or cash equivalents, the Portfolio does not have any
specific income objective.
The Portfolio may dispose of investments (including money market instruments)
regardless of the holding period if, in the opinion of the Sub-Adviser, an
issuer's creditworthiness or perceived changes in a company's growth prospects
or asset value make selling them advisable. Such an investment decision may
result in capital gains or losses and could result in a high portfolio
turnover rate during a given period, resulting in increased transaction costs
related to equity securities. Disposing of debt securities in these
circumstances should not increase direct transaction costs, since debt
securities are normally traded on a principal basis without brokerage
commissions. However, such transactions do involve a mark-up or mark-down of
the price.
It is anticipated that the Portfolio will have an annual turnover rate
(excluding turnover of securities having a maturity of one year or less) of
100% or less. A 100% annual turnover rate would occur, for example, if all the
securities in the Portfolio's investment portfolio were replaced once in a
period of one year. An investment in the Portfolio will entail both market and
financial risk, the extent of which depends on the amount of the Portfolio's
assets that are committed to equity, longer-term debt or money market
securities at any particular time. As the Portfolio may invest in
mortgage-backed securities, such securities, while similar to other
fixed-income securities, involve the additional risk of prepayment because
mortgage prepayments are passed through to the holder of the mortgage-backed
security and must be reinvested. Prepayments of mortgage principal reduce the
stream of future payments and generate cash which must be reinvested. When
interest rates fall, prepayments tend to rise. As such, the Portfolio may have
to reinvest that portion of its assets invested in such securities more
frequently when interest rates are low than when interest rates are high.
There is no limit to the amount of foreign securities that the Portfolio may
acquire. Certain factors and risks are presented by investment in foreign
securities, which are in addition to the usual risks inherent in domestic
securities. (See "Appendix - Foreign Investments" and the SAI for a discussion
of the risks involved in foreign investing.)
It is the present intention of the Sub-Adviser to invest no more than 5% of
the Portfolio's net assets in bonds rated below "Baa3" by Moody's or "BBB" by
S&P (commonly known as "junk bonds"). In the event that the Sub-Adviser
intends in the future to invest more than 5% of the Portfolio's net assets in
junk bonds, appropriate disclosures will be made to existing and prospective
shareholders. (For information about the possible risks of investing in junk
bonds, see "Appendix - Lower-Rated Investments" and the SAI.)
The Portfolio may also engage in repurchase agreements, lend portfolio
securities (up to 10% of the value of the Portfolio's total assets), enter
into forward foreign currency contracts, and invest in modified pass-through
certificates. These investments and transactions are described in greater
detail in the Appendix and the SAI.
<PAGE> 11
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
The Portfolio's investment objective is to provide total returns that
exceed, over time, the S&P 500 Index through investment in equity securities.
This objective may be changed only with the approval of a majority of the
Portfolio's shareholders as defined by the 1940 Act.
Equity securities are selected by the Portfolio on the basis of a proprietary
analytical model of the Sub-Adviser. Each security is ranked according to two
separate and uncorrelated measures: value and the momentum of Wall Street
sentiment. The value measure compares a company's assets, projected earnings
growth, and cash flow growth with its stock price within the context of its
historical valuation. The measure of Wall Street sentiment examines changes in
Wall Street analysts' earnings estimates and ranks stocks by the strength and
consistency of those changes. These two measures are combined to create a
single composite score of each stock's attractiveness. These scores are then
plotted on a matrix according to their relative attractiveness. Sector weights
are maintained at a similar level to that of the S&P 500 Index to avoid
unintended exposure to factors such as the direction of the economy, interest
rates, energy prices, and inflation.
The Portfolio invests at least 65% of its total assets in equity securities.
However, the Portfolio may invest temporarily for defensive purposes, without
limitation, in certain high-quality, short-term, fixed-income securities. Such
securities may be used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These securities include
obligations issued or guaranteed as to principal and interest by the U.S.
government, its agencies and instrumentalities, and repurchase agreements
collateralized by these obligations, commercial paper, bank certificates of
deposit, bankers' acceptances, and time deposits.
The Portfolio may invest in U.S. government securities, which include U.S.
Treasury bills, notes and bonds, and other obligations issued or guaranteed as
to interest and principal by the U.S. government, its agencies and
instrumentalities. Obligations issued or guaranteed as to interest and
principal by the U.S. government, its agencies and instrumentalities, include
securities that are supported by the full faith and credit of the United
States Treasury, securities that are supported by the right of the issuer to
borrow from the United States Treasury, discretionary authority of the U.S.
government agency or instrumentality, and securities supported solely by the
creditworthiness of the issuer.
The Portfolio may enter into or invest in repurchase agreements, reverse
repurchase agreements, forward commitments, when-issued transactions (up to
25% of the Portfolio's net assets), illiquid securities (up to 15% of the
Portfolio's net assets), restricted securities (up to 10% of the Portfolio's
net assets), and variable amount master demand notes. The Portfolio also may
enter into futures contracts, options on futures, covered put and call options
on securities in which it may directly invest, and purchase or sell options on
securities indexes that are comprised of securities in which the Portfolio may
directly invest. The Portfolio may lend portfolio securities with a value of
up to 331/3% of the Portfolio's total assets.
In addition to the policies noted above, the Portfolio may also invest in
obligations of foreign issuers which are U.S. dollar-denominated, ADRs,
corporate bonds, debentures, notes, and warrants. Investment in each of these
instruments will not exceed 5% of the Portfolio's total net assets during the
coming year.
These investments and transactions are described in greater detail in the
Appendix and the SAI.
GLOBAL ADVISORS MONEY MARKET PORTFOLIO
The Portfolio's investment objective is to maximize current income, to
the extent consistent with the preservation of capital and liquidity and the
maintenance of a stable $1.00 per share net asset value, by investing in
dollar-denominated securities with remaining maturities of one year or less.
This investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the 1940 Act).
The Portfolio attempts to meet its investment objective by investing in
high-quality money market instruments. Such instruments include: (a) U.S.
Treasury bills, notes and bonds; (b) other obligations issued or guaranteed as
to interest and principal by the U.S. government, its agencies and
instrumentalities; (c) instruments of U.S. and foreign banks, including
certificates of deposit, banker's acceptances, and time deposits; these
instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit ("YCDs");
(d) commercial paper of U.S. and foreign companies; (e) asset-backed
securities; (f) corporate obligations; (g) variable amount master demand
notes; and (h) repurchase agreements.
<PAGE> 12
The Portfolio will limit its portfolio investments, including puts and
repurchase agreements, if any, to those U.S. dollar-denominated instruments
that, at the time of acquisition, the Sub-Adviser determines present minimal
credit risk and are: (a) rated as a First Tier or Second Tier security (as
defined in Rule 2a-7 under the 1940 Act) by any two NRSROs; (b) long-term
securities with a remaining maturity of 397 days or less and which have been
assigned a short-term rating in the two highest rating categories by any two
NRSROs or whose issuer has outstanding short-term obligations of comparable
priority and security which are rated in the two highest short-term rating
categories by any two NRSROs; (c) rated as a First Tier or Second Tier
security if rated by only one NRSRO; or (d) if unrated, determined by the
Sub-Adviser to be of a quality comparable to a First or Second Tier security.
The Portfolio may invest in U.S. government securities, which include U.S.
Treasury bills, notes and bonds, and other obligations issued or guaranteed as
to interest and principal by the U.S. government, its agencies and
instrumentalities. Obligations issued or guaranteed as to interest and
principal by the U.S. government, its agencies and instrumentalities include
securities that are supported by the full faith and credit of the United
States Treasury, securities that are supported by the right of the issuer to
borrow from the United States Treasury, discretionary authority of the U.S.
government agency or instrumentality, and securities supported solely by the
creditworthiness of the issuer.
The Portfolio may enter into or invest in repurchase agreements, reverse
repurchase agreements, forward commitments, when-issued transactions (up to
25% of the Portfolio's net assets), illiquid securities (up to 10% of the
Portfolio's net assets), restricted securities (up to 10% of the Portfolio's
net assets), and variable amount master demand notes.
The Portfolio may also purchase asset-backed securities representing undivided
fractional interests in pools of instruments, such as consumer loans. The
Portfolio may invest in mortgage-related pass-through securities, including
GNMA Certificates ("Ginnie Maes"), FHLMC Mortgage Participation Certificates
("Freddie Macs"), FNMA, and Guaranteed Mortgage Pass-Through Certificates
("Fannie Maes"). Mortgage pass-through certificates are mortgage-backed
securities representing undivided fractional interests in pools of
mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations, and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the U.S. government, but Freddie
Macs and Fannie Maes are not.
The Portfolio may invest in zero-coupon securities and variable and floating
rate securities. As stated above, the Portfolio may invest in ECDs, ETDs, and
YCDs. ECDs are U.S. dollar-denominated certificates of deposit issued by
foreign branches of domestic banks. ETDs are U.S. dollar-denominated deposits
in foreign branches of U.S. banks and foreign banks. YCDs are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of foreign
banks.
The Portfolio may lend portfolio securities with a value of up to 331/3% of
its total assets.
These investments and transactions are described in greater detail in the
Appendix and the SAI.
The Portfolio must limit investments to securities with remaining maturities
of 397 days or less, and must maintain a dollar-weighted average maturity of
90 days or less. The Portfolio normally holds instruments to maturity, but may
dispose of them prior to maturity if the Sub-Adviser finds it advantageous to
do so.
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO
The investment objective of the Portfolio is to seek a high level of
current income. This investment objective is fundamental and may not be
changed without the affirmative vote of a majority of the Portfolio's
outstanding shares (as defined in the 1940 Act). The Sub-Adviser seeks to
attain the Portfolio's objective by investing a substantial portion of its
assets in debt obligations and mortgage-backed securities issued or guaranteed
by the U.S. government and its agencies or instrumentalities, and
collateralized mortgage obligations backed by such securities.
At least 80% of the total assets of the Portfolio will be invested in:
1. U.S. Treasury obligations;
2. Obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government which are backed by their own credit and may not be
backed by the full faith and credit of the U.S. government;
3. Mortgage-backed securities guaranteed by the GNMA (popularly known
as "Ginnie Maes") that are supported by the full faith and credit of the U.S.
government, and mortgage-backed securities guaranteed by agencies or
instrumentalities of the U.S. government, which are supported by their own
credit, but not the full faith and credit of the U.S. government, such as the
FHLMC and the FNMA; and
4. Collateralized mortgage obligations issued by private issuers for
which the underlying mortgage-backed securities serving as collateral are
backed (a) by the credit alone of the U.S. government agency or
instrumentality that issues or guarantees the mortgage-backed securities or
(b) by the full faith and credit of the U.S. government.
<PAGE> 13
Up to 20% of the total assets of the Portfolio may be invested in U.S.
dollar-denominated marketable corporate debt securities (such as bonds and
debentures) of domestic and foreign issuers rated at the time of purchase "A"
or better by Moody's or S&P, or of comparable quality thereto as determined by
the Sub-Adviser. The risks associated with such investments are described in
greater detail in the Appendix.
From time to time, a significant portion of the Portfolio's assets may be
invested in mortgage-backed securities. The mortgage-backed securities in
which the Portfolio invests represent partici- pating interests in pools of
fixed-rate and adjustable-rate residential mortgage loans issued or guaranteed
by agencies or instrumentalities of the U.S. government. However, any
guarantee of these types of securities runs only to the principal and interest
payments on the securities and not to the market value of such securities or
the principal and interest payments on the underlying mortgages. In addition,
the guarantee only runs to the portfolio securities held by the Portfolio and
not the purchase of shares of the Portfolio.
Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks, and savings and loan associations. Mortgage-backed
securities generally provide monthly payments which are, in effect, a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans.
Principal prepayments result from the sale of the underlying property or the
refinancing or foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based on the prepayment rates
experienced over the life of the security. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest
rates prepayments will most likely decline. Reinvestments by the Portfolio of
scheduled principal payments and unscheduled prepayments may occur at higher
or lower rates than the original investment, thus affecting the yield of the
Portfolio. Monthly interest payments received by the Portfolio have a
compounding effect, which will increase the yield to shareholders as compared
to debt obligations that pay interest semi-annually. (For a further
description of mortgage-backed securities, see the Appendix and the SAI.)
The Portfolio will not knowingly invest in a high-risk mortgage security. The
term "high-risk mortgage security" is defined generally as any mortgage
security that exhibits significantly greater price volatility than a benchmark
security, the FNMA current coupon 30-year, mortgage-backed pass-through
security. Shares of the Portfolio are neither insured nor guaranteed by the
U.S. government, its agencies or instrumentalities. Neither the issuance by,
nor the guarantee of, a U.S. government agency for a security constitutes
assurance that the security will not significantly fluctuate in value or that
the Portfolio will receive the originally anticipated yield on the security.
The Portfolio may engage in various hedging and other strategic transactions,
including that it may: write covered call options and put options on
securities and purchase call and put options on securities; write covered call
and put options on securities indexes and purchase call and put options on
securities indexes; and may enter into futures contracts on financial
instruments and indexes and write and purchase put and call options on such
futures contracts. It is not presently anticipated that any of these
strategies will be used to a significant degree by the Portfolio. The Appendix
and the SAI contain a description of these strategies and of certain risks
associated therewith.
The Portfolio may purchase debt securities on a "when-issued" or
"forward-delivery" basis, loan portfolio securities (up to 20% of total
Portfolio assets), engage in repurchase agreements, reverse repurchase
agreements and dollar-roll transactions, and invest in illiquid securities (up
to 15% of the Portfolio's net assets, not including restricted securities for
which a ready market is available pursuant to exemption provided by Rule 144A
under the Securities Act of 1933 (the "1933 Act")). These investments and
transactions are described in greater detail in the Appendix and the SAI.
High rates of portfolio turnover necessarily result in correspondingly greater
brokerage and portfolio trading costs that are paid by the Portfolio. The
Portfolio turnover rate for the period ended December 31, 1996, was 297%. (See
"Portfolio Turnover" in the SAI.)
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO
The Portfolio seeks to provide capital appreciation for its shareholders;
any ordinary income received from portfolio securities is entirely incidental.
This objective is not fundamental and may be changed by the Trust's Board of
Trustees without shareholder approval; however, no change is anticipated. If
there is a change in the investment objective of the Portfolio, shareholders
should consider whether the Portfolio remains an appropriate investment in
light of their then-current financial position and needs. There can, of
course, be no assurance that the objective of capital appreciation will be
realized. Therefore, full consideration should be given to the risks inherent
in the investment techniques that the Sub-Adviser may use to achieve such
objective.
<PAGE> 14
As a fundamental investment policy, the Portfolio, under normal conditions,
invests at least 65% of its total assets in common stocks of small and
medium-sized companies, both domestic and foreign, in the early stages of
their life cycles that the Sub-Adviser believes have the potential to become
major enterprises. Investments in such companies may offer greater
opportunities for growth of capital than larger, more established companies,
but also may involve certain special risks. Emerging growth companies often
have limited product lines, markets, or financial resources, and they may be
dependent upon one person or a few key people for management. The securities
of such companies may be subject to more abrupt or erratic market movements
than securities of larger, more established companies or the market averages
in general. While the Portfolio will invest primarily in common stocks, to a
limited extent, it may invest in other securities, such as preferred stocks,
convertible securities, and warrants.
The Portfolio does not limit its investment to any single group or type of
security. The Portfolio may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers, or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.
The Portfolio's primary approach is to seek what the Sub-Adviser believes to
be unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above-average volatility of price
movement. Because prices of common stocks and other securities fluctuate, the
value of an investment in the Portfolio will vary based on the Portfolio's
investment performance. The Portfolio attempts to reduce overall exposure to
risk from declines in securities prices by spreading its investments over many
different companies in a variety of industries. There is, however, no
assurance that the Portfolio will be successful in achieving its objective.
The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. (See "Appendix - Foreign Investments" and the SAI for a
discussion of the risks involved in foreign investing.) Additionally, the
Portfolio may invest up to 10% of the value of its assets in restricted
securities (i.e., securities which may not be sold without registration under
the 1933 Act) and in other securities not having readily-available market
quotations. The Portfolio may enter into repurchase agreements with domestic
banks and broker-dealers that involve certain risks. The Portfolio does not
presently expect to commit as much as 5% of its total assets to investments in
either warrants or restricted securities. The risks involved in investing in
restricted securities, warrants, and repurchase agreements are described under
"Investment Objectives and Policies" in the SAI.
The Portfolio may invest in options, futures contracts, and related options.
These investments and transactions are described in greater detail in the
Appendix and SAI.
High rates of portfolio turnover necessarily result in correspondingly greater
brokerage and portfolio trading costs that are paid by the Portfolio. The
Portfolio turnover rate for the period ended December 31, 1996, was 154%. (See
"Portfolio Turnover" in the SAI.)
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement, dated April 21, 1995, WNL
Investment Advisory Services, Inc., a Delaware corporation (the "Adviser"),
manages the business and affairs of the Portfolios and the Trust, subject to
the control of the Trustees. The Adviser was incorporated in 1994 and is
located at 5555 San Felipe, Suite 900, Houston, Texas 77056. The Adviser is a
subsidiary of Western National Corporation, a Delaware corporation ("Western
National"), organized in October 1993 to serve as the holding company for the
Life Company. The Adviser has had no previous experience in advising a mutual
fund.
On December 23, 1994, American General Life Insurance Company ("AG Life"), a
Missouri-domiciled life insurer, purchased 24,947,500 shares (the "Shares") of
common stock, par value $.001 per share, of Western National from Conseco
Investment Holding Company ("CIHC"), a wholly owned subsidiary of Conseco,
Inc. ("Conseco"), representing approximately 40% of the outstanding common
stock of Western National. The Shares represent all of the common stock of
Western National then held by Conseco and its subsidiaries. AG Life is a
wholly owned subsidiary of American General Corporation, a Texas corporation
("AGC"). References to "American General" are references to AGC and its direct
and indirect majority-controlled subsidiaries. Prior to the above-described
transaction, American General held no voting securities of Western National.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies, and restrictions, and to determine, from time to time, securities to
be purchased, sold, retained, or lent by the Trust and to implement those
decisions. The Investment Advisory Agreement also provides that the Adviser
shall manage the Trust's business and affairs and provide such services
required for effective administration of the Trust as are now provided by
employees or other agents engaged by the Trust. The Investment Advisory
Agreement further provides that the Adviser shall furnish the Trust with
office space and necessary personnel, pay ordinary office expenses, pay all
executive salaries of the Trust, and furnish, without expense to the Trust,
the services of such members of its organization as may be duly elected
officers or Trustees of the Trust. The Investment Advisory Agreement provides
that Adviser may retain Sub-Advisers, at the Adviser's own cost and expense,
for the purpose of managing the investment of the assets of one or more
Portfolios of the Trust.
<PAGE> 15
As full compensation for its services under the Investment Advisory Agreement,
the Trust will pay the Adviser a monthly fee at the following annual rates
shown in the table below based on the average daily net assets of each
Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE
<S> <C>
BEA Growth and Income .75% of average net assets
BlackRock Managed Bond .55% of average net assets
Credit Suisse International Equity .90% of average net assets
EliteValue Asset Allocation .65% of average net assets
Global Advisors Growth Equity .61% of average net assets
Global Advisors Money Market .45% of average net assets
Salomon Brothers U.S. Government Securities .475% of average net assets
Van Kampen American Capital Emerging Growth .75% of average net assets
</TABLE>
ADVISORY FEE WAIVER AND EXPENSE CAP
The Adviser has voluntarily agreed to waive that portion of its advisory
fee which is in excess of the amount payable by the Adviser to each
Sub-Adviser pursuant to the respective Sub-Advisory Agreements for each
Portfolio until May 1, 1998. The Adviser has reserved the right to withdraw or
modify its agreement to waive a portion of its advisory fee.
For the periods ended December 31, 1995 and 1996, the Adviser waived its
advisory fees in the following amounts with respect to the Portfolios which
were operational for such period:
ADVISORY FEES WAIVED
<TABLE>
<CAPTION>
PORTFOLIO 1996 OR INCEPTION TO INCEPTION TO
DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C>
BEA Growth and Income Portfolio $ 9,918 $ 3,106
BlackRock Managed Bond Portfolio 12,335 N/A
Credit Suisse International Equity Portfolio 10,342 3,643
EliteValue Asset Allocation Portfolio 6,128 N/A
Global Advisors Growth Equity Portfolio 9,010 2,490
Global Advisors Money Market Portfolio 1,984 106
Salomon Brothers U.S. Government
Securities Portfolio 7,227 N/A
Van Kampen American Capital Emerging
Growth Portfolio 5,171 N/A
</TABLE>
In addition, the Life Company, an affiliate of the Adviser, has
undertaken to bear until May 1, 1998, all operating expenses of each
Portfolio, excluding the compensation of the Adviser, that exceed .12% of each
Portfolio's average daily net assets. The Life Company has reserved the right
to withdraw or modify its policy of expense reimbursement for the Trust.
The Adviser and the Life Company have entered into an Investment Advisory
Services Agreement, dated August 23, 1995, the purpose of which is to ensure
that the Adviser, which is minimally capitalized, has adequate facilities and
financing for the carrying on of its business. Under the terms of this
Agreement, the Life Company is obligated to provide the Adviser with adequate
capitalization in order for the Adviser to meet any minimum capital
requirements. The Life Company is further obligated to reimburse the Adviser
or assume payment for any obligation incurred by the Adviser. The Life Company
is also obligated to provide the Adviser with facilities and personnel
sufficient for the Adviser to perform its obligations under the Investment
Advisory Agreement.
The Adviser retains State Street Bank and Trust Company, a Massachusetts trust
company, to supervise various aspects of the Trust's administrative operations
and to perform certain specific services including, but not limited to, the
preparation and filing of Trust reports and tax returns, pursuant to a
Sub-Administration Agreement for Reporting and Accounting Services among the
Adviser, the Trust, and State Street Bank and Trust Company.
<PAGE> 16
EXPENSES OF THE TRUST
The organizational expenses of the Trust were paid for by the Life
Company. The Life Company also contributed "seed money" and the initial
working capital to the Trust.
SUB-ADVISERS
In accordance with each Portfolio's investment objective and policies,
and under the supervision of the Adviser and the Trust's Board of Trustees,
each Portfolio's Sub-Adviser is responsible for the day-to-day investment
management of the Portfolio, makes investment decisions for the Portfolio, and
places orders on behalf of the Portfolio to effect the investment decisions
made as provided in separate Sub-Advisory Agreements among each Sub-Adviser,
the Adviser, and the Trust. The following organizations act as Sub-Advisers to
the Portfolios:
BEA ASSOCIATES ("BEA"), One Citicorp Center, 153 East 53rd Street, New York,
New York 10022, is the Sub-Adviser for the BEA Growth and Income Portfolio of
the Trust. BEA is a general partnership organized under the laws of the State
of New York and, together with its predecessor firms, has been engaged in the
investment advisory business for more than 50 years. BEA has been affiliated
with Credit Suisse since 1990. BEA is a New York general partnership whose
interests are indirectly owned by Credit Suisse Group. Credit Suisse Group is
the largest global financial service group based in Switzerland.
BEA is a diversified asset manager, handling global equity, balanced,
fixed-income, and derivative securities accounts for private individuals, as
well as corporate pension and profit-sharing plans, state pension funds, union
funds, endowments, and other charitable institutions. As of December 31, 1996,
BEA managed approximately $30 billion in assets.
BEA currently acts as investment adviser for 74 registered investment
companies and 40 offshore funds.
The Portfolio is managed by teams of BEA managers, each dedicated to managing
a portion of the Portfolio's assets. The BEA Domestic Equity Management Team
manages the equity portion of the Portfolio. The BEA Fixed-Income Management
Team manages the fixed-income portion of the Portfolio.
BLACKROCK FINANCIAL MANAGEMENT ("BLACKROCK"), 345 Park Avenue, New York, New
York 10154, is the Sub-Adviser for the BlackRock Managed Bond Portfolio of the
Trust. BlackRock is an independent adviser that specializes in managing
investment-grade, fixed-income portfolios. BlackRock currently manages more
than $47 billion of government, mortgage-backed, corporate, asset-backed,
municipal, and non-U.S. dollar denominated securities.
BlackRock was founded in 1988 on the belief that experienced professionals,
using a disciplined process and advanced analytical tools, will consistently
add value to client portfolios. The firm has extensive experience creating,
analyzing, and managing investment-grade, fixed-income portfolios. BlackRock
has more than 175 professionals, including 16 portfolio managers and 59
quantitative, credit, and computer analysts. BlackRock provides fixed-income
investment management services to public and private pension plans, insurance
companies, mutual funds, and international investors. Since 1994, BlackRock
has been an indirect subsidiary of PNC Bank, the nation's 10th largest banking
organization.
The day-to-day Portfolio management of the Portfolio is the responsibility of
Keith Anderson and Bob Michele.
Keith Anderson is a managing director at BlackRock, and co-head of the
Portfolio Management Group. Mr. Anderson is a member of both the firm's
Management Committee and its Investment Strategy Committee, and has primary
responsibility for managing client portfolios and for acting as a specialist
in the government and mortgage sectors. His areas of expertise include
Treasuries, agencies, futures, options, swaps, and a wide range of traditional
and non-traditional mortgage securities.
Prior to founding BlackRock in 1988, Mr. Anderson was a vice president in
fixed-income research at The First Boston Corporation. Mr. Anderson joined
First Boston in 1987 as a mortgage securities and derivative products
strategist working with institutional money managers. From 1983 to 1987, Mr.
Anderson was a vice president and portfolio manager at Criterion Investment
Management Company (now Nicholas-Applegate Capital Management), where he had
primary responsibility for a $2.8 billion fixed-income portfolio and was an
integral part of the firm's portfolio management team.
Mr. Anderson has authored numerous articles on fixed-income strategies,
including two articles in The Handbook of Fixed Income Options: "Scenario
Analysis and the Use of Options in Total Return Portfolio Management" and
"Measuring, Interpreting, and Applying Volatility within the Fixed-Income
Market." Mr. Anderson received a B.S. in economics and finance from Nichols
College in 1981 and an M.B.A. in business administration from Rice University
in 1983.
<PAGE> 17
Robert Michele, CFA, is a managing director and portfolio manager at
BlackRock. Mr. Michele is a member of both the firm's Investment Strategy
Group and its Credit Committee. Mr. Michele has primary responsibility for
managing client portfolios with special emphasis on total return accounts. He
is also responsible for overseeing the firm's corporate bond investments. His
areas of expertise include corporates, asset- and mortgage-backed securities
("ABS/MBS").
Prior to joining BlackRock in 1995, Mr. Michele was a director and head of
U.S. fixed-income investments with CS First Boston Investment Management
Corporation. While with the firm, Mr. Michele's responsibilities included
setting U.S. fixed-income investment policy and coordinating the firm's
multi-sector fixed-income product. Mr. Michele focused on managing total
return oriented portfolios for foreign central banks and government entities,
domestic pension, corporate, and mutual fund accounts. From 1985 to 1993, he
served as deputy manager and senior portfolio manager at Brown Brothers
Harriman & Co., responsible for managing total return oriented fixed-income
portfolios for predominantly non-U.S. institutional clients. Mr. Michele began
his investment career with Bankers Trust Company in 1981, where he was an
investment associate working on balanced, equity, and fixed-income portfolios.
Mr. Michele earned a B.A. degree in classical studies from the University of
Pennsylvania in 1981, and received his Chartered Financial Analyst (CFA)
designation in 1987.
CREDIT SUISSE ASSET MANAGEMENT, LTD. ("CSAM"), One Cabot Square, London,
England, is the Sub-Adviser for the Credit Suisse International Equity
Portfolio of the Trust. CSAM is an indirect wholly owned subsidiary of Credit
Suisse, the largest global financial services group based in Switzerland.
The firm, which prior to June 1995 was owned by an affiliate of Credit Suisse
and was doing business under the name CS First Boston Investment Management
Limited, has been offering diverse global fixed-income and equity investment
strategies for institutional clients in more than 35 countries worldwide since
1983. Clients include central banks and other government entities, insurance
companies, pension funds, multinational corporations, commercial banks, and
other institutions. Individual portfolio holdings are denominated in more than
15 currencies. The team of 51 investment professionals is dedicated to adding
value to the investment process by creating and implementing portfolio
strategies tailored to each client's needs.
At December 31, 1996, Credit Suisse Investment Management Group provided
investment advice for approximately $30 billion of assets.
The day-to-day management of the Portfolio is the responsibility of Glenn
Wellman, who joined the firm in 1993 as a managing director and head of Global
Equity Portfolio Management. Mr. Wellman has been investing in international
markets since 1970. He has managed Europe Australia Far East (EAFE) benchmark
mutual funds, as well as private accounts for Fortune 100 clients since 1982.
A worldwide equity team of 24 professionals supports Mr. Wellman. Prior to
joining CSAM, Mr. Wellman spent 14 years with Alliance Capital Limited, most
recently as chief investment officer with responsibility for developing
Alliance's global equity management service. He has been an associate of the
Institute of Investment Management and Research since 1974. Mr. Wellman earned
a BSc (Hons) in chemistry from the University of London and an M.B.A. from
Manchester Business School.
OPCAP ADVISORS ("ADVISORS"), One World Financial Center, 200 Liberty Street,
New York, New York 10281, is the Sub-Adviser for the EliteValue Asset
Allocation Portfolio of the Trust. Advisors is a majority-owned subsidiary of
Oppenheimer Capital, a registered investment adviser whose employees perform
all investment advisory services provided to the Portfolio by the Sub-Adviser.
Oppenheimer Financial Corp., a holding company, is a 1% general partner of
Advisors and holds a one-third managing general partner interest in
Oppenheimer Capital. Oppenheimer Capital, L.P., a Delaware limited partnership
whose units are traded on the NYSE and of which Oppenheimer Financial Corp. is
the sole 1% general partner, owns the remaining two-thirds interest.
Oppenheimer Capital has operated as an investment adviser since 1968, and had
more than $49 billion under management as of March 31, 1997. The investments
of the Portfolio are managed by Richard J. Glasebrook II, a managing director
of Oppenheimer Capital.
On February 13, 1997, PIMCO Advisors L.P., a registered investment adviser
with $110 billion in assets under management through various subsidiaries,
signed an Agreement and Plan of Merger with Oppenheimer Group, Inc. and its
subsidiary, Oppenheimer Financial Corp., pursuant to which PIMCO Advisors L.P.
and its affiliate, Thomson Advisory Group, Inc., will acquire the one-third
managing general partner interest in Oppenheimer Capital, the 1% managing
general partner interest in Advisors, and the 1% general partner interest in
Oppenheimer Capital L.P. The completion of the transaction is subject to
certain conditions being satisfied prior to closing, including consent from
certain lenders, approval from regulatory authorities, including a favorable
tax ruling from the Internal Revenue Service and consent of certain clients.
<PAGE> 18
SALOMON BROTHERS ASSET MANAGEMENT INC ("SBAM"), 7 World Trade Center, New
York, New York 10048, is the Sub-Adviser for the Salomon Brothers U.S.
Government Securities Portfolio of the Trust. SBAM is an indirect, wholly
owned subsidiary of Salomon Inc. ("SI"), incorporated in 1987 as affiliate of
Salomon Brothers Inc. Through its office in New York and affiliates in London,
Frankfurt, Hong Kong, and Tokyo, SBAM provides a full range of fixed-income
and equity investment advisory services for its individual and institutional
clients around the world, including central banks, pension funds, endowments,
insurance companies, and various investment companies (including portfolios
thereof). As of December 31, 1996, SBAM had investment advisory responsibility
for approximately $20 billion of assets. SBAM has access to SI's more than 400
economists, mortgage, bond, sovereign, and equity analysts.
Steven Guterman is primarily responsible for the day-to-day management of the
Portfolio. Mr. Guterman is assisted in the management of the Portfolio by
Roger Lavan.
Mr. Guterman, who joined SBAM in 1990, is a senior portfolio manager and is
responsible for the day-to-day management of SBAM-managed portfolios which
invest primarily in mortgage-backed and U.S. government securities. Mr.
Guterman joined Salomon Brothers Inc in 1983. He initially worked in the
mortgage research group, where he became a research director and later traded
derivative mortgage-backed securities for Salomon Brothers Inc.
Mr. Lavan, who joined SBAM in 1990, is a portfolio manager and is responsible
for investment company and institutional portfolios which invest in
mortgage-backed and U.S. government securities. Prior to joining SBAM, Mr.
Lavan spent four years analyzing portfolios for Salomon Brothers Inc's Fixed
Income Sales Group and Product Support Divisions. Mr. Lavan is a Chartered
Financial Analyst, a member of the New York Society of Security Analysts, and
received his M.B.A. from Fordham University in 1990.
STATE STREET GLOBAL ADVISORS, Two International Place, Boston, MA 02110, the
investment management division of State Street Bank and Trust Company, is the
Sub-Adviser for the Global Advisors Growth Equity and Global Advisors Money
Market Portfolios of the Trust. State Street Bank and Trust Company, one of
the largest providers of securities processing and recordkeeping services for
U.S. mutual funds and pension funds, is a wholly owned subsidiary of State
Street Boston Corporation, a publicly held bank holding company. State Street
Global Advisors, with more than $300 billion (U.S.) under management as of
December 31, 1996, provides complete global investment management services
from offices in the United States, London, Sydney, Hong Kong, Tokyo, Toronto,
Luxembourg, Melbourne, Montreal, and Paris.
Investment decisions regarding the Global Advisors Growth Equity Portfolio are
made by a committee, and no one person is primarily responsible for making
recommendations to that committee.
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC. ("VAN KAMPEN AMERICAN
CAPITAL"), One Parkview Plaza, Oakbrook Terrace, Illinois 60181, is the
Sub-Adviser for the Van Kampen American Capital Emerging Growth Portfolio of
the Trust. Van Kampen American Capital is a diversified asset management
company with more than two million retail investor accounts, extensive
capabilities for managing institutional portfolios, and nearly $57 billion
under management or supervision. Van Kampen American Capital's more than 40
open-end and 38 closed-end funds and more than 2,500 unit investment trusts
are professionally distributed by leading financial advisers nationwide.
Van Kampen American Capital is a wholly owned subsidiary of Van Kampen
American Capital, Inc., which is a wholly owned subsidiary of MSAM Holding II,
Inc., which, in turn, is a wholly owned subsidiary of Morgan Stanley Group
Inc.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading, merger,
acquisition, restructuring, and other corporate finance advisory activities;
merchant banking; stock brokerage and research services; asset management;
trading of futures, options, foreign exchange, commodities, and swaps
(involving foreign exchange, commodities, indices, and interest rates); real
estate advice, financing, and investing; and global custody, securities
clearance services, and securities lending.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form a
new company to be named Morgan Stanley, Dean Witter, Discover & Co. Subsequent
to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, Van Kampen American Capital
will be an indirect subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
Dean Witter, Discover & Co. is a financial services company with three major
businesses: full-service brokerage, credit services, and asset management of
more than $100 billion in customer accounts.
<PAGE> 19
Gary M. Lewis is primarily responsible for the day-to-day management of the
Portfolio's investment portfolio. Mr. Lewis has been senior vice president of
Van Kampen American Capital since October 31, 1995. He was previously vice
president - portfolio manager of Van Kampen American Capital. Since June 1995,
Mr. Lewis has been a senior vice president of Van Kampen American Capital
Investment Advisory Corp.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreements, the Adviser pays to the
Sub-Advisers, as full compensation for services rendered under the respective
Agreements with respect to the various Portfolios, monthly fees at the
following annual rates shown in the table below based on the average daily net
assets of each Portfolio.
<TABLE>
<CAPTION>
Portfolio Sub-Advisory Fee
<S> <C>
BEA Growth and Income .50% of average net assets
BlackRock Managed Bond .30% of average net assets
Credit Suisse International Equity .65% of average net assets
EliteValue Asset Allocation .40% of average net assets
Global Advisors Growth Equity .36% of average net assets
Global Advisors Money Market .20% of average net assets
Salomon Brothers U.S. Government Securities .225% of average net assets
Van Kampen American Capital Emerging Growth .50% of average net assets
</TABLE>
SALES AND REDEMPTIONS
The Separate Account of the Life Company places orders to purchase and
redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to the VA Contracts issued by the Life Company.
Orders received by the Trust are effected on days on which the NYSE is open
for trading, at the net asset value per share next determined after receipt of
the order, except that, in the case of the Global Advisors Money Market
Portfolio, purchases will not be effected until the next determination of net
asset value after federal funds have been made available to the Trust. For
orders received before 4:00 p.m., New York time, such purchases and
redemptions of shares of each Portfolio are effected at the respective net
asset values per share determined as of 4:00 p.m., New York time on that day.
(See "Net Asset Value," below and "Determination of Net Asset Value" in the
Trust's SAI.) Payment for redemptions will be made within seven days after
receipt of a redemption request in good order. No fee is charged the separate
account of the Life Company when it redeems Portfolio shares. The Trust may
suspend the sale of shares at any time and may refuse any order to purchase
shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (a) during which the NYSE is closed other
than for customary weekend and holiday closings, or during which trading on
the NYSE is restricted; (b) when the SEC determines that a state of emergency
exists, which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (c) as the SEC may, by order,
permit for the protection of the security holders of the Trust; or (d) at any
time when the Trust may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of a share by dividing the
total value of its assets less liabilities by the number of shares
outstanding. Shares are valued as of 4:00 p.m., New York time on each day the
NYSE is open.
The Global Advisors Money Market Portfolio's securities are valued at their
amortized cost, which does not take into account unrealized gains or losses on
securities. This method involves initially valuing an instrument at its cost,
and thereafter assuming a constant amortization to maturity of any premium
paid or discount received. (See "Determination of Net Asset Value" in the SAI
for a more complete description of amortized cost valuation.)
Because foreign securities are quoted in foreign currencies, which will be
translated into U.S. dollars at the New York cable transfer rates or at such
other rates as the Trustees may determine in computing net asset value,
fluctuations in the value of such currencies in relation to the U.S. dollar
will affect the net asset value of shares of a Portfolio investing in foreign
securities even though there has not been any change in the local currency
values of such securities.
<PAGE> 20
PERFORMANCE INFORMATION
Global Advisors Money Market Portfolio: From time to time, the Global
Advisors Money Market Portfolio's annualized "yield" and "effective yield" may
be presented in advertisements and sales literature. These yield figures are
based on historical earnings and are not intended to indicate future
performance. The "yield" of the Global Advisors Money Market Portfolio refers
to the income generated by an investment in the shares of that Portfolio over
a seven-day period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized, the income earned by an
investment in the shares of the Global Advisors Money Market Portfolio is
assumed to be reinvested. The "effective yield" will be slightly higher than
the "yield" because of the compounding effect of this assumed reinvestment.
(See "Performance Information" in the SAI for more information regarding the
computation of "yield" and "effective yield.")
Other Portfolios: Performance information for each of the other Portfolios may
also be presented from time to time in advertisements and sales literature.
The Portfolios may advertise several types of performance information. These
are the "yield," "average annual total return," and "aggregate total return."
Each of these figures is based upon historical results and is not necessarily
representative of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or 30 days)
and dividing the result by the net asset value per share at the end of the
valuation period. The average annual total return and aggregate total return
figures measure both the net investment income generated by, and the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in, the Portfolio's portfolio for the period in question, assuming
the reinvestment of all dividends. Thus, these figures reflect the change in
the value of an investment in a Portfolio's shares during a specified period.
Average annual total return will be quoted for at least the one-, five- and
10-year periods ending on a recent calendar quarter (or if such periods have
not yet elapsed, at the end of a shorter period corresponding to the life of
the Portfolio). Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question. Total return figures are not annualized and represent the aggregate
percentage or dollar value change over the period in question. (See
"Performance Information" in the SAI for more information regarding the
computation of yield, average annual total return, and aggregate total
return.)
Any Portfolio performance information presented will also include performance
information for the insurance company separate accounts investing in the
Trust, which will take into account insurance-related charges and expenses
under such insurance policies and contracts.
Advertisements concerning the Trust may, from time to time, compare the
performance of one or more Portfolios to various indexes. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, and Financial Services Week. Any such comparisons or rankings are
based on past performance and the statistical computation performed by
publications and services, and are not necessarily indications of future
performance. Because the Portfolios are managed investment vehicles investing
in a wide variety of securities, the securities owned by a Portfolio will not
match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elects to be treated
as a regulated investment company that is taxed under the rules of Subchapter
M of the Internal Revenue Code. As an electing regulated investment company, a
Portfolio will not be subject to federal income tax on its net ordinary income
and net realized capital gains to the extent such income and gains are
distributed to the separate account of the Life Company which holds its
shares. For further information concerning federal income tax consequences for
the holders of the VA Contracts of the Life Company, investors should consult
the Prospectus used in connection with the issuance of their VA Contracts.
The Global Advisors Money Market Portfolio will declare a dividend of its net
ordinary income daily and distribute such dividend monthly. The Global
Advisors Money Market Portfolio does not anticipate that it will normally
realize any long-term capital gains with respect to its Portfolio securities.
Distributions will be made shortly after the first business day of each month
following declaration of the dividend. Each of the other Portfolios will
declare and distribute dividends from net ordinary income at least annually
and will distribute net realized capital gains, if any, at least annually.
Distributions of ordinary income and capital gains will be made in shares of
such Portfolios unless an election is made on behalf of a separate account to
receive distributions in cash. The Life Company will be informed at least
annually about the amount and character of distributions from the Trust for
federal income tax purposes.
<PAGE> 21
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the
laws of Massachusetts by a Declaration of Trust dated December 12, 1994, as
amended April 19, 1995 (the "Declaration of Trust"). Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. The
Declaration of Trust contains an express disclaimer of shareholder liability
in connection with Trust property or the acts, obligations, or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of a
Portfolio's property of any shareholder of that Portfolio held personally
liable for the claims and liabilities to which a shareholder may become
subject by reason of being or having been a shareholder. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio itself would be unable to meet
its obligations. A copy of the Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights. The Trust's
custodian, sub-administrator, and transfer and dividend-paying agent is State
Street Bank and Trust Company.
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser, and the Sub-Advisers
have adopted policies that restrict securities trading in personal accounts of
the Portfolio managers and others who normally come into possession of
information on Portfolio transactions. These policies comply, in all material
respects, with the recommendations of the Investment Company Institute.
APPENDIX
SECURITIES AND INVESTMENT PRACTICES
In attempting to achieve its investment objective or policies, each
Portfolio employs a variety of instruments, strategies, and techniques, which
are described in greater detail below. Risks and restrictions associated with
these practices are also described. Policies and limitations are considered at
the time a security or instrument is purchased or a practice initiated.
Generally, securities need not be sold if subsequent changes in market value
result in applicable limitations not being met.
A Portfolio might not buy all of these securities or use all of these
techniques to the full extent permitted unless the Sub-Adviser, subject to
oversight by Adviser, believes that doing so will help the Portfolio achieve
its goal. As a shareholder, you will receive Portfolio reports every six
months detailing the Trust's holdings and describing recent investment
practices.
Except where otherwise noted, the investment guidelines set forth below may be
changed at any time without shareholder consent by vote of the Board of
Trustees of the Trust. A complete list of investment restrictions, that
identifies additional restrictions that cannot be changed without the approval
of a majority of an affected Portfolio's outstanding shares, is contained in
the SAI.
AMERICAN DEPOSITORY RECEIPTS AND EUROPEAN DEPOSITORY RECEIPTS
Certain Portfolios may invest in securities of foreign issuers directly
or in the form of ADRs, EDRs, or other similar securities representing
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities they represent. ADRs are
receipts typically issued by a United States bank or trust company evidencing
beneficial ownership of the underlying foreign securities. EDRs are receipts
issued by a European financial institution evidencing a similar arrangement.
Generally, ADRs, in registered form, are designed for use in the U.S.
securities markets, and EDRs, in bearer form, are designed for use in European
securities markets.
<PAGE> 22
ASSET-BACKED SECURITIES
Certain Portfolios may purchase asset-backed securities that represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, most often a pool of assets similar to one
another. Assets generating such payments may include motor vehicle installment
purchase obligations, company receivables, truck and auto loans, leases,
credit card receivables, and home equity loans. Such securities are generally
issued as pass-through certificates, which represent undivided fractional
ownership interests in the underlying pools of assets. Such securities also
may be debt instruments that are also known as collateralized obligations and
are generally issued as the debt of a special purpose entity, such as a trust,
organized solely for the purpose of owning such assets and issuing such debt.
Asset-backed securities are not issued or guaranteed by the U.S. government or
its agencies or instrumentalities; however, the payment of principal and
interest on such obligations may be guaranteed up to certain amounts and for a
certain period by a letter of credit issued by a financial institution (such
as a bank or insurance company) unaffiliated with the issuers of such
securities. The purchase of asset-backed securities raises risk considerations
peculiar to the financing of the instruments underlying such securities. For
example, there is a risk that another party could acquire an interest in the
obligations superior to that of the holders of the asset-backed securities.
There also is the possibility that recoveries on repossessed collateral may
not, in some cases, be available to support payments on those securities.
Asset-backed securities entail prepayment risk that may vary depending on the
type of asset, but that is generally less than the prepayment risk associated
with mortgage-backed securities. In addition, credit card receivables are
unsecured obligations of the cardholder.
BANK OBLIGATIONS
All of the Portfolios may invest in bank obligations, that include
certificates of deposit, time deposits, and bankers' acceptances of U.S.
commercial banks or savings and loan institutions, which are determined by the
Sub-Advisers to present minimal credit risks. Certain Portfolios may invest in
foreign currency-denominated bank obligations, including Eurocurrency
instruments and securities of U.S. and foreign banks and thrifts.
BORROWING
Each of the Portfolios may borrow money (including reverse repurchase
agreements, if permitted by the Portfolio's investment objectives and
policies), up to 331/3% of its assets for temporary or emergency purposes. In
addition, the Global Advisors Money Market Portfolio may borrow to facilitate
redemptions. A Portfolio may borrow for leveraging or investment with respect
to reverse repurchase agreements and dollar-roll transactions (including
covered rolls) to the extent such investments are permitted under the
Portfolio's investment objectives and policies. If a Portfolio borrows money,
its share price may be subject to greater fluctuation until the borrowing is
paid off. If the Portfolio makes additional investments while borrowings are
outstanding, this may be construed as a form of leverage.
Borrowing, including reverse repurchase agreements and, in certain
circumstances, dollar rolls, creates leverage which increases a Portfolio's
investment risk. If the income and gains on the securities purchased with the
proceeds of borrowings exceed the cost of the arrangements, the Portfolio's
earnings or net asset value will increase faster than would be the case
otherwise. Conversely, if the income and gains fail to exceed the costs,
earnings or net asset value will decline faster than would otherwise be the
case.
As a matter of operating policy, no Portfolio will borrow more than 10% of its
total net asset value when borrowing for general purposes, and none will
borrow an amount equal to more than 25% of its total net asset value when
borrowing as a temporary measure or to facilitate redemptions. For these
purposes, net asset value is the market value of all investments or assets,
less outstanding liabilities at the time that the new or additional borrowing
is undertaken. Also, for these purposes, securities purchased on a when-issued
or delayed-delivery basis and short sales of securities are considered
borrowing. Reverse repurchase agreements and dollar rolls (including covered
rolls) are not considered borrowings for purposes of this operating policy. A
Portfolio will not purchase investments once borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets. This 5% limitation is a
fundamental investment restriction of the Trust that may not be changed
without shareholder approval.
COMMON STOCKS AND OTHER EQUITY SECURITIES
Common stocks represent an equity (ownership) interest in a corporation.
This ownership interest generally gives a Portfolio the right to vote on
measures affecting the company's organization and operations.
Certain Portfolios may also buy securities such as convertible debt, preferred
stock, warrants, or other securities exchangeable for shares of common stock.
In selecting equity investments for a Portfolio, each Portfolio's Sub-Adviser
will generally invest the Portfolio's assets in industries and companies that
it believes are experiencing favorable demand for their products and services
and which operate in a favorable competitive and regulatory climate.
Investments in equity securities in general are subject to market risks that
may cause their prices to fluctuate over time. The value of convertible equity
securities is also affected by prevailing interest rates, the credit quality
of the issuer, and any call provision. Fluctuations in the value of equity
securities in which a Portfolio invests will cause the net asset value of a
Portfolio to fluctuate.
<PAGE> 23
CONVERTIBLE SECURITIES
Convertible securities are corporate securities that are exchangeable for
a set number of another security at a pre-stated price. Convertible securities
typically have characteristics similar to both fixed-income and equity
securities.
Because of the conversion feature, the market value of convertible securities
tends to move with the market value of the underlying stock. The value of a
convertible security is also affected by prevailing interest rates, the credit
quality of the issuer, and any call provisions.
CURRENCY MANAGEMENT
A Portfolio's flexibility to participate in higher-yielding debt markets
outside of the United States may allow the Portfolio to achieve higher yields
than those generally obtained by domestic money market funds and short-term
bond investments. When a Portfolio invests significantly in securities
denominated in foreign currencies, however, movements in foreign currency
exchange rates vs. the U.S. dollar are likely to affect the Portfolio's share
price stability relative to domestic short-term income funds. Fluctuations in
foreign currencies can have a positive or negative effect on returns.
Normally, to the extent that the Portfolio is invested in foreign securities,
a weakening in the U.S. dollar relative to the foreign currencies underlying a
Portfolio's investments should help increase the net asset value of the
Portfolio. Conversely, a strengthening in the U.S. dollar vs. the foreign
currencies in which a Portfolio's securities are denominated will generally
lower the net asset value of the Portfolio. Each Portfolio's Sub-Adviser
attempts to minimize exchange rate risk through active portfolio management,
including hedging currency exposure through the use of futures, options, and
forward currency transactions and attempting to identify bond markets with
strong or stable currencies. There can be no assurance that such hedging will
be successful and such transactions, if unsuccessful, could result in
additional losses or expenses to a Portfolio.
DOLLAR ROLL TRANSACTIONS
Certain Portfolios seeking a high level of current income may enter into
dollar rolls and "covered rolls" in which the Portfolio sells securities
(usually mortgage-backed securities) and simultaneously contracts to purchase,
typically in 30 to 60 days, substantially similar but not identical,
securities on a specified future date. The proceeds of the initial sale of
securities in such transactions may be used to purchase long-term securities
that will be held during the roll period. During the roll period, the
Portfolio forgoes principal and interest paid on the securities sold at the
beginning of the roll period. The Portfolio is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop"), as well as by the interest earned on the
cash proceeds of the initial sale. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or cash equivalent
securities position that matures on or before the forward settlement date of
the dollar roll transaction. As used herein, the term "dollar roll" refers to
dollar rolls that are not "covered rolls." At the end of the roll commitment
period, the Portfolio may or may not take delivery of the securities the
Portfolio has contracted to purchase.
A Portfolio will establish with its custodian a segregated account in which it
will maintain cash, U.S. government securities, or other liquid high-grade
debt obligations equal in value at all times to its obligations in respect of
dollar rolls, and accordingly, the Portfolio will not treat such obligations
as senior securities for purposes of the 1940 Act. "Covered rolls" are not
subject to these segregation requirements. Dollar rolls and covered rolls may
be considered borrowings and are, therefore, subject to the borrowing
limitations applicable to the Portfolios, except that dollar rolls (including
covered rolls) shall not be considered to be "borrowed funds" for purposes of
the 5% limitation described under "Borrowings" above. Dollar rolls involve the
risk that the market value of the securities the Portfolio is obligated to
repurchase under the agreement may decline below the repurchase price. In the
event the buyer of securities under a dollar roll files for bankruptcy or
becomes insolvent, the Portfolio's use of proceeds of the dollar roll may be
restricted, pending a determination by the other party, or its trustee or
receiver, whether to enforce the Portfolio's obligation to repurchase the
securities.
EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL ORGANIZATIONS
Portfolios authorized to invest in securities of foreign issuers may
invest assets in equity and debt securities issued or guaranteed by
supranational organizations, such as obligations issued or guaranteed by the
Asian Development Bank, InterAmerican Development Bank, International Bank for
Reconstruction and Development (World Bank), African Development Bank,
European Coal and Steel Community, European Economic Community, European
Investment Bank, and the Nordic Investment Bank.
<PAGE> 24
EXCHANGE RATE-RELATED SECURITIES
Certain Portfolios may invest in securities that are indexed to certain
specific foreign currency exchange rates. The terms of such security would
provide that the principal amount or interest payments are adjusted upward or
downward (but not below zero) at payment to reflect fluctuations in the
exchange rate between two currencies while the obligation is outstanding,
depending on the terms of the specific security. A Portfolio will purchase
such security with the currency in which it is denominated and will receive
interest and principal payments thereon in the currency, but the amount of
principal or interest payable by the issuer will vary in proportion to the
change (if any) in the exchange rate between the two specific currencies
between the date the instrument is issued and the date the principal or
interest payment is due. The staff of the SEC is currently considering whether
a mutual fund's purchase of this type of security would result in the issuance
of a "senior security" within the meaning of the 1940 Act. The Trust believes
that such investments do not involve the creation of such a senior security,
but nevertheless undertakes, pending the resolution of this issue by the
staff, to establish a segregated account with respect to such investments and
to maintain in such account cash not available for investment or U.S.
government securities or other liquid, high-quality debt securities having a
value equal to the aggregate principal amount of outstanding securities of
this type.
Investment in exchange rate-related securities entails certain risks. There is
the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an exchange rate-related security is
linked. In addition, there is no assurance that sufficient trading interest to
create a liquid secondary market will exist for a particular exchange
rate-related security due to conditions in the debt and foreign currency
markets. Illiquidity in the forward foreign exchange market and the high
volatility of the foreign exchange market may, from time to time, combine to
make it difficult to sell an exchange rate-related security prior to maturity
without incurring a significant price loss.
FIXED-INCOME SECURITIES
Fixed-income securities consist of bonds, notes, debentures, and other
interest-bearing securities that represent indebtedness. The market value of
fixed-income obligations held by the Portfolios and, consequently the net
asset value per share of the Portfolios, can be expected to vary inversely to
changes in prevailing interest rates. Investors should also recognize that, in
periods of declining interest rates, the yields of the fixed-income Portfolios
will tend to be somewhat higher than prevailing market rates and, in periods
of rising interest rates, the fixed-income Portfolios' yields will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the fixed-income Portfolios from the continuous sales of their shares
will likely be invested in instruments producing lower yields than the balance
of their assets, thereby reducing current yields. In periods of rising
interest rates, the opposite can be expected to occur. Prices of longer-term
securities generally increase or decrease more sharply than those of
shorter-term securities in response to interest rate changes. In addition,
obligations purchased by certain of the fixed-income Portfolios that are rated
in the lower of the top four ratings ("Baa" by Moody's or "BBB" by S&P, Duff,
or Fitch) and are considered to have speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher-grade securities. (See "Lower-Rated Securities" in this Appendix.)
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Certain Portfolios may engage in foreign currency exchange transactions.
Portfolios that buy and sell securities denominated in currencies other than
the U.S. dollar and receive interest, dividends, and sale proceeds in
currencies other than the U.S. dollar, may enter into foreign currency
exchange transactions to convert to and from different foreign currencies and
to convert foreign currencies to and from the U.S. dollar. A Portfolio can
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 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 and is traded at a net price without a commission. The Portfolio
maintains with its custodian, in a segregated account, high-grade liquid
assets in an amount at least equal to its obligations under each forward
foreign currency exchange contract. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of
the Portfolio's portfolio securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.
<PAGE> 25
A Portfolio may enter into foreign currency exchange transactions for hedging
purposes as well as for non-hedging purposes. Transactions are entered into
for hedging purposes 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. 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. In addition,
when the Sub-Adviser believes that the currency of a specific country may
deteriorate against another currency, it may enter into a forward contract to
sell the less attractive currency and buy the more attractive one. The amount
in question could be less than or equal to the value of the Portfolio's
securities denominated in the less attractive currency. The Portfolio may also
enter into a forward contract to sell a currency that is linked to a currency
or currencies in which some or all of the Portfolio's portfolio securities are
or could be denominated, and to buy U.S. dollars. These practices are referred
to as "cross hedging" and "proxy hedging."
A Portfolio may enter into foreign currency exchange transactions for other
than hedging purposes, which presents greater profit potential, but also
involves increased risk. For example, if the Sub-Adviser believes that the
value of a particular foreign currency will increase or decrease relative to
the value of the U.S. dollar, the Portfolio may purchase or sell such
currency, respectively, through a forward foreign currency exchange contract.
If the expected changes in the value of the currency occur, the Portfolio will
realize profits, which will increase its gross income. Where exchange rates do
not move in the direction or to the extent anticipated, however, the Portfolio
may sustain losses that will reduce its gross income. Such transactions,
therefore, could be considered speculative.
Forward currency exchange contracts are agreements to exchange one currency
for another - for example, to exchange a certain amount of U.S. dollars for a
certain amount of Japanese yen - at a future date and specified price.
Typically, the other party to a currency exchange contract will be a
commercial bank or other financial institution. Because there is a risk of
loss to the Portfolio if the other party does not complete the transaction,
the Portfolio's Sub-Adviser will enter into foreign currency exchange
contracts only with parties approved by the Trust's Board of Trustees.
A Portfolio may maintain "short" positions in forward currency exchange
transactions in which the Portfolio agrees to exchange currency that it
currently does not own for another currency, for example, to exchange an
amount of Japanese yen that it does not own for a certain amount of U.S.
dollars, at a future date and specified price in anticipation of a decline in
the value of the currency sold short relative to the currency that the
Portfolio has contracted to receive in the exchange.
While such actions are intended to protect the Portfolio from adverse currency
movements, there is a risk that currency movements involved will not be
properly anticipated. Use of this technique may also be limited by
management's need to protect the status of the Portfolio as a regulated
investment company under the Internal Revenue Code of 1986 ("the Code"), as
amended. The projection of currency market movements is extremely difficult,
and the successful execution of currency strategies is highly uncertain.
FOREIGN INVESTMENTS
Certain Portfolios may invest in securities of foreign issuers. There are
certain risks involved in investing in foreign securities, including those
resulting from fluctuations in currency exchange rates, devaluation of
currencies, future political or economic developments, and the possible
imposition of currency exchange blockages or other foreign governmental laws
or restrictions, reduced availability of public information concerning
issuers, and the fact that foreign companies are not generally subject to
uniform accounting, auditing, and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic companies. Moreover, securities of many foreign companies may be less
liquid and the prices more volatile than those of securities of comparable
domestic companies. With respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation, and
limitations on the use or removal of funds or other assets of the Portfolios,
including the withholding of dividends.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolios hold various foreign
currencies from time to time, the value of the net assets of the Portfolios as
measured in U.S. dollars will be affected favorably or unfavorably by changes
in exchange rates. The cost of the Portfolio's currency exchange transactions
will generally be the difference between the bid and offer spot rate of the
currency being purchased or sold. To protect against uncertainty in the level
of future foreign currency exchange rates, the Portfolios are authorized to
enter into certain foreign currency exchange transactions. Investors should be
aware that exchange rate movements can be significant and can endure for long
periods of time. Extensive research of the economic, political, and social
factors that influence global markets is conducted by the Sub-Advisers.
Particular attention is given to country-specific analysis, reviewing the
strengths or weaknesses of a country's overall economy, the government
policies influencing business conditions, and the outlook for the country's
currency. Certain Portfolios are authorized to engage in foreign currency
options, futures, options on futures, and forward currency contract
transactions for hedging and/or other permissible purposes.
<PAGE> 26
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases, it remains appreciably
below that of the NYSE. Accordingly, the Portfolios' foreign investments may
be less liquid and their prices may be more volatile than comparable
investments in securities of U.S. companies. Moreover, the settlement periods
for foreign securities, which are often longer than those for securities of
U.S. issuers, may affect portfolio liquidity. In buying and selling securities
on foreign exchanges, the Portfolio normally pays fixed commissions that are
generally higher than the negotiated commissions charged in the United States.
In addition, there is generally less governmental supervision and regulation
of securities exchanges, brokers, and issuers in foreign countries than in the
United States.
Certain Portfolios may invest a portion of their assets in developing markets.
The risks of investing in foreign markets are generally intensified for
investments in developing markets. Additional risks of investing in such
markets include: (a) less social, political, and economic stability; (b) the
smaller size of the securities markets in such countries and the lower volume
of trading, which may result in a lack of liquidity and in greater price
volatility; (c) certain national policies that may restrict a Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interest; and (d) less developed legal
structures governing private or foreign investment or allowing for judicial
redress for injury to private property.
FUTURES AND OPTIONS ON FUTURES
When deemed appropriate by its Sub-Adviser, certain Portfolios may enter
into financial or currency futures and related options that are traded on a
U.S. exchange or board of trade or, to the extent permitted under applicable
law, on exchanges located outside the United States, for hedging purposes or
for non-hedging purposes to the extent permitted by applicable law. A
Portfolio may not enter into futures and options contracts for which aggregate
initial margin deposits and premiums paid for unexpired futures options
entered into for purposes other than "bona fide hedging" positioning, as
defined in regulations adopted by the Commodities Futures Trading Commission
("CFTC"), exceed 5% of the fair market value of the Portfolio's net assets,
after taking into account unrealized profits and unrealized losses on futures
contracts into which it has entered. With respect to each long position in a
futures contract or option thereon, the underlying commodity value of such
contract will always be covered by cash and cash equivalents set aside, plus
accrued profits held at the futures commission merchant.
A financial or currency futures contract provides for the future sale by one
party and the purchase by the other party of a specified amount of a
particular financial instrument or currency (e.g., debt security or currency)
at a specified price, date, time, and place. An index futures contract is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. An option on a futures contract generally
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time prior
to the expiration date of the option.
The purpose of entering into a futures contract by a Portfolio is either to
enhance return or to protect the Portfolio from fluctuations in the value of
its securities caused by anticipated changes in interest rates, currency, or
market conditions withoutbuying or selling the securities. The use of futures
contracts and options on futures contracts involves several risks. There can
be no assurance that there will be a correlation between price movements in
the underlying securities, currencies, or index, on the one hand, and price
movements in the securities that are the subject of the futures contract or
option on futures contract, on the other hand. Positions in futures contracts
and options on futures contracts may be closed out only on the exchange or
board of trade on which they were entered into, and there can be no assurance
that an active market will exist for a particular contract or option at any
particular time. If a Portfolio has hedged against the possibility of an
increase in interest rates or bond prices adversely affecting the value of
securities held in its portfolio, and rates or prices decrease instead, a
Portfolio will lose part or all of the benefit of the increased value of
securities that it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if a Portfolio had
insufficient cash, it may have to sell securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so. These
sales of securities may, but will not necessarily, be at increased prices that
reflect the decline in interest rates or bond prices, as the case may be. In
addition, the Portfolio would pay commissions and other costs in connection
with such investments, which may increase the Portfolio's expenses and reduce
its return. While utilization of options, futures contracts, and similar
instruments may be advantageous to the Portfolio, if the Portfolio's
Sub-Adviser is not successful in employing such instruments in managing the
Portfolio's investments, the Portfolio's performance will be worse than if the
Portfolio did not make such investments.
<PAGE> 27
Losses incurred in futures contracts and options on futures contracts and the
costs of these transactions will adversely affect a Portfolio's performance.
GEOGRAPHICAL AND INDUSTRY CONCENTRATION
In a Portfolio that invests at least 25% of its assets in bank
obligations, the Portfolio's investments may be subject to greater risk than a
Portfolio that does not concentrate in the banking industry. In particular,
bank obligations may be subject to the risks associated with interest rate
volatility, changes in federal and state laws and regulations governing
banking and the inability of borrowers to pay principal and interest when due.
In addition, foreign banks present the risks of investing in foreign
securities generally and are not subject to reserve requirements and other
regulations comparable to those of U.S. banks.
GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES
Certain Portfolios may invest in government stripped mortgage-backed
securities issued or guaranteed by the GNMA, FNMA and FHLMC. These securities
represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only")
on mortgage-backed certificates issued by GNMA, FNMA, or FHLMC, as the case
may be. The certificates underlying the government stripped mortgage-backed
securities represent all or part of the beneficial interest in pools of
mortgage loans. The Portfolios will invest in interest-only government
stripped mortgage-backed securities in order to enhance yield or to benefit
from anticipated appreciation in value of the securities at times when the
appropriate Sub-Adviser believes that interest rates will remain stable or
increase. In periods of rising interest rates, the value of interest-only
government stripped mortgage-backed securities may be expected to increase
because of the diminished expectation that the underlying mortgages will be
prepaid. In this situation, the expected increase in the value of
interest-only government stripped mortgage-backed securities may offset all or
a portion of any decline in value of the portfolio securities of the
Portfolios. Investing in government stripped mortgage-backed securities
involves the risks normally associated with investing in mortgage-backed
securities issued by government or government-related entities. (See
"Mortgage-Backed Securities.") In addition, the yields on interest-only and
principal-only government stripped mortgage-backed securities are extremely
sensitive to the prepayment experience on the mortgage loans underlying the
certificates collateralizing the securities. If a decline in the level of
prevailing interest rates results in a rate of principal prepayments higher
than anticipated, distributions of principal will be accelerated, thereby
reducing the yield to maturity on interest-only government stripped
mortgage-backed securities and increasing the yield to maturity on
principal-only government stripped mortgage-backed securities. Conversely, if
an increase in the level of prevailing interest rates results in a rate of
principal prepayments lower than anticipated, distributions of principal will
be deferred, thereby increasing the yield to maturity on interest-only
government stripped mortgage-backed securities and decreasing the yield to
maturity on principal-only government stripped mortgage-backed securities.
Sufficiently high prepayment rates could result in the Portfolio not fully
recovering its initial investment in an interest-only government stripped
mortgage-backed security. Government stripped mortgage-backed securities are
currently traded in an over-the-counter market maintained by several large
investment banking firms. There can be no assurance that the Portfolio will be
able to effect a trade of a government stripped mortgage-backed security at a
time when it wishes to do so. The Portfolios will acquire government stripped
mortgage-backed securities only if a liquid secondary market for the
securities exists at the time of acquisition.
INTEREST RATE TRANSACTIONS
Certain Portfolios may engage in certain interest rate transactions, such
as swaps, caps, floors, and collars. Interest rate swaps involve the exchange
with another party of commitments to pay or receive interest (e.g., an
exchange of floating rate payments for fixed-rate payments). The purchase of
an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate cap.
The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling
such interest rate floor. An interest rate collar combines the elements of
purchasing a cap and selling a floor. The interest rate collar protects
against an interest rate rise above the maximum amount, but gives up the
benefits of an interest rate decline below the minimum amount. The net amount
of the excess, if any, of a Portfolio's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis, and an
amount of cash or liquid securities having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account
with the Trust's custodian. If there is a default by the other party to the
transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transactions.
<PAGE> 28
ILLIQUID SECURITIES
Up to 15% (10% for Credit Suisse International Equity Portfolio and for
Global Advisors Money Market Portfolio) of the net assets of a Portfolio may
be invested in securities that are not readily marketable, including, where
applicable: (a) repurchase agreements with maturities greater than seven
calendar days; (b) time deposits maturing in more than seven calendar days;
(c) to the extent a liquid secondary market does not exist for the
instruments, futures contracts, and options thereon (except for the Global
Advisors Money Market Portfolio); (d) certain over-the-counter options, as
described below and in the SAI; (e) certain variable rate demand notes having
a demand period of more than seven days; and (f) securities, the disposition
of which is restricted under federal securities laws (excluding Rule 144A
securities, described below). The Portfolios will not include, for purposes of
the restrictions on illiquid investments, securities sold pursuant to Rule
144A under the Securities Act of 1933, as amended, so long as such securities
meet liquidity guidelines established by the Trust's Board of Trustees. Under
Rule 144A, securities that would otherwise be restricted may be sold by
persons other than issuers or dealers to qualified institutional buyers.
INVESTMENT COMPANIES
When a Portfolio's Sub-Adviser believes that it would be beneficial for
the Portfolio and appropriate under the circumstances, the Sub-Adviser may
invest up to 10% of the Portfolio's assets in securities of mutual funds. As a
shareholder in any such mutual fund, the Portfolio will bear its ratable share
of the mutual fund's expenses, including management fees, and will remain
subject to the Portfolio's advisory and administration fees with respect to
the assets so invested.
LEASE OBLIGATION BONDS
Lease obligation bonds are mortgages on a facility that are secured by
the facility and are paid by a lessee over a long term. The rental stream to
service the debt, as well as the mortgage, are held by a collateral trustee on
behalf of the public bondholders. The primary risk of such instrument is the
risk of default. Under the lease indenture, the failure to pay rent is an
event of default. The remedy to cure default is to rescind the lease and sell
the assets. If the lease obligation is not readily marketable or market
quotations are not readily available, such lease obligations will be subject
to a Portfolio's limit on illiquid securities.
LENDING OF SECURITIES
All of the Portfolios have the ability to lend portfolio securities to
brokers and other financial organizations. By lending its securities, a
Portfolio can increase its income by continuing to receive interest on the
loaned securities, as well as by either investing the cash collateral in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. These loans,
if and when made, may not exceed 20% (except 10% with respect to the
EliteValue Asset Allocation Portfolio, 15% with respect to the Credit Suisse
International Equity Portfolio, and 331/3% with respect to the Global Advisors
Money Market Portfolio) of a Portfolio's total assets taken at value. Loans of
portfolio securities by a Portfolio will be collateralized by cash, letters of
credit, or U.S. government securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities.
Any gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Portfolio
involved. Each Portfolio's Sub-Adviser will monitor on an ongoing basis the
creditworthiness of the institutions to which the Portfolio lends securities.
LOWER-RATED SECURITIES
Certain Portfolios may invest in debt securities rated lower than "BBB"
by S&P or "Baa" by Moody's, or of equivalent quality as determined by the
Sub-Adviser. Securities rated "BB," "Ba," or lower are commonly referred to as
"junk bonds."
Securities rated below investment-grade, as well as unrated securities, are
often considered to be speculative and usually entail greater risk (including
the possibility of default or bankruptcy of the issuers). Such securities
generally involve greater price volatility and risk of principal and income,
and may be less liquid than securities in higher-rated categories. Both price
volatility and illiquidity may make it difficult for the Portfolio to value
certain of these securities at certain times, and these securities may be
difficult to sell under certain market conditions. Prices for securities rated
below investment-grade may be affected by legislative and regulatory
developments. (See the SAI for additional information pertaining to
lower-rated securities including risks.)
<PAGE> 29
MORTGAGE-BACKED SECURITIES
Certain Portfolios may invest in mortgage-backed securities, which
represent an interest in a pool of mortgage loans. The primary government
issuers or guarantors of mortgage-backed securities are GNMA, FHMA, and FHLMC.
Mortgage-backed securities generally provide a monthly payment consisting of
interest and principal payments. Additional payments may be made out of
unscheduled repayments of principal resulting from the sale of the underlying
residential property, refinancing, or foreclosure, net of fees or costs that
may be incurred. Prepayments of principal on mortgage-backed securities may
tend to increase due to refinancing of mortgages as interest rates decline.
Prompt payment of principal and interest on GNMA mortgage pass-through
certificates is backed by the full faith and credit of the U.S. government.
FNMA guaranteed mortgage pass-through certificates and FHLMC participation
certificates are solely the obligations of those entities, but are supported
by the discretionary authority of the U.S. government to purchase the
agencies' obligations.
If mortgage-backed securities are purchased at a premium, faster-than-expected
prepayments will reduce yield to maturity, while slower-than-expected
prepayments will increase yield to maturity. Conversely, if mortgage-backed
securities are purchased at a discount, faster-than-expected prepayments will
increase yield to maturity, while slower-than-expected prepayments will reduce
yield to maturity. Accelerated prepayments on securities purchased at a
premium also impose a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is prepaid in full.
Because of the reinvestment of prepayments of principal at current rates,
mortgage-backed securities may be less effective than Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. When interest rates rise, the value and liquidity of mortgage-backed
securities may decline sharply, and generally will decline more than would be
the case with other fixed-income securities; however, when interest rates
decline, the value of mortgage-backed securities may not increase as much as
other fixed-income securities due to the prepayment feature. Certain market
conditions may result in greater-than-expected volatility in the prices of
mortgage-backed securities. For example, in periods of supply and demand
imbalances in the market for such securities, and/or in periods of sharp
interest rate movements, the prices of mortgage-backed securities may
fluctuate to a greater extent than would be expected from interest rate
movements alone.
To the extent that a Portfolio invests in adjustable rate mortgage-backed
securities, the Portfolio will not benefit from increases in interest rates to
the extent that interest rates rise to the point where they cause the current
coupon of the underlying adjustable rate mortgages to exceed any maximum
allowable annual or lifetime reset limits (or "cap rates") for a particular
mortgage. In this event, the value of the mortgage-backed securities in a
Portfolio would likely decrease. Also, a Portfolio's net asset value could
vary to the extent that current yields on adjustable rate mortgage securities
are different than market yields during interim periods between coupon reset
dates, or if the timing of changes to the index upon which the rate for the
underlying mortgages is based lags behind changes in market rates. During
periods of declining interest rates, income to a Portfolio derived from
adjustable rate mortgages that remain in a mortgage pool will decrease in
contrast to the income on fixed-rate mortgages, which will remain constant.
Adjustable rate mortgages also have less potential for appreciation in value
as interest rates decline than do fixed-rate investments.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
A Portfolio may invest in collateralized mortgage obligations.
Collateralized mortgage obligations, or "CMOs," are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae, or Freddie Mac
certificates, but also may be collateralized by whole loans or private
pass-throughs (such collateral collectively hereinafter referred to as
"Mortgage Assets"). Multi-class pass-through securities are interests in a
trust composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multi-class pass-through securities.
Payments of principal and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multi-class pass-through securities.
CMOs may be issued by agencies or instrumentalities of the U.S. government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks, and
special purpose subsidiaries of the foregoing. CMOs acquired by the Salomon
Brothers U.S. Government Securities Portfolio will be limited to those issued
or guaranteed by agencies or instrumentalities of the U.S. government and, if
available in the future, the U.S.government.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specified
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly, or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a series of
a CMO in innumerable ways. In one structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
of CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. The Salomon Brothers U.S. Government
Securities Portfolio has no present intention to invest in CMO residuals. As
market conditions change, and particularly during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of the CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be significantly reduced. Such changes can result in
volatility in the market value, and in some instances, reduced liquidity of
the CMO class.
<PAGE> 30
A Portfolio may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date, of each class, which as with other
CMO structures, must be retired by its stated maturity date or a final
distribution date, but may be retired earlier. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience
on the underlying mortgage loans falls within a predefined range. If the
actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range, or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted. The magnitude of the predefined range varies from one PAC Bond
to another; a narrower range increases the risk that prepayments on the PAC
Bond will be greater or smaller than predicted. Because of these features, PAC
Bonds generally are less subject to the risks of prepayment than are other
types of Mortgage-Backed Securities.
NEW ISSUERS
A Portfolio may invest up to 5% of its assets in the securities of
issuers that have been in continuous operation for less than three years.
OPTIONS ON SECURITIES
Option Purchase. Certain Portfolios may purchase put and call options on
portfolio securities in which they may invest that are traded on a U.S. or
foreign securities exchange or in the over-the-counter market. A Portfolio may
utilize up to 10% of its assets to purchase put options on portfolio
securities, and may do so at or about the same time that it purchases the
underlying security, or at a later time, and may also utilize up to 10% of its
assets to purchase call options on securities in which it is authorized to
invest. By buying a put, the Portfolios limit their risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by the Portfolio to
acquire the underlying securities for the Portfolio at a price that avoids any
additional cost that would result from a substantial increase in the market
value of a security. The Portfolios may also purchase call options to increase
their return to investors at a time when the call is expected to increase in
value due to anticipated appreciation of the underlying security. Prior to
their expiration, put and call options may be sold in closing sale
transactions (sales by the Portfolio, prior to the exercise of options that it
has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option, plus the related transaction costs.
Covered Option Writing. Certain Portfolios may write put and call options on
securities for hedging purposes. The Portfolios realize fees (referred to as
"premiums") for granting the rights evidenced by the options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price at
any time during the option period. In contrast, a call option embodies the
right of its purchaser to compel the writer of the option to sell to the
option holder an underlying security at a specified price at any time during
the option period.
Upon the exercise of a put option written by a Portfolio, the Portfolio may
suffer a loss equal to the difference between the price at which the Portfolio
is required to purchase the underlying security and its market value at the
time of the option exercise, less the premium received for writing the option.
Upon the exercise of a call option written by the Portfolio, the Portfolio may
suffer a loss equal to the excess of the security's market value at the time
of the option exercise over the Portfolio's acquisition cost of the security,
less the premium received for writing the option.
The Portfolios will comply with regulatory requirements of the SEC and the
CFTC with respect to coverage of options and futures positions by registered
investment companies and, if the guidelines so require, will set aside cash
and/or appropriate liquid assets in a segregated custodial account in the
amount prescribed. Securities held in a segregated account cannot be sold
while the futures or options position is outstanding, unless replaced with
other permissible assets. As a result, there is a possibility that the
segregation of a large percentage of a Portfolio's assets may force the
Portfolio to close out futures and options positions and/or liquidate other
portfolio securities, any of which may occur at disadvantageous prices, in
order for the Portfolio to meet redemption requests or other current
obligations.
<PAGE> 31
The principal reason for writing covered call and put options on a securities
portfolio is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. In return for a
premium, the writer of a covered call option forfeits the rights to any
appreciation in the value of the underlying security above the strike price
for the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer
of the covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that the Portfolios may receive
may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option writing activities.
The Portfolios may engage in closing purchase transactions to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the
outstanding option's expiration). To effect a closing purchase transaction,
the Portfolios would purchase, prior to the holder's exercise of an option
that the Portfolio has written, an option of the same series as that on which
the Portfolio desires to terminate its obligation. The obligation of the
Portfolio under an option that it has written would be terminated by a closing
purchase transaction, but the Portfolio would not be deemed to own an option
as the result of the transaction. There can be no assurance that the Portfolio
will be able to effect closing purchase transactions at a time when it wishes
to do so. The ability of the Portfolio to engage in closing transactions with
respect to options depends on the existence of a liquid secondary market.
While the Portfolio will generally purchase or write options only if there
appears to be a liquid secondary market for the options purchased or sold, for
some options no such secondary market may exist or the market may cease to
exist. To facilitate closing purchase transactions, however, the Portfolio
will ordinarily write options only if a secondary market for the options
exists on a U.S. securities exchange or in the over-the-counter market.
Option writing for the Portfolios may be limited by position and exercise
limits established by U.S. securities exchanges and the National Association
of Securities Dealers, Inc., and by requirements of the Code, as amended, for
qualification as a regulated investment company. In addition to writing
covered put and call options to generate current income, the Portfolios may
enter into options transactions as hedges to reduce investment risk, generally
by making an investment expected to move in the opposite direction of a
portfolio position. A hedge is designed to offset a loss on a portfolio
position with a gain on the hedge position; at the same time, however, a
properly correlated hedge will result in a gain on the portfolio position's
being offset by a loss on the hedge position. The Portfolios bear the risk
that the prices of the securities being hedged will not move in the same
amount as the hedge. A Portfolio will engage in hedging transactions only when
deemed advisable by its Sub-Adviser. Successful use by a Portfolio of options
will depend on its Sub-Adviser's ability to correctly predict movements in the
direction of the stock underlying the option used as a hedge. Losses incurred
in hedging transactions and the costs of these transactions will adversely
affect the Portfolio's performance.
OPTIONS ON FOREIGN CURRENCIES
A Portfolio may purchase and write put and call options on foreign
currencies for the purpose of hedging against declines in the U.S. dollar
value of foreign currency-denominated portfolio securities and against
increases in the U.S. dollar cost of such securities to be acquired.
Generally, transactions relating to options on foreign currencies occur in the
over-the-counter market. As in the case of other kinds of options, however,
the writing of an option on a foreign currency constitutes only a partial
hedge, up to the amount of the premium received, and the Portfolio could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of rate movements adverse to the Portfolio's
position, it may forfeit the entire amount of the premium, plus related
transaction costs. There is no specific percentage limitation on the
Portfolio's investments in options on foreign currencies. (See the SAI for
further discussion of the use, risks, and costs of Options on Foreign
Currencies and Over-the-Counter Options.)
OPTIONS ON INDEXES
A Portfolio may, subject to applicable securities regulations, purchase
and write put and call options on stock and fixed- income indexes listed on
foreign and domestic stock exchanges. A stock index fluctuates with changes in
the market values of the stocks included in the index. An example of a
domestic stock index is the Standard and Poor's 500 Stock Index. Examples of
foreign stock indexes are the Canadian Market Portfolio Index (Montreal Stock
Exchange), The Financial Times - Stock Exchange 100 (London Stock Exchange),
and the Toronto Stock Exchange Composite 300 (Toronto Stock Exchange).
Examples of fixed-income indexes include the Lehman Government/Corporate Bond
Index and the Lehman Treasury Bond Index.
<PAGE> 32
Options on indexes are generally similar to options on securities, except that
the delivery requirements are different. Instead of giving the right to take
or make delivery of a security at a specified price, an option on an index
gives the holder the right to receive a cash "exercise settlement amount"
equal to: (a) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (b) a fixed "index multiplier." Receipt of this cash amount will depend on
the closing level of the index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The amount of cash received will be equal to such
difference between the closing price of the index and the exercise price of
the option expressed in dollars or a foreign currency, as the case may be,
times a specified multiple. The writer of the option is obligated, in return
for the premium received, to make a delivery of this amount. The writer may
offset its position in index options prior to expiration by entering into a
closing transaction on an exchange, or the option may expire unexercised.
The effectiveness of purchasing or writing options as a hedging technique will
depend on the extent to which price movements in the portion of the securities
portfolio of a Portfolio correlate with price movements of the stock index
selected. Because the value of an index option depends on movements in the
level of the index rather than the price of a particular stock, whether a
Portfolio will realize a gain or loss from the purchase or writing of options
on an index depends on movements in the level of stock prices in the stock
market generally or, in the case of certain indexes, in an industry or market
segment, rather than movements in the price of a particular stock.
Accordingly, successful use of options on indexes by a Portfolio will be
subject to its Sub-Adviser's ability to correctly predict movements in the
direction of the market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Options on securities indexes entail risks in addition to the risks of options
on securities. Because exchange trading of options on securities indexes is
relatively new, the absence of a liquid secondary market to close out an
option position is more likely to occur, although a Portfolio generally will
only purchase or write such an option if the Sub-Adviser believes the option
can be closed out. Because options on securities indexes require settlement in
cash, a Portfolio may be forced to liquidate portfolio securities to meet
settlement obligations. A Portfolio will engage in stock index options
transactions only when determined by its Sub-Adviser to be consistent with its
efforts to control risk. There can be no assurance that such judgement will be
accurate or that the use of these portfolio strategies will be successful.
OVER-THE-COUNTER OPTIONS
Certain Portfolios may write or purchase options in privately negotiated
domestic or foreign transactions ("OTC Options"), as well as exchange traded
or "listed" options. OTC Options can be closed out only by agreement with the
other party to the transaction, and thus any OTC Options purchased by a
Portfolio will be considered an illiquid security. In addition, certain OTC
Options on foreign currencies are traded through financial institutions acting
as market makers in such options and the underlying currencies.
The staff of the SEC has taken the position that purchased OTC Options and
assets used to cover written OTCOptions are illiquid and, therefore, together
with other illiquid securities, cannot exceed the maximum percentage of a
Portfolio's assets allowed to be invested in illiquid securities (the
"illiquidity ceiling"). (See "Illiquid Securities" in this Appendix.) Except
as provided below, the Portfolios intend to write OTCOptions only with primary
U.S. government securities dealers recognized by the Federal Reserve Bank of
New York. Also, the contracts that such Portfolios have in place with such
primary dealers will provide that each Portfolio has the absolute right to
repurchase any option it writes at any time at a price which represents the
fair market value, as determined in good faith through negotiation between the
parties, but which, in no event, will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based
on a multiple of the premium received by the Portfolio for writing the option,
plus the amount, if any, of the option's intrinsic value (i.e., the amount
that the option is in the money). The formula may also include a factor to
account for the difference between the price of the security and the strike
price of the option, if the option is written out-of-the-money. A Portfolio
will treat all or a part of the formula price as illiquid for purposes of the
illiquidity ceiling. Certain Portfolios may also write OTCOptions with
nonprimary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid for purposes of such illiquidity ceiling.
OTC Options entail risks in addition to the risks of exchange traded options.
Exchange traded options are in effect guaranteed by the Options Clearing
Corporation, while a Portfolio relies on the party from which it purchases an
OTC Option to perform, if the Portfolio exercises the option. With OTC
Options, if the transacting dealer fails to make or take delivery of the
securities or amount of foreign currency underlying an option it has written
in accordance with the terms of that option, the Portfolio will lose the
premium paid for the option, as well as any anticipated benefit of the
transaction. Furthermore, OTC Options are less liquid than exchange traded
options.
<PAGE> 33
REPURCHASE AGREEMENTS
Repurchase agreements are agreements to purchase underlying debt
obligations from financial institutions, such as banks and broker-dealers,
subject to the seller's agreement to repurchase the obligations at an
established time and price. The collateral for such repurchase agreements will
be held by the Portfolio's custodian or a duly appointed sub-custodian. The
Portfolio will enter into repurchase agreements only with banks and
broker-dealers that have been determined to be creditworthy by the Trust's
Board of Trustees under criteria established in consultation with the Adviser
and the Sub-Adviser. The seller under a repurchase agreement would be required
to maintain the value of the obligations subject to the repurchase agreement
at not less than the repurchase price. Default by the seller would, however,
expose the Portfolio to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations. In
addition, if bankruptcy proceedings are commenced with respect to the seller
of the obligations, the Portfolio may be delayed or limited in its ability to
sell the collateral.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are the same as repurchase agreements
except that, in this instance, the Portfolios would assume the role of
seller/borrower in the transaction. The Portfolios will maintain segregated
accounts with the Custodian consisting of U.S. government securities, cash, or
money-market instruments that at all times are in an amount equal to their
obligations under reverse repurchase agreements. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio
may decline below the repurchase price of the securities and, if the proceeds
from the reverse repurchase agreement are invested in securities, that the
market value of the securities sold may decline below the repurchase price of
the securities sold. Each Portfolio's Sub-Adviser, acting under the
supervision of the Board of Trustees, reviews on an ongoing basis the
creditworthiness of the parties with which it enters into reverse repurchase
agreements. Under the 1940 Act, reverse repurchase agreements may be
considered borrowings by the seller. Whenever borrowings by a Portfolio,
including reverse repurchase agreements, exceed 5% of the value of a
Portfolio's total assets, the Portfolio will not purchase any securities.
SMALL COMPANIES
Certain Portfolios may invest in small companies, some of which may be
unseasoned. While smaller companies generally have potential for rapid growth,
investments in such companies often involve higher risks because the companies
may lack the management experience, financial resources, product
diversification, and competitive strengths of larger corporations. Moreover,
the markets for the shares of such companies typically are less liquid than
those for the shares of larger companies.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of the
Portfolios, as stated elsewhere in the Prospectus and SAI of the Trust, each
of the Portfolios may, but are not required to, utilize various investment
strategies as described in this Appendix to hedge various market risks, to
manage the effective maturity or duration of fixed-income securities, or to
seek potentially higher returns. Utilizing these investment strategies, the
Portfolio may purchase and sell, to the extent not otherwise limited or
restricted for such Portfolio, exchange-listed and over-the-counter put and
call options on securities, equity and fixed-income indexes, and other
financial instruments; purchase and sell financial futures contracts and
options thereon; enter into various Interest Rate Transactions such as swaps,
caps, floors, or collars; and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps, or
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Portfolio's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Portfolio's unrealized gains in the value of
its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the
Portfolio's portfolio, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities.
Some Strategic Transactions may also be used to seek potentially higher
returns, although no more than 5% of the Portfolio's assets will be used as
the initial margin or purchase price of options for Strategic Transactions
entered into for purposes other than "bona fide hedging" positions as defined
in the regulations adopted by the CFTC. Any or all of these investment
techniques may be used at any time, as use of any Strategic Transaction is a
function of numerous variables, including market conditions. The ability of
the Portfolio to successfully utilize these Strategic Transactions will depend
on the Sub-Adviser's ability to predict, which cannot be assured, pertinent
market movements. The Portfolio will comply with applicable regulatory
requirements when utilizing Strategic Transactions. Strategic Transactions
involving financial futures and options thereon will be purchased, sold, or
entered into only for bona fide hedging, risk management, or portfolio
management purposes.
<PAGE> 34
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S.
Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations
directly issued or guaranteed by U.S. government agencies or
instrumentalities. Some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government are backed by the full faith and
credit of the U.S. government (such as GNMA certificates). Others are backed
only by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks) and still others are backed only by the
credit of the instrumentality (such as FNMA and FHLMC certificates).
Guarantees of principal by agencies or instrumentalities of the U.S.
government may be a guarantee of payment at the maturity of the obligation so
that, in the event of a default prior to maturity, there might not be a
market, and thus no means of realizing on the obligation prior to maturity.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of these securities, nor to the value of a Portfolio's
shares.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
In order to secure yields or prices deemed advantageous at the time,
certain Portfolios may purchase or sell securities on a when-issued or a
delayed-delivery basis. The Portfolios will enter into a when-issued
transaction for the purpose of acquiring portfolio securities and not for the
purpose of leverage, although a Portfolio may dispose of a when-issued
security or forward commitment prior to settlement, if it is deemed
appropriate to do so. In such transactions, delivery of the securities occurs
beyond the normal settlement periods, but no payment or delivery is made by,
and no interest accrues to the Portfolios prior to the actual delivery or
payment by the other party to the transaction. Due to fluctuations in the
value of securities purchased on a when-issued or a delayed-delivery basis,
the yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually
delivered to the buyers. Similarly, the sale of securities for delayed
delivery can involve the risk that the prices available in the market when
delivery is made may actually be higher than those obtained in the transaction
itself. The Portfolios will establish a segregated account with the custodian
consisting of cash, U.S. government securities, or other high-grade debt
obligations in an amount equal to the amount of its when-issued and
delayed-delivery commitments.
<PAGE>
WNL SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
This Statement of Additional Information (the "SAI") contains information
which may be of interest to investors but which is not included in the
Prospectus of WNL Series Trust (the "Trust"). The SAI is not a prospectus and
is only authorized for distribution when accompanied or preceded by the
Prospectus of the Trust dated May 1, 1997. The SAI should be read together
with the Prospectus. Investors may obtain a free copy of the Prospectus by
calling Western National Life Insurance Company (the "Life Company") at
1-800-910-4455.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
DEFINITIONS 1
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST 1
Options 1
Futures Contracts 2
Special Risks of Transactions in Futures Contracts and Related Options 5
Forward Commitments 6
Repurchase Agreements 6
Reverse Repurchase Agreements 6
When-Issued Securities 7
Loans of Portfolio Securities 7
Foreign Securities 7
Foreign Currency Transactions 7
Commercial Mortgage-Backed Securities 10
Zero-Coupon Securities 11
Variable- or Floating-Rate Securities 11
Lower-Grade Securities 12
INVESTMENT RESTRICTIONS 13
Fundamental Investment Restrictions 13
Non-Fundamental Investment Restrictions 14
MANAGEMENT OF THE TRUST 15
Substantial Shareholders 16
Investment Adviser 17
Trust Administration 18
Sub-Advisers 18
Investment Decisions 18
Brokerage and Research Services 18
DETERMINATION OF NET ASSET VALUE 19
TAXES 20
DIVIDENDS AND DISTRIBUTIONS 21
PERFORMANCE INFORMATION 22
SHAREHOLDER COMMUNICATIONS 23
ORGANIZATION AND CAPITALIZATION 23
PORTFOLIO TURNOVER 23
CUSTODIAN 24
LEGAL COUNSEL 24
INDEPENDENT AUDITORS 24
SHAREHOLDER LIABILITY 24
DESCRIPTION OF NRSRO RATINGS 24
Description of Moody's Corporate Ratings 24
Description of S&P's Corporate Ratings 25
Description of Duff Corporate Ratings 25
Description of Fitch Corporate Ratings 25
Description of Thomson Bankwatch, Inc. Corporate Ratings 26
Description of IBCA Limited and IBCA Inc. Corporate Ratings 26
Description of S&P's Commercial Paper Ratings 26
Description of Moody's Commercial Paper Ratings 26
Description of Duff Commercial Paper Ratings 26
Description of Fitch Commercial Paper Ratings 27
Description of IBCA Limited and IBCA Inc. Commercial Paper Ratings 27
Description of Thomson Bankwatch, Inc. Commercial Paper Ratings 27
FINANCIAL STATEMENTS 27
</TABLE>
WNL SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
THE "TRUST" - WNL Series Trust.
"ADVISER" - WNL Investment Advisory Services, Inc., the Trust's investment
adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
The Trust currently offers shares of beneficial interest of eight series (the
"Portfolios") with separate investment objectives and policies. The investment
objectives and policies of each of the Portfolios of the Trust are described
in the Prospectus. The SAI contains additional information concerning certain
investment practices and investment restrictions of the Trust.
Except as described below under "Investment Restrictions," the investment
objectives and policies described in the Prospectus and in the SAI are not
fundamental, and the Trustees may change the investment objectives and
policies of a Portfolio without an affirmative vote of shareholders of the
Portfolio.
Except as otherwise noted below, the following descriptions of certain
investment policies and techniques are applicable to all of the Portfolios.
OPTIONS
Each Portfolio, other than the Global Advisors Money Market Portfolio, may
purchase put and call options on portfolio securities in which they may invest
that are traded on a U.S. or foreign securities exchange or in the
over-the-counter market.
COVERED CALL OPTIONS. Each Portfolio, other than the Global Advisors
Money Market Portfolio, may write covered call options on portfolio securities
to realize a greater current return through the receipt of premiums than it
would realize on portfolio securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the writer
to sell, a security at the exercise price at any time before the expiration
date. A call option is "covered" if the writer, at all times while obligated
as a writer, either owns the underlying securities (or comparable securities
satisfying the cover requirements of the securities exchanges), or has the
right to acquire such securities through immediate conversion of portfolio
securities.
In return for the premium received when it writes a covered call option, the
Portfolio gives up some or all of the opportunity to profit from an increase
in the market price of the securities covering the call option during the life
of the option. The Portfolio retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Portfolio realizes
a gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Portfolio realizes a gain
or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus
commissions) plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it expires
by entering into a closing purchase transaction. A Portfolio may enter into
closing purchase transactions in order to free itself to sell the underlying
security or to write another call on the security, realize a profit on a
previously written call option, or protect a security from being called in an
unexpected market rise. Any profits from a closing purchase transaction may be
offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Trust.
COVERED PUT OPTIONS. Each Portfolio, other than the Global Advisors Money
Market Portfolio, may write covered put options in order to enhance its
current return. Such options transactions may also be used as a limited form
of hedging against an increase in the price of securities that the Portfolio
plans to purchase. A put option gives the holder the right to sell, and
obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade, short-term debt obligations or other permissible
collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its then-current market value, resulting in a
potential capital loss, unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it expires
by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
PURCHASING PUT AND CALL OPTIONS. Each Portfolio, other than the Global
Advisors Money Market Portfolio, may also purchase put options to protect
portfolio holdings against a decline in market value. This protection lasts
for the life of the put option because the Portfolio, as a holder of the
option, may sell the underlying security at the exercise price, regardless of
any decline in its market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below
the exercise price to cover the premium and transaction costs that the
Portfolio must pay. These costs will reduce any profit the Portfolio might
have realized had it sold the underlying security instead of buying the put
option.
Each Portfolio, other than the Global Advisors Money Market Portfolio, may
purchase call options to hedge against an increase in the price of securities
that the Portfolio ultimately wants to buy. Such hedge protection is provided
during the life of the call option since the Portfolio, as holder of the call
option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
and transaction costs. These costs will reduce any profit the Portfolio might
have realized had it bought the underlying security at the time it purchased
the call option.
OPTIONS ON FOREIGN SECURITIES. The Trust may, on behalf of each of the
Portfolios other than the Global Advisors Money Market Portfolio, purchase and
sell options on foreign securities if, in the opinion of the Sub-Adviser of
the particular Portfolio, the investment characteristics of such options,
including the risks of investing in such options, are consistent with the
Portfolio's investment objectives. It is expected that risks related to such
options will not differ materially from risks related to options on U.S.
securities. However, position limits and other rules of foreign exchanges may
differ from those in the United States. In addition, options markets in some
countries, many of which are relatively new, may be less liquid than
comparable markets in the United States.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the following: (a) that a Portfolio's Sub-Adviser
will not forecast interest rate or market movements correctly; (b) that a
Portfolio may be unable at times to close out such positions; or (c) that
hedging transactions may not accomplish their purpose because of imperfect
market correlations. The successful use of these strategies depends on the
ability of a Portfolio's Sub-Adviser to forecast market and interest rate
movements correctly.
An exchange-listed option may be closed out only on an exchange that 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 or at any particular time. If no secondary market were to exist, it
would be impossible to enter into a closing transaction to close out an option
position. As a result, a Portfolio may be forced to continue to hold, or to
purchase at a fixed price, a security on which it has sold an option at a time
when a Portfolio's Sub-Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Trust's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by
an investor or group of investors acting in concert. It is possible that the
Trust and other clients of a Sub-Adviser may be considered such a group. These
position limits may restrict the Trust's ability to purchase or sell options
on particular securities.
Options which are not traded on national securities exchanges may be closed
out only with the other party to the option transaction. For that reason, it
may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification as a
"regulated investment company" under the Internal Revenue Code, may also
restrict the Trust's use of options.
FUTURES CONTRACTS
The Trust may, on behalf of each Portfolio that may invest in debt securities,
other than the Global Advisors Money Market Portfolio, buy and sell futures
contracts on debt securities of the type in which the Portfolio may invest and
on indexes of debt securities. In addition, the Trust may, on behalf of each
Portfolio that may invest in equity securities, purchase and sell stock index
futures for hedging and non-hedging purposes. The Trust may also, for hedging
and non-hedging purposes, purchase and write options on futures contracts of
the type that such Portfolios are authorized to buy and sell and may engage in
related closing transactions. All futures and related options which are traded
in the United States will, as may be required by applicable law, be traded on
exchanges that are licensed and regulated by the Commodities Futures Trading
Commission (the "CFTC"). Trading on foreign commodity exchanges is not
regulated by the CFTC.
FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery during a particular
month of securities having a standardized face value and rate of return. By
purchasing futures on debt securities - assuming a "long" position - the Trust
will legally obligate itself on behalf of the Portfolios to accept the future
delivery of the underlying security and pay the agreed price. By selling
futures on debt securities - assuming a "short" position - it will legally
obligate itself to make the future delivery of the security against payment of
the agreed price. Open futures positions on debt securities will be valued at
the most recent settlement price, unless that price does not, in the judgment
of persons acting at the direction of the Trustees as to the valuation of the
Trust's assets, reflect the fair value of the contract, in which case, the
positions will be valued by or under the direction of the Trustees or such
persons.
Positions taken in the futures markets are not normally held to maturity, but
instead are liquidated through offsetting transactions which may result in a
profit or loss. While futures positions taken by the Trust on behalf of a
Portfolio will usually be liquidated in this manner, the Trust may instead
make or take delivery of the underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes
responsibility for such closing transactions and guarantees that the Trust's
sale and purchase obligations under closed-out positions will be performed at
the termination of the contract.
Hedging by use of futures on debt securities seeks to establish, more
certainly than would otherwise be possible, the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short" position in
the futures market by selling contracts for the future delivery of debt
securities held by the Portfolio (or securities having characteristics similar
to those held by the Portfolio) in order to hedge against an anticipated rise
in interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities may be substantially offset
by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Trust
expects to purchase for the Portfolio particular securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in
the futures markets. If the anticipated rise in the price of the securities
should occur (with its concomitant reduction in yield), the increased cost to
the Portfolio of purchasing the securities may be offset, at least to some
extent, by the rise in the value of the futures position taken in anticipation
of the subsequent securities purchase.
Successful use by the Trust of futures contracts on debt securities is subject
to the ability of a Portfolio's Sub-Adviser to correctly predict movements in
the direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of
an increase in interest rates which would adversely affect the market prices
of debt securities held by it and the prices of such securities increase
instead, the Portfolio will lose part or all of the benefit of 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 the
Portfolio has insufficient cash, it may have to sell securities to meet daily
maintenance margin requirements, and thus the Portfolio may have to sell
securities at a time when it may be disadvantageous to do so.
The Trust may purchase and write put and call options on certain debt futures
contracts as they become available. Such options are similar to options on
securities, except that options on futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period
of the option. As with options on securities, the holder or writer of an
option may terminate his position by selling or purchasing an option of the
same series. There is no guarantee that such closing transactions can be
effected. The Trust will be required to deposit initial margin and maintenance
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements, and, in addition, net option premiums
received will be included as initial margin deposits. (See "Margin Payments,"
below.) Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Trust because the maximum amount at risk is the premium paid for the options
plus transactions costs. However, there may be circumstances when the purchase
of call or put options on a futures contract would result in a loss to the
Trust when the purchase or sale of the futures contracts would not, such as
when there is no movement in the prices of debt securities. The writing of a
put or call option on a futures contract involves risks similar to those risks
relating to the purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. The Trust may invest in debt index
futures contracts and stock index futures contracts and in related options. A
debt index futures contract is a contract to buy or sell units of a specified
debt index at a specified future date at a price agreed upon when the contract
is made. A unit is the current value of the index. Debt index futures in which
the Trust presently expects to invest are not now available, although the
Trust expects such futures contracts to become available in the future. A
stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index futures
contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100 Index")
is composed of 100 selected common stocks, most of which are listed on the New
York Stock Exchange (the "NYSE"). The S&P 100 Index assigns relative
weightings to the common stocks included in the S&P 100 Index, and the S&P 100
Index fluctuates with changes in the market values of those common stocks. In
the case of the S&P 100 Index, contracts are to buy or sell 100 units. Thus,
if the value of the S&P 100 Index were $180, one contract would be worth
$18,000 (100 units x $180). The stock index futures contract specifies that no
delivery of the actual stocks making up the index will take place. Instead,
settlement in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and the actual
level of the stock index at the expiration of the contract. For example, if a
Portfolio enters into a futures contract to buy 100 units of the S&P 100 Index
at a specified future date at a contract price of $180 and the S&P 100 Index
is at $184 on that future date, the Portfolio will gain $400 (100 units x gain
of $4). If the Portfolio enters into a futures contract to sell 100 units of
the stock index at a specified future date at a contract price of $180 and the
S&P 100 Index is at $182 on that future date, the Portfolio will lose $200
(100 units x loss of $2).
The Trust does not presently expect to invest in debt index futures contracts.
Stock index futures contracts are currently traded with respect to the S&P 100
Index on the Chicago Mercantile Exchange, and with respect to other broad
stock market indexes, such as the New York Stock Exchange Composite Stock
Index, which is traded on the New York Futures Exchange, and the Value Line
Composite Stock Index, which is traded on the Kansas City Board of Trade, as
well as with respect to narrower "sub-indexes" such as the S&P 100 Energy
Stock Index and the New York Stock Exchange Utilities Stock Index. To the
extent permitted under applicable law, a Portfolio may trade futures contracts
and options on futures contracts on exchanges created outside the United
States, such as the London International Financial Futures Exchange and the
Sydney Futures Exchange Limited. Foreign markets may offer advantages such as
trading in commodities that are not currently traded in the United States or
arbitrage possibilities not available in the United States. Foreign markets,
however, may have greater risk potential than domestic markets. A Portfolio
may purchase or sell futures contracts with respect to any stock. Positions in
index futures may be closed out only on an exchange or board of trade which
provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, the Trust must invest in futures contracts with
respect to indexes or sub-indexes, the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
Options on index futures contracts are similar to options on securities except
that options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is
a put) at a specified exercise price at any time during the period of the
option. Upon exercise of the option, the holder would assume the underlying
futures position and would receive a variation margin payment of cash or
securities approximating the increase in the value of the holder's option
position. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
based on the difference between the exercise price of the option and the
closing level of the index on which the futures contract is based on the
expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing and selling call and put options on index
futures contracts, each of the Portfolios that may purchase and sell index
futures contracts may purchase and sell call and put options on the underlying
indexes themselves to the extent that such options are traded on national
securities exchanges. Index options are similar to options on individual
securities in that the purchaser of an index option acquires the right to buy
(in the case of a call) or sell (in the case of a put), and the writer
undertakes the obligation to sell or buy (as the case may be), units of an
index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of
an index option has the right to receive a cash "exercise settlement amount."
This amount is equal to the amount by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of the exercise,
multiplied by a fixed "index multiplier."
A Portfolio may purchase or sell options on stock indexes in order to close
out its outstanding positions in options on stock indexes that it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on an index involves less potential risk to the Trust because the
maximum amount at risk is the premium paid for the options plus transactions
costs. The writing of a put or call option on an index involves risks similar
to those risks relating to the purchase or sale of index futures contracts.
MARGIN PAYMENTS. When a Portfolio purchases or sells a futures contract,
it is required to deposit with the Custodian an amount of cash, U.S. Treasury
bills, or other permissible collateral equal to a small percentage of the
amount of the futures contract. This amount is known as "initial margin." The
nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Trust upon termination of the contract,
assuming the Trust satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a process
known as "marking to market." These payments are called "variation margin" and
are made as the value of the underlying futures contract fluctuates. For
example, when a Portfolio sells a futures contract and the price of the
underlying debt security rises above the delivery price, the Portfolio's
position declines in value. The Portfolio then pays the broker a variation
margin payment equal to the difference between the delivery price of the
futures contract and the market price of the securities underlying the futures
contract. Conversely, if the price of the underlying security falls below the
delivery price of the contract, the Portfolio's futures position increases in
value. The broker then must make a variation margin payment equal to the
difference between the delivery price of the futures contract and the market
price of the securities underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Trust intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular
time. If there is not a liquid secondary market at a particular time, it may
not be possible to close a futures position at such time and, in the event of
adverse price movements, the Trust would continue to be required to make daily
cash payments of variation margin. However, in the event financial futures are
used to hedge portfolio securities, such securities will not generally be sold
until the financial futures can be terminated. In such circumstances, an
increase in the price of the portfolio securities, if any, may partially or
completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain
that such a market will develop. Although the Trust generally will purchase
only those options for which there appear to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option or at any particular time. In the event that no such
market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that the Trust would have
to exercise the options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the
prices of the futures contracts and options and movements in the underlying
securities or index or movements in the prices of the Trust's securities which
are the subject of the hedge. A Portfolio's Sub-Adviser will, however, attempt
to reduce this risk by purchasing and selling, to the extent possible, futures
contracts and related options on securities and indexes, the movements of
which will, in its judgment, correlate closely with movements in the prices of
the underlying securities or index and the Trust's portfolio securities sought
to be hedged.
Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to a Portfolio's Sub-Adviser's ability to correctly
predict movements in the direction of the market. It is possible that, where a
Portfolio has purchased puts on futures contracts to hedge its portfolio
against a decline in the market, the securities or index on which the puts are
purchased may increase in value and the value of securities held in the
Portfolio may decline. If this occurred, the Portfolio would lose money on the
puts and also experience a decline in value in its portfolio securities. In
addition, the prices of futures, for a number of reasons, may not correlate
perfectly with movements in the underlying securities or index due to certain
market distortions. First, all participants in the futures market are subject
to margin deposit requirements. Such requirements may cause investors to close
futures contracts through offsetting transactions which could distort the
normal relationship between the underlying security or index and futures
markets. Second, the margin requirements in the futures markets are less
onerous than margin requirements in the securities markets in general, and as
a result, the futures markets may attract more speculators than the securities
markets. Increased participation by speculators in the futures markets may
also cause temporary price distortions. Due to the possibility of price
distortion, even a correct forecast of general market trends by a Portfolio's
Sub-Adviser still may not result in a successful hedging transaction over a
very short time period.
FOREIGN TRANSACTION RISKS. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the CFTC
and may be subject to greater risks than trading on domestic exchanges. For
example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. In addition, unless a Portfolio hedges against
fluctuations in the exchange rate between the U.S. dollar and the currencies
in which trading is done on foreign exchanges, any profits that the Portfolio
might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Portfolio could incur losses as a result of those
changes. Transactions on foreign exchanges may include both commodities which
are traded on domestic exchanges and those which are not.
OTHER RISKS. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts
and options on futures will be purchased and sold to reduce certain risks,
those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and related options,
unanticipated changes in interest rates or stock price movements may result in
a poorer overall performance for the Portfolio than if it had not entered into
any futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
The Trust may, on behalf of each Portfolio, enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account maintained by the Custodian with
assets selected by the Custodian, cash or high-grade debt obligations in an
amount sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. Forward
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Portfolio's other assets. Where such purchases are made through
dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price.
Although a Portfolio will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant
to options contracts it has entered into, a Portfolio may dispose of a
commitment prior to settlement if a Portfolio's Sub-Adviser deems it
appropriate to do so. A Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
REPURCHASE AGREEMENTS
On behalf of each Portfolio, the Trust may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a
security for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). It is the Trust's present intention to enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers meeting certain criteria as to creditworthiness and
financial condition established by the Trustees of the Trust and only with
respect to obligations of the U.S. government or its agencies or
instrumentalities or other high-quality, short-term debt obligations.
Repurchase agreements may also be viewed as loans made by the Trust which are
collateralized by the securities subject to repurchase. The Sub-Advisers will
monitor such transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. If the seller defaults,
the Trust could realize a loss on the sale of the underlying security to the
extent that the proceeds of sale, including accrued interest, are less than
the resale price provided in the agreement including interest. In addition, if
the seller should be involved in bankruptcy or insolvency proceedings, the
Trust may incur delay and costs in selling the underlying security or may
suffer a loss of principal and interest if the Trust is treated as an
unsecured creditor and required to return the underlying collateral to the
seller's estate.
REVERSE REPURCHASE AGREEMENTS
The Trust may, on behalf of each of the Portfolios, enter into reverse
repurchase agreements, which involve the sale by the Portfolio of securities
held by it with an agreement to repurchase the securities at an agreed upon
price, date, and interest payment. The Portfolios will use the proceeds of the
reverse repurchase agreements to purchase securities either maturing, or under
an agreement to resell, at a date simultaneous with or prior to the expiration
of the reverse repurchase agreement. A Portfolio will use reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
reverse repurchase transaction. Reverse repurchase agreements into which the
Portfolios will enter require that the market value of the underlying security
and other collateral equal or exceed the repurchase price (including interest
accrued on the security), and require the Portfolios to provide additional
collateral if the market value of such security falls below the repurchase
price at any time during the term of the reverse repurchase agreement. At all
times that a reverse repurchase agreement is outstanding, the Portfolio will
maintain cash, liquid high-grade debt obligations, or U.S. government
securities, as the case may be, in a segregated account at its custodian with
a value at least equal to its obligations under the agreement.
WHEN-ISSUED SECURITIES
The Trust may, on behalf of each Portfolio, from time to time purchase
securities on a "when-issued" basis. Debt securities are often issued on this
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase. During the period
between purchase and settlement, no payment is made by a Portfolio and no
interest accrues to the Portfolio. To the extent that assets of a Portfolio
are held in cash pending the settlement of a purchase of securities, that
Portfolio would earn no income. While the Trust may sell its right to acquire
when-issued securities prior to the settlement date, the Trust intends
actually to acquire such securities unless a sale prior to settlement appears
desirable for investment reasons. At the time a Portfolio makes the commitment
to purchase a security on a when-issued basis, it will record the transaction
and reflect the amount due and the value of the security in determining the
Portfolio's net asset value. The market value of the when-issued securities
may be more or less than the purchase price payable at the settlement date.
Each Portfolio will establish a segregated account in which it will maintain
cash and U.S. government securities or other high-grade debt obligations at
least equal in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be sold on or
before the settlement date.
LOANS OF PORTFOLIO SECURITIES
The Trust may lend the portfolio securities of any Portfolio, provided: (a)
the loan is secured continuously by collateral consisting of U.S. government
securities, cash, or cash equivalents adjusted daily to have market value at
least equal to the current market value of the securities loaned; (b) the
Trust may, at any time, call the loan and regain the securities loaned; (c)
the Trust will receive any interest or dividends paid on the loaned
securities; and (d) the aggregate market value of securities of any Portfolio
loaned will not, at any time, exceed 20% (except 10% with respect to the
EliteValue Asset Allocation Portfolio, 15% with respect to the Credit Suisse
International Equity Portfolio, and 331/3% with respect to the Global Advisors
Money Market Portfolio and the Global Advisors Growth Equity Portfolio) of the
total assets of the Portfolio taken at value. In addition, it is anticipated
that the Portfolio may share with the borrower some of the income received on
the collateral for the loan or that it will be paid a premium for the loan.
Before the Portfolio enters into a loan, a Portfolio's Sub-Adviser considers
all relevant facts and circumstances including the creditworthiness of the
borrower. The risks in lending portfolio securities, as with other extensions
of credit, consist of possible delay in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially.
Although voting rights, or rights to consent, with respect to the loaned
securities pass to the borrower, the Trust retains the right to call the loans
at any time on reasonable notice, and it will do so in order that the
securities may be voted by the Trust if the holders of such securities are
asked to vote upon or consent to matters materially affecting the investment.
The Trust will not lend portfolio securities to borrowers affiliated with the
Trust.
FOREIGN SECURITIES
Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and
possible consequent illiquidity, greater volatility in price, the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation of assets, nationalization, or other adverse political
or economic developments. Foreign companies may not be subject to auditing and
financial reporting standards and requirements comparable to those which apply
to U.S. companies. Foreign brokerage commissions and other fees are generally
higher than in the United States. It may also be more difficult to obtain and
enforce a judgment against a foreign issuer.
In addition, to the extent that any Portfolio's foreign investments are not
U.S. dollar-denominated, the Portfolio may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.
In determining whether to invest in securities of foreign issuers, the
Sub-Adviser of a Portfolio will consider the likely effect of foreign taxes on
the net yield available to the Portfolio and its shareholders. Income received
by a Portfolio from sources within foreign countries may be reduced by
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax in advance, since
the amount of a Portfolio's assets to be invested in various countries is not
known, and tax laws and their interpretations may change from time to time and
without advance notice. Any such taxes paid by a Portfolio will reduce its net
income available for distribution to shareholders.
FOREIGN CURRENCY TRANSACTIONS
The Trust may engage in currency exchange transactions, on behalf of its
Portfolios which may invest in foreign securities, to protect against
uncertainty in the level of future foreign currency exchange rates and to
increase current return. The Trust may engage in both "transaction hedging"
and "position hedging."
When it engages in transaction hedging, the Trust enters into foreign currency
transactions with respect to specific receivables or payables of a Portfolio
generally arising in connection with the purchase or sale of its portfolio
securities. The Trust will engage in transaction hedging when it desires to
"lock-in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging, the Trust will attempt to protect a
Portfolio against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold
or on which the dividend or interest payment is declared and the date on which
such payments are made or received.
The Trust may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with transaction hedging. The Trust may
also enter into contracts to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts.
For transaction hedging purposes, the Trust may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures
contracts and on foreign currencies. A put option on a futures contract gives
the Trust the right to assume a short position in the futures contract until
expiration of the option. A put option on currency gives the Trust the right
to sell a currency at an exercise price until the expiration of the option. A
call option on a futures contract gives the Trust the right to assume a long
position in the futures contract until the expiration of the option. A call
option on currency gives the Trust the right to purchase a currency at the
exercise price until the expiration of the option. The Trust will engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of the Portfolio's
Sub-Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When it engages in position hedging, the Trust enters into foreign currency
exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by a Portfolio are denominated or
are quoted in their principal trading markets or an increase in the value of
currency for securities that a Portfolio expects to purchase. In connection
with position hedging, the Trust may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Trust may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the values of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of a Portfolio's
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Trust to purchase
additional foreign currency on behalf of a Portfolio on the spot market (and
bear the expense of such purchase) if the market value of the security or
securities being hedged is less than the amount of foreign currency the Trust
is obligated to deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received
upon the sale of the portfolio security or securities of a Portfolio if the
market value of such security or securities exceeds the amount of foreign
currency the Trust is obligated to deliver on behalf of the Portfolio.
To offset some of the costs to a Portfolio of hedging against fluctuations in
currency exchange rates, the Trust may write covered call options on those
currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time.
Additionally, although these techniques tend to minimize the risk of loss due
to a decline in the value of the hedged currency, they tend to limit any
potential gain which might result from the increase in the value of such
currency.
A Portfolio may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts, and
by purchasing and selling foreign currency forward contracts.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract as agreed by the parties, at a price set at the time of the
contract. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are designed by
and traded on exchanges regulated by the CFTC, such as the New York Mercantile
Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Trust may either accept
or make delivery of the currency specified in the contract, or at or prior to
maturity, enter into a closing transaction involving the purchase or sale of
an offsetting contract. Closing transactions with respect to forward contracts
are usually effected with the currency trader who is a party to the original
forward contract. Closing transactions with respect to futures contracts are
effected on a commodities exchange; a clearing corporation associated with the
exchange assumes responsibility for closing out such contracts.
Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Trust intends to purchase or
sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appear to be active secondary markets, there is
no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position
and, in the event of adverse price movements, the Trust would continue to be
required to make daily cash payments of variation margin on its futures
positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when a
Portfolio's Sub-Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the U.S. options markets.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Trust
at one rate, while offering a lesser rate of exchange should the Trust desire
to resell that currency to the dealer.
SWAPS, CAPS, FLOORS, AND COLLARS. Among the strategic transactions into
which certain Portfolios may enter are interest rate, currency and index
swaps, and other types of available swap agreements, such as caps, floors, and
collars. A Portfolio will enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique, or
to protect against any increase in the price of securities a Portfolio
anticipates purchasing at a later date. A Portfolio will use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, (e.g., an exchange
of floating rate payments for fixed rate payments) with respect to a notional
amount of principal. A currency swap is an agreement to exchange cash flows on
a notional amount of two or more currencies based on the relative value
differential among them. An index swap is an agreement to swap cash flows on a
notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument) with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors, and collars are entered into for good faith hedging
purposes, the Sub-Advisers and the Portfolios believe such obligations do not
constitute senior securities under the Investment Company Act of 1940 (the
"1940 Act"), as amended, and accordingly, will not treat them as being subject
to its borrowing restrictions. If there is a default by the counterparty, the
Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting as both principals
and agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and accordingly, they are less liquid than swaps.
With respect to swaps, the Portfolio will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on
a daily basis and will segregate with its custodian an amount of cash or
liquid high-grade securities having a value equal to the accrued excess. Caps,
floors, and collars require segregation of assets with a value equal to a
Portfolio's net obligation, if any.
COMMERCIAL MORTGAGE-BACKED SECURITIES
The BlackRock Managed Bond Portfolio may invest in commercial mortgage-backed
securities. Commercial mortgage-backed securities are generally multi-class
debt or pass-through securities backed by a mortgage loan or pool of mortgage
loans secured by commercial property, such as industrial and warehouse
properties, office buildings, retail space and shopping malls, multi-family
properties and cooperative apartments, hotels and motels, nursing homes,
hospitals, senior living centers, and agricultural property. The commercial
mortgage loans that underlie commercial mortgage-backed securities have
certain distinct characteristics. Commercial mortgage loans are generally not
amortizing or not fully amortizing. At their maturity date, repayment of the
remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or sale of the property. Unlike most
single-family residential mortgages, commercial real property loans often
contain provisions which substantially reduce the likelihood that such
securities will be prepaid. The provisions generally impose significant
prepayment penalties on loans and, in some cases, there may be prohibitions on
principal prepayments for several years following origination. This difference
in prepayment exposure is significant due to extraordinarily high levels of
refinancing of traditional residential mortgages experienced over the past
year as mortgage rates have reached a 25-year low. Assets underlying
commercial mortgage-backed securities may relate to only a few properties or
to a single property.
Commercial mortgage-backed securities have been issued in public and private
transactions by a variety of public and private issuers. Non-governmental
entities that have issued or sponsored commercial mortgage-backed securities
offerings include owners of commercial properties, originators of and
investors in mortgage loans, savings and loan associations, mortgage banks,
commercial banks, insurance companies, investment banks, and special-purpose
subsidiaries of the foregoing. The BlackRock Managed Bond Portfolio may, from
time to time, purchase commercial mortgage-backed securities directly from
issuers in negotiated transactions or from a holder of such commercial
mortgage-backed securities in the secondary market.
Commercial mortgage-backed securities generally are structured to protect the
senior class investors against potential losses on the underlying mortgage
loans. This is generally provided by the subordinated class investors, which
may be included in the Portfolio, by taking the first loss if there are
defaults on the underlying commercial mortgage loans. Other protection, which
may benefit all of the classes, including the subordinated classes in which
the Portfolio intends to invest, may include issuer guarantees, reserve funds,
additional subordinated securities, cross-collateralization,
over-collateralization, and the equity investors in the underlying properties.
By adjusting the priority of interest and principal payments on each class of
a given commercial mortgage-backed security, issuers are able to issue senior
investment-grade securities and lower-rated or non-rated subordinated
securities tailored to meet the needs of sophisticated institutional
investors. In general, subordinated classes of commercial mortgage-backed
securities are entitled to receive repayment of principal only after all
required principal payments have been made to more senior classes and have
subordinate rights as to receipt of interest distributions. Such subordinated
classes are subject to a substantially greater risk of nonpayment than are
senior classes of commercial mortgage-backed securities. Even within a class
of subordinate securities, most commercial mortgage-backed securities are
structured with a hierarchy of levels (or "loss positions"). Loss positions
are the order in which nonrecoverable losses of principal are applied to the
securities within a given structure. For instance, a first-loss subordinate
security will absorb any principal losses before any higher-loss position
subordinate security. This type of structure allows a number of classes of
securities to be created with varying degrees of credit exposure, prepayment
exposure, and potential total return.
Subordinated classes of commercial mortgage-backed securities have more
recently been structured to meet specific investor preferences and issuer
constraints and have different priorities for cash flow and loss absorption.
As previously discussed, from a credit perspective, they are structured to
absorb any credit-related losses prior to the senior class. The principal cash
flow characteristics of subordinated classes are designed to be among the most
stable in the mortgage-backed securities market, the probability of prepayment
being much lower than with traditional residential mortgage-backed securities.
This characteristic is primarily due to the structural feature that directs
the application of principal payments first to the senior classes until they
are retired before the subordinated classes receive any prepayments. While
this serves to enhance the credit protection of the senior classes, it
produces subordinated classes with more stable average lives. Subject to the
applicable provisions of the 1940 Act, there are no limitations on the classes
of commercial mortgage-backed securities in which the Portfolio may invest.
Accordingly, in certain circumstances, the Portfolio may recover
proportionally less of its investment in a commercial mortgage-backed security
than the holders of more senior classes of the same commercial mortgage-backed
security.
The rating assigned to a given issue and class of commercial mortgage-backed
securities is a product of many factors, including the structure of the
security, the level of subordination, the quality and adequacy of the
collateral, and the past performance of the originators and servicing
companies. The rating of any commercial mortgage-backed security is determined
to a substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the
loan-to-value (the "LTV") ratio of the pooled properties. The amount of the
securities issued in any one rating category is determined by the rating
agencies after a rigorous credit rating process which includes analysis of the
issuer, servicer, and property manager, as well as verification of the LTV and
debt service coverage ratios. LTV ratios may be particularly important in the
case of commercial mortgages because most commercial mortgage loans provide
that the lender's sole remedy in the event of a default is against the
mortgaged property, and the lender is not permitted to pursue remedies with
respect to other assets of the borrower. Accordingly, LTV ratios may, in
certain circumstances, determine the amount realized by the holder of the
commercial mortgage-backed security.
ZERO-COUPON SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt obligations
which are generally issued at a discount and payable in full at maturity, and
which do not provide for current payments of interest prior to maturity.
Zero-coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest. As a result, the net asset value of shares
of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other Portfolios of the Trust and other mutual
funds investing in securities making current distributions of interest and
having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold
them in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). 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 owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership
of particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry recordkeeping 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." Under the STRIPS program, a Portfolio will be able to have its
beneficial ownership of U.S. Treasury zero-coupon securities recorded directly
in the book-entry recordkeeping system in lieu of having to hold certificates
or other evidences of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons
by the holder, the stripped coupons are sold separately. The principal or
corpus is sold at a deep discount because the buyer only receives the right to
receive a future fixed payment on the security and does not receive any rights
to periodic cash interest payments. Once stripped or separated, the corpus and
coupons may be sold separately. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold in such bundled
form. Purchasers of stripped obligations acquire, in effect, discount
obligations that are economically identical to the zero-coupon securities
issued directly by the obligor.
VARIABLE- OR FLOATING-RATE SECURITIES
Certain Portfolios may invest in securities which offer a variable or floating
rate of interest. Variable-rate securities provide for automatic establishment
of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities provide for automatic
adjustment of the interest rate whenever some specified interest rate index
changes. The interest rate on variable- or floating-rate securities is
ordinarily determined by reference to, or is a percentage of, a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial
paper or bank certificates of deposit, an index of short-term interest rates,
or some other objective measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on seven days' notice;
in other cases, the demand feature is exercisable at any time on 30 days'
notice or on similar notice at intervals of not more than one year. Some
securities which do not have variable or floating interest rates may be
accompanied by puts producing similar results and price characteristics.
Variable-rate demand notes include master demand notes which are obligations
that permit a Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Portfolio as
lender and the borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations normally has a corresponding right,
after a given period, to prepay, in its discretion, the outstanding principal
amount of the obligations plus accrued interest upon a specified number of
days' notice to the holders of such obligations. The interest rate on a
floating-rate demand obligation is based on a known lending rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded, and there generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies. If not so rated, a
Portfolio may invest in them only if the Portfolio's Sub-Adviser determines
that, at the time of investment, the obligations are of comparable quality to
the other obligations in which the Portfolio may invest. The Sub-Adviser, on
behalf of a Portfolio, will consider on an ongoing basis the creditworthiness
of the issuers of the floating- and variable-rate demand obligations in the
Portfolio's portfolio.
LOWER-GRADE SECURITIES
Certain Portfolios may invest in lower-grade income securities. Such
lower-grade securities are commonly referred to as "junk bonds." Investment in
such securities involves special risks, as described herein. Liquidity relates
to the ability of a Portfolio to sell a security in a timely manner at a price
which reflects the value of that security. As discussed below, the market for
lower-grade securities is generally considered to be less liquid than the
market for investment-grade securities. The relative illiquidity of some of a
Portfolio's portfolio securities may adversely affect the ability of the
Portfolio to dispose of such securities in a timely manner and at a price
which reflects the value of such security in the Sub-Adviser's judgment. The
market for less liquid securities tends to be more volatile than the market
for more liquid securities and market values of relatively illiquid securities
may be more susceptible to change as a result of adverse publicity and
investor perceptions than are the market values of higher-grade, more liquid
securities.
A Portfolio's net asset value will change with changes in the value of its
portfolio securities. If a Portfolio invests in fixed-income securities, the
Portfolio's net asset value can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed-income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed-income securities can be expected to decline. Net asset value and market
value may be volatile due to a Portfolio's investment in lower-grade and less
liquid securities. Volatility may be greater during periods of general
economic uncertainty.
A Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which a Portfolio may
invest, there may be relatively inactive trading in such securities and the
ability of the Sub-Adviser to accurately value such securities may be
adversely affected. During periods of reduced market liquidity and in the
absence of readily available market quotations for securities held in a
Portfolio's portfolio, the responsibility of the Sub-Adviser to value the
Portfolio's securities becomes more difficult and the Sub-Adviser's judgment
may play a greater role in the valuation of the Portfolio's securities due to
the reduced availability of reliable objective data. To the extent that a
Portfolio invests in illiquid securities and securities which are restricted
as to resale, the Portfolio may incur additional risks and costs.
Lower-grade securities generally involve greater credit risk than higher-grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower-grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower-grade securities to repay
principal and to pay interest, to meet projected financial goals, and to
obtain additional financing may be adversely affected. Such consequences could
lead to an increased incidence of default for such securities and adversely
affect the value of the lower-grade securities in a Portfolio's portfolio and
thus a Portfolio's net asset value. The secondary market prices of lower-grade
securities are less sensitive to changes in interest rates than are those for
higher-rated securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower-grade securities.
Yields on a Portfolio's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest
rates can be expected to result in increased volatility of the market prices
of the lower-grade securities in a Portfolio's portfolio and thus in the net
asset value of a Portfolio. Net asset value and market value may be volatile
due to a Portfolio's investment in lower-grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty. The
Portfolios may incur additional expenses to the extent they are required to
seek recovery upon a default in the payment of interest or a repayment of
principal on their portfolio holdings, and the Portfolios may be unable to
obtain full recovery thereof. In the event an issuer of securities held by a
Portfolio experiences difficulties in the timely payment of principal or
interest and such issuer seeks to restructure the terms of its borrowings,
such Portfolio may incur additional expenses and may determine to invest
additional capital with respect to such issuer or the project or projects to
which the Portfolio's portfolio securities relate.
The Portfolios will rely on each Sub-Adviser's judgment, analysis, and
experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Sub-Adviser will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management, and
regulatory matters. The Sub-Adviser also may consider, although it does not
rely primarily on, the credit ratings of S&P and Moody's in evaluating
fixed-income securities. Such ratings evaluate only the safety of principal
and interest payments, not market value risk. Additionally, because the
creditworthiness of an issuer may change more rapidly than is able to be
timely reflected in changes in credit ratings, the Sub-Adviser continuously
monitors the issuers of such securities held in the Portfolio's portfolio. A
Portfolio may, if deemed appropriate by the Sub-Adviser, retain a security
whose rating has been downgraded below B by S&P or below B by Moody's, or
whose rating has been withdrawn.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the 1940 Act and the
rules thereunder, a "majority of the outstanding voting securities" of a
Portfolio means the lesser of (a) 67% of the shares of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding shares of that
Portfolio are present in person or by proxy and (b) more than 50% of the
outstanding shares of that Portfolio. Any investment restrictions which
involve a maximum percentage of securities or assets shall not be considered
to be 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 or on behalf of, a Portfolio, as the case may be.
The Trust may not, on behalf of a Portfolio:
(1) With respect to 75% of its total assets, purchase the securities
of any issuer if such purchase would cause more than 5% of the value of a
Portfolio's total assets to be invested in securities of any one issuer
(except securities issued or guaranteed by the U.S. government or any agency
or instrumentality thereof), or purchase more than 10% of the outstanding
voting securities of any one issuer;
(2) Invest more than 25% of the value of its net assets in the
securities (other than U.S. government securities) of issuers in a single
industry, except that this policy shall not limit investment by the Global
Advisors Money Market Portfolio in obligations of U.S. banks (excluding their
foreign branches);
(3) Borrow money (including reverse repurchase agreements), except as
a temporary measure for extraordinary or emergency purposes or, with respect
to the Global Advisors Money Market Portfolio, to facilitate redemptions (and
not for leveraging or investment, except with respect to reverse repurchase
agreements and dollar roll transactions, to the extent such investments are
permitted under a Portfolio's investment objectives and policies), provided
that borrowings do not exceed an amount equal to 331/3% of the current value
of the Portfolio's assets taken at market value, less liabilities other than
borrowings. If at any time a Portfolio's borrowings exceed this limitation due
to a decline in net assets, such borrowings will be reduced within three days
to the extent necessary to comply with this limitation. A Portfolio will not
purchase investments once borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets;
(4) Make loans to other persons, except loans of Portfolio securities
and except to the extent that the purchase of debt obligations in accordance
with its investment objectives and policies or entry into repurchase
agreements may be deemed to be loans;
(5) Purchase or sell any commodity contract, except that each
Portfolio (other than the Global Advisors Money Market Portfolio), to the
extent permitted by its investment objectives and policies, may purchase and
sell futures contracts based on debt securities, indexes of securities, and
foreign currencies and purchase and write options on securities, futures
contracts which it may purchase, securities indexes, and foreign currencies
and purchase forward contracts. (Securities denominated in gold or other
precious metals or whose value is determined by the value of gold or other
precious metals are not considered to be commodity contracts.)
(6) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its Portfolio investments,
it may be deemed to be an underwriter under federal securities laws;
(7) Purchase or sell real estate, although (with respect to
Portfolios other than the Global Advisors Money Market Portfolio) it may
purchase and sell securities which are secured by or represent interests in
real estate, mortgage-related securities, securities of companies principally
engaged in the real estate industry, and participation interests in pools of
real estate mortgage loans, and it may liquidate real estate acquired as a
result of default on a mortgage; and
(8) Issue any class of securities which is senior to a Portfolio's
shares of beneficial interest except as permitted under the 1940 Act or by
order of the SEC.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are non-fundamental and may be changed
by the Trustees of the Trust without shareholder approval. Although
shareholder approval is not necessary, the Trust intends to notify its
shareholders before implementing any material change in any non-fundamental
investment restriction.
The Trust may not, on behalf of a Portfolio:
(1) Invest more than 15% (except 10% with respect to the Credit
Suisse International Equity Portfolio and the Global Advisors Money Market
Portfolio) of the net assets of a Portfolio (taken at market value) in
illiquid securities, including repurchase agreements maturing in more than
seven days;
(2) Purchase securities on margin, except (with respect to all
Portfolios other than the Global Advisors Money Market Portfolio) such
short-term credits as may be necessary for the clearance of purchases and
sales of securities, and except (with respect to all Portfolios other than the
Global Advisors Money Market Portfolio) that it may make margin payments in
connection with options, futures contracts, options on futures contracts, and
forward foreign currency contracts and in connection with swap agreements;
(3) Make short sales of securities unless such Portfolio (other than
the Global Advisors Money Market Portfolio) owns an equal amount of such
securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short; and
(4) Make investments for the purpose of gaining control of a
company's management.
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<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT OF THE TRUST
POSITION HELD WITH PRINCIPAL OCCUPATION DURING
NAME, ADDRESS, AND AGE THE TRUST PAST FIVE YEARS
<S> <C> <C>
RICHARD W. SCOTT* PRESIDENT, PRINCIPAL VICE CHAIRMAN SINCE JULY 1996, GENERAL COUNSEL AND CHIEF
5555 SAN FELIPE, SUITE 900 EXECUTIVE OFFICER, INVESTMENT OFFICER SINCE FEBRUARY 1993, AND EXECUTIVE
HOUSTON, TEXAS 77056 AND TRUSTEE VICE PRESIDENT FROM FEBRUARY 1993 UNTIL JULY 1996 OF
AGE: 43 WESTERN NATIONAL CORPORATION; VICE CHAIRMAN SINCE JULY
1996, CHIEF INVESTMENT OFFICER SINCE FEBRUARY 1993,
GENERAL COUNSEL FROM FEBRUARY 1993 UNTIL FEBRUARY
TRUSTEE 1997 OF WESTERN NATIONAL LIFE; PRIOR THERETO, A PARTNER
5555 SAN FELIPE, SUITE 900 WITH VINSON & ELKINS L.L.P.
HOUSTON, TEXAS 77056
AGE: 37 SINCE OCTOBER 1993 OF WESTERN NATIONAL CORPORATION AND OF
TRUSTEE WESTERN NATIONAL LIFE INSURANCE COMPANY; PRIOR THERETO
EXECUTIVE, SENIOR, SECOND, OR ASSISTANT VICE PRESIDENT
16670 ARNOLD DRIVE OR VICE PRESIDENT, MARKETING OF CONSECO, INC. AND WESTERN
SONOMA, CA 95476 TRUSTEE NATIONAL LIFE INSURANCE COMPANY.
AGE: 69
MARCH 1993; PRIOR THERETO, VICE PRESIDENT, INVESTMENT
C/O VINSON & ELKINS L.L.P. ADMINISTRATION & PLANNING, AMERICAN GENERAL CORPORATION.
2300 FIRST CITY TOWER TRUSTEE
1001 FANNIN RETIRED SINCE 1993; PRIOR THERETO, A PARTNER WITH
HOUSTON, TEXAS 77002-6760 VINSON & ELKINS L.L.P.
AGE: 58
952 ECHO LANE, SUITE 322
HOUSTON, TEXAS 77024 VICE PRESIDENT, TREASURER, MARCH 1, 1993 UNTIL SEPTEMBER 15, 1994, PRESIDENT AND
AGE: 54 PRINCIPAL FINANCIAL DIRECTOR OF TEXAS CAPITAL BANCSHARES, INC. AND ITS
OFFICER, AND PRINCIPAL SUBSIDIARY BANK, TEXAS CAPITAL BANK, N.A.; PRIOR THERETO,
MELVIN C. PAYNE ACCOUNTING OFFICER A PARTNER WITH KPMG PEAT MARWICK.
1300 POST OAK BLVD., SUITE 1500
HOUSTON, TEXAS 77045 SECRETARY SINCE 1991; PRIOR THERETO, AN INDEPENDENT CONSULTANT TO
AGE: 54 VARIOUS COMPANIES.
5555 SAN FELIPE, SUITE 900 VICE PRESIDENT, TREASURER OF WESTERN NATIONAL LIFE INSURANCE
HOUSTON, TEXAS 77056 COMPANY SINCE FEBRUARY 1994; PRIOR THERETO, VICE PRESIDENT,
AGE: 39 VICE PRESIDENT AND ASSISTANT SECOND VICE PRESIDENT, ASSISTANT VICE PRESIDENT - FINANCIAL
TREASURER REPORTING, CONSECO, INC., CARMEL, INDIANA.
5555 SAN FELIPE, SUITE 900
HOUSTON, TEXAS 77056 OF WESTERN NATIONAL CORPORATION. SENIOR VICE PRESIDENT SINCE
AGE: 44 FEBRUARY 1996, AND GENERAL COUNSEL SINCE FEBRUARY 1997 OF
ASSISTANT SECRETARY WESTERN NATIONAL LIFE INSURANCE COMPANY; PRIOR THERETO,
VICE PRESIDENT AND FROM DECEMBER 1993 UNTIL FEBRUARY
1996, ASSOCIATE GENERAL COUNSEL FROM FEBRUARY 1995 UNTIL
KURT R. FREDLAND FEBRUARY 1997, AND CORPORATE SECRETARY FROM DECEMBER 1993
5555 SAN FELIPE, SUITE 900 UNTIL FEBRUARY 1997 OF WESTERN NATIONAL LIFE INSURANCE
HOUSTON, TEXAS 77056 COMPANY
AGE: 48
WESTERN NATIONAL LIFE, SINCE APRIL, 1994; PRIOR THERETO,
FROM FEBRUARY 1993 TO APRIL 1994, A FINANCIAL CONSULTANT;
EVELYN M. CURRAN PRIOR THERETO, FROM APRIL 1977 TO FEBRUARY 1993, SENIOR
5555 SAN FELIPE, SUITE 900 VICE PRESIDENT (AND A NUMBER OF OTHER POSITIONS AT THE
HOUSTON, TEXAS 77056 SAME EMPLOYER PRECEDING THAT POSITION), FIRST CITY
AGE: 31 BANCORPORATION OF TEXAS, INC., HOUSTON, TEXAS.
FEBRUARY 1996.ASSISTANT VICE PRESIDENT-LAW SINCE FEBRUARY
1996, AND CORPORATE SECRETARY SINCE FEBRUARY 1997 OF
WESTERN NATIONAL LIFE; PRIOR THERETO, FROM FEBRUARY
1996 UNTIL FEBRUARY 1997, ASSISTANT VICE-PRESIDENT-LAW AND
ASSISTANT CORPORATE SECRETARY; FROM MARCH 1994 UNTIL
FEBRUARY 1996, STAFF ATTORNEY OF WESTERN NATIONAL LIFE.
</TABLE>
* INTERESTED PERSON OF THE TRUST WITHIN THE MEANING OF THE 1940 ACT.EACH
TRUSTEE OF THE TRUST WHO IS NOT AN EMPLOYEE, OFFICER, OR DIRECTOR OF THE LIFE
COMPANY, THE ADVISER, OR A SUB-ADVISER RECEIVES AN ANNUAL FEE OF $7,500 AND AN
ADDITIONAL FEE OF $750 FOR EACH TRUSTEES' MEETING ATTENDED. IN ADDITION,
DISINTERESTED TRUSTEES WHO ARE MEMBERS OF ANY BOARD COMMITTEES WILL RECEIVE A
SEPARATE $750 FEE FOR ATTENDANCE OF ANY COMMITTEE MEETING THAT IS HELD ON A
DAY ON WHICH NO BOARD MEETING IS HELD. NONE OF THE TRUSTEES OR OFFICERS OF THE
TRUST OWN ANY OF THE OUTSTANDING SHARES OF THE TRUST AS OF MAY 1, 1997. WITH
RESPECT TO THE PERIOD ENDED DECEMBER 31, 1996, THE TRUST PAID TRUSTEES' FEES
AGGREGATING $41,250. THE FOLLOWING TABLE SHOWS THE 1996 COMPENSATION BY
TRUSTEE.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated Annual From Registrant
Name of Person, Compensation from Benefits Accrued Benefits Upon and Fund Complex
Position Registrant As Part of Fund Expenses Retirement Paid to Trustee
<S> <C> <C> <C> <C>
Richard W. Scott None None None None
President and
Trustee
John A. Graf None None None None
Trustee
Alden W. Brosseau $ 10,500 None None $ 10,500
Trustee
Hugh L. Hyde $ 10,500 None None $ 10,500
Trustee
Melvin C. Payne $ 9,750 None None $ 9,750
Trustee
S. Tevis Grinstead $ 10,500 None None $ 10,500
Trustee
</TABLE>
SUBSTANTIAL SHAREHOLDERS
Shares of the Portfolios are issued and redeemed in connection with
investments in and payments under certain variable annuity contracts issued
through a Separate Account of the Life Company. As of May 1, 1997, the
Separate Account of the Life Company was known to the Board of Trustees and
the management of the Trust to own of record 100% of the shares of each
Portfolio of the Trust.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in the Declaration
of Trust that they have not acted in good faith, in the reasonable belief that
their actions were in the best interests of the Trust, or that such
indemnification would relieve any officer or Trustee of any liability to the
Trust, or its shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of his or her duties. The Trust, at its
expense, may provide liability insurance for the benefit of its Trustees and
officers.
INVESTMENT ADVISER
Under the Investment Advisory Agreement between the Trust and the Adviser (the
"Investment Advisory Agreement"), the Adviser, at its expense, provides the
Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of
the Trust and each Portfolio. The fees to be paid under the Investment
Advisory Agreement are set forth in the Trust's prospectus.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies, and restrictions and to determine, from time to time, securities to
be purchased, sold, retained, or lent by the Trust and implement those
decisions, subject always to the provisions of the Trust's Declaration of
Trust and By-laws, and of the 1940 Act, and subject further to such policies
and instructions as the Trustees may from time to time establish.
The Investment Advisory Agreement further provides that the Adviser shall
furnish the Trust with office space and necessary personnel, pay ordinary
office expenses, pay all executive salaries of the Trust, and furnish, without
expense to the Trust, the services of such members of its organization as may
be duly elected officers or Trustees of the Trust.
Under the Investment Advisory Agreement, the Trust is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing, or accounting expenses; Trustees' fees and expenses; insurance
premiums; brokers' commissions; taxes and governmental fees; expenses of issue
or redemption of shares; expenses of registering or qualifying shares for
sale; reports and notices to shareholders and fees and disbursements of
custodians, transfer agents, registrars, shareholder servicing agents, and
dividend disbursing agents; and certain expenses with respect to membership
fees of industry associations.
The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at Adviser's own cost and expense, for the purpose of managing
the investment of the assets of one or more Portfolios.
The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer, or employee of Adviser will be liable for any loss suffered
by the Trust in the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations and duties. In addition, the
Agreement provides for indemnification of the Adviser by the Trust.
The Investment Advisory Agreement may be terminated without penalty by vote of
the Trustees, as to any Portfolio by the shareholders of that Portfolio, or by
Adviser on 60 days' written notice. The Agreement also terminates without
payment of any penalty in the event of its assignment. In addition, the
Investment Advisory Agreement may be amended only by a vote of the
shareholders of the affected Portfolio(s) and provides that it will continue
in effect from year to year only so long as such continuance is approved at
least annually with respect to each Portfolio by vote of either the Trustees
or the shareholders of the Portfolio, and, in either case, by a majority of
the Trustees who are not "interested persons" of the Adviser. In each of the
foregoing cases, the vote of the shareholders is the affirmative vote of a
"majority of the outstanding voting securities" as defined in the 1940 Act.
The Adviser has agreed to waive that portion of its advisory fee which is in
excess of the amount payable by the Adviser to each Sub-Adviser pursuant to
the respective sub-advisory agreements for each Portfolio until May 1, 1998.
In addition, the Adviser has undertaken to bear all operating expenses of each
Portfolio, excluding the compensation of the Adviser, that exceed .12% of each
Portfolio's average daily net assets until May 1, 1998. Information concerning
the advisory fees waived and expenses reimbursed for the period ended December
31, 1996, is contained in the Prospectus.
For the years ended December 31, 1996 and 1995, respectively, the Adviser was
paid advisory fees as follows:
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
BEA Growth and Income Portfolio $4,727 -
BlackRock Managed Bond Portfolio 1,588 N/A
Credit Suisse International Equity Portfolio 5,824 -
EliteValue Asset Allocation Portfolio 986 N/A
Global Advisors Growth Equity Portfolio 3,353 -
Global Advisors Money Market Portfolio 569 -
Salomon Brothers U.S. Government
Securities Portfolio 355 N/A
Van Kampen American Capital Emerging
Growth Portfolio 970 N/A
</TABLE>
For the years ended December 31, 1996 and 1995, respectively, the Adviser
waived advisory fees as follows:
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
BEA Growth and Income Portfolio $ 6,812 3,106
BlackRock Managed Bond Portfolio 12,335 N/A
Credit Suisse International Equity Portfolio 6,699 3,643
EliteValue Asset Allocation Portfolio 6,128 N/A
Global Advisors Growth Equity Portfolio 6,520 2,490
Global Advisors Money Market Portfolio 1,878 106
Salomon Brothers U.S. Government
Securities Portfolio 7,227 N/A
Van Kampen American Capital Emerging
Growth Portfolio 5,171 N/A
</TABLE>
TRUST ADMINISTRATION
State Street Bank and Trust Company provides certain accounting, transfer
agency, and other services to the Trust.
SUB-ADVISERS
Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more of the Portfolios of the Trust pursuant to separate written
agreements. Certain services provided by, and the fees paid to, the
Sub-Advisers are described in the Prospectus under "Management of the Trust -
Sub-Advisers."
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Sub-Advisers are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their
investments generally. Frequently, a particular security may be bought or sold
for only one client or in different amounts and at different times for more
than one, but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients of a Sub-Adviser on the same day. In such event, such
transactions will be allocated among the clients in a manner believed by the
Sub-Adviser to be equitable to each. In some cases, this procedure could have
an adverse effect on the price or amount of the securities purchased or sold
by the Trust. Purchase and sale orders for the Trust may be combined with
those of other clients of a Sub-Adviser in the interest of achieving the most
favorable net results for the Trust.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Trust of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the
United States. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed,
fixed commission or discount retained by the underwriter or dealer. It is
currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Trust and buy and sell
securities for the Trust through a substantial number of brokers and dealers.
In so doing, the Sub-Advisers will use their best efforts to obtain for the
Trust the best price and execution available. In seeking the best price and
execution, the Sub-Advisers, having in mind the Trust's best interests, will
consider all factors they deem relevant, including, by way of illustration,
price; the size of the transaction; the nature of the market for the security;
the amount of the commission; the timing of the transaction taking into
account market prices and trends; the reputation, experience, and financial
stability of the broker-dealer involved; and the quality of service rendered
by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive research, statistical, and quotation services from
broker-dealers who execute portfolio transactions for the clients of such
advisers. Consistent with this practice, the Sub-Advisers may receive
research, statistical, and quotation services from any broker-dealers with
whom they place the Trust's portfolio transactions. These services, which in
some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities, and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Sub-Advisers and/or
their affiliates in advising various other clients (including the Trust),
although not all of these services are necessarily useful and of value in
managing the Trust. The management fees paid by the Trust are not reduced
because the Sub-Advisers and/or their affiliates may receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Sub-Adviser may cause a Portfolio to pay a broker-dealer who provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess
of the commission which another broker-dealer would have charged for effecting
that transaction provided that the Sub-Adviser determines in good faith that
such commission was reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer, viewed in terms of that
particular transaction or in terms of all of the accounts over which
investment discretion is so exercised. A Sub-Adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Adviser or the Trustees may adopt from time to time.
During the Trust's fiscal year ended December 31, 1996, the Portfolios paid
the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
BEA Growth and Income Portfolio $13,588
BlackRock Managed Bond Portfolio -
Credit Suisse International Equity Portfolio 14,302
EliteValue Asset Allocation Portfolio 2,448
Global Advisors Growth Equity Portfolio 4,082
Global Advisors Money Market Portfolio -
Salomon Brothers U.S. Government
Securities Portfolio -
Van Kampen American Capital Emerging
Growth Portfolio 3,423
$37,843
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined daily as of 4:00
p.m., New York time, on each day the NYSE is open for trading. The NYSE is
normally closed on the following national holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
The value of a foreign security is determined in its national currency as of
the close of trading on the foreign exchange on which it is traded or as of
4:00 p.m., New York time, if that is earlier, and that value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined.
The valuation of the Global Advisors Money Market Portfolio's portfolio
securities is based upon their amortized cost, which does not take into
account unrealized securities gains or losses. This method involves initially
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the effect
of fluctuating interest rates on the market value of the instrument. By using
amortized cost valuation, the Trust seeks to maintain a constant net asset
value of $1 per share for the Global Advisors Money Market Portfolio, despite
minor shifts in the market value of its portfolio securities. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Global Advisors Money Market Portfolio would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of the Global Advisors Money Market Portfolio may tend to be higher
than a like computation made by a fund with identical investments utilizing a
method of valuation based on market prices and estimates of market prices for
all of its portfolio instruments. Thus, if the use of amortized cost by the
Portfolio resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Global Advisors Money Market Portfolio would be
able to obtain a somewhat higher yield if he or she purchased shares of the
Global Advisors Money Market Portfolio on that day, than would result from
investment in a fund utilizing solely market values, and existing investors in
the Global Advisors Money Market Portfolio would receive less investment
income. The converse would apply on a day when the use of amortized cost by
the Portfolio resulted in a higher aggregate portfolio value. However, as a
result of certain procedures adopted by the Trust, the Trust believes any
difference will normally be minimal.
The net asset value of the shares of each of the Portfolios, other than the
Global Advisors Money Market Portfolio, is determined by dividing the total
assets of the Portfolio, less all liabilities, by the total number of shares
outstanding. Securities traded on a national securities exchange or quoted on
the NASDAQ National Market System are valued at their last-reported sale price
on the principal exchange or reported by NASDAQ or, if there is no reported
sale, and in the case of over-the-counter securities not included in the
NASDAQ National Market System, at a bid price estimated by a broker or dealer.
Debt securities, including zero-coupon securities and certain foreign
securities, will be valued by a pricing service. Other foreign securities will
be valued by the Trust's custodian. Securities for which current market
quotations are not readily available and all other assets are valued at fair
value as determined in good faith by the Trustees, although the actual
calculations may be made by persons acting pursuant to the direction of the
Trustees.
If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Trust could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the
restrictions on disposition of the securities (including any registration
expenses that might be borne by the Trust in connection with such
disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities, and any available analysts' reports
regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
NYSE. The values of these securities used in determining the net asset value
of the Trust's shares are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities issues, the values of certain securities (such as
convertible bonds and U.S. government securities) are determined based on
market quotations collected earlier in the day at the latest practicable time
prior to the close of the NYSE. Occasionally, events affecting the value of
such securities may occur between such times and the close of the NYSE which
will not be reflected in the computation of the Trust's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value, in the
manner described above.
The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or more
Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can
otherwise be fairly made.
TAXES
Each Portfolio of the Trust intends to qualify each year and elect to be taxed
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). As a regulated investment company
qualifying to have its tax liability determined under Subchapter M, a
Portfolio will not be subject to federal income tax on any of its net
investment income or net realized capital gains that are distributed to the
Separate Account of the Life Company. As a Massachusetts business trust, a
Portfolio, under present law, will not be subject to any excise or income
taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio must,
among other things: (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities, or foreign currencies, and
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities,
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of certain assets (including stock and securities) held less
than three months; and (c) diversify its holdings so that, at the close of
each quarter of its taxable year, (i) at least 50% of the value of its total
assets consists of cash, cash items, U.S. government securities, and other
securities limited generally with respect to any one issuer to not more than
5% of the total assets of the Portfolio and not more than 10% of the
outstanding voting securities of such issuer and (ii) not more than 25% of the
value of its assets is invested in the securities of any issuer (other than
U.S. government securities). Moreover, in order to receive the favorable tax
treatment accorded regulated investment companies and their shareholders, a
Portfolio must, in general, distribute at least 90% of its interest,
dividends, net short-term capital gain, and certain other income each year.
With respect to investment income and gains received by a Portfolio from
sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. The effective rate of foreign
taxes in which a Portfolio will be subject depends on the specific countries
in which its assets will be invested and the extent of the assets invested in
each such country and, therefore, cannot be determined in advance.
A Portfolio's ability to use options, futures, and forward contracts and other
hedging techniques, and to engage in certain other transactions, may be
limited by tax considerations. A Portfolio's transactions in
foreign-currency-denominated debt instruments and its hedging activities will
likely produce a difference between its book income and its taxable income.
This difference may cause a portion of the Portfolio's distributions of book
income to constitute returns of capital for tax purposes or require the
Portfolio to make distributions exceeding book income in order to permit the
Trust to continue to qualify and be taxed under Subchapter M of the Code, as a
regulated investment company.
Under federal income tax law, a portion of the difference between the purchase
price of zero-coupon securities in which a Portfolio has invested and their
face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must
be distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
It is the policy of each of the Portfolios to meet the requirements of the
Code to qualify as a regulated investment company that is taxed pursuant to
Subchapter M of the Code. One of these requirements is that less than 30% of a
Portfolio's gross income must be derived from gains from sale or other
disposition of securities held for less than three months (with special rules
applying to so-called designated hedges). Accordingly, a Portfolio will be
restricted in selling securities held or considered under Code rules to have
been held less than three months, and in engaging in hedging or other
activities (including entering into options, futures, or short-sale
transactions) which may cause the Trust's holding period in certain of its
assets to be less than three months.
This discussion of the federal income tax and state tax treatment of the Trust
and its shareholders is based on the law as of the date of this SAI. It does
not describe in any respect the tax treatment of any insurance or other
product pursuant to which investments in the Trust may be made. For further
information concerning federal income tax consequences for the holders of the
VA Contracts of the Life Company, investors should consult the Prospectus used
in connection with the issuance of their VA Contracts.
DIVIDENDS AND DISTRIBUTIONS
GLOBAL ADVISORS MONEY MARKET PORTFOLIO. The net investment income of the
Global Advisors Money Market Portfolio is determined as of the close of
trading on the NYSE (generally 4 p.m., New York time) on each day on which the
NYSE is open for business. All of the net investment income so determined
normally will be declared daily as a dividend to shareholders of record as of
the close of trading on the NYSE after the purchase and redemption of shares.
Unless the business day before a weekend or holiday is the last day of an
accounting period, the dividend declared on that day will include an amount in
respect of the Portfolio's income for the subsequent non-business day or days.
No daily dividend will include any amount of net income in respect of a
subsequent semi-annual accounting period. Dividends commence on the next
business day after the date of purchase. Dividends declared during any month
will be invested as of the close of business on the last calendar day of that
month (or the next business day after the last calendar day of the month if
the last calendar day of the month is a non-business day) in additional shares
of the Portfolio at the net asset value per share, normally $1, determined as
of the close of business on that day, unless payment of the dividend in cash
has been requested.
Net income of the Global Advisors Money Market Portfolio consists of all
interest income accrued on portfolio assets less all expenses of the Portfolio
and amortized market premium. Amortized market discount is included in
interest income. The Portfolio does not anticipate that it will normally
realize any long-term capital gains with respect to its portfolio securities.
Normally the Global Advisors Money Market Portfolio will have a positive net
income at the time of each determination thereof. Net income may be negative
if an unexpected liability must be accrued or a loss realized. If the net
income of the Portfolio determined at any time is a negative amount, the net
asset value per share will be reduced below $1 unless one or more of the
following steps, for which the Trustees have authority, are taken: (a)
reducing the number of shares in each shareholder's account; (b) offsetting
each shareholder's pro rata portion of negative net income against the
shareholder's accrued dividend account or against future dividends; or (c)
combining these methods in order to seek to maintain the net asset value per
share at $1. The Trust may endeavor to restore the Portfolio's net asset value
per share to $1 by not declaring dividends from net income on subsequent days
until restoration, with the result that the net asset value per share will
increase to the extent of positive net income which is not declared as a
dividend.
Should the Global Advisors Money Market Portfolio incur or anticipate, with
respect to its portfolio, any unusual or unexpected significant expense or
loss which would affect disproportionately the Portfolio's income for a
particular period, the Trustees would at that time consider whether to adhere
to the dividend policy described above or to revise it in light of the
then-prevailing circumstances in order to ameliorate, to the extent possible,
the disproportionate effect of such expense or loss on then-existing
shareholders. Such expenses or losses may, nevertheless, result in a
shareholder receiving no dividends for the period during which the shares are
held, and receiving, upon redemption, a price per share lower than that which
was paid.
OTHER PORTFOLIOS. Each of the Portfolios, other than the Global Advisors
Money Market Portfolio, will declare and distribute dividends from net
investment income, if any, and will distribute its net realized capital gains,
if any, at least annually. Both dividends and capital gain distributions will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account to receive dividends and capital gain distributions in cash.
PERFORMANCE INFORMATION
GLOBAL ADVISORS MONEY MARKET PORTFOLIO: The Portfolio's yield is computed
by determining the percentage net change, excluding capital changes, in the
value of an investment in one share of the Portfolio over the base period, and
multiplying the net change by 365/7 (or approximately 52 weeks). The
Portfolio's effective yield represents a compounding of the yield by adding
one to the number representing the percentage change in value of the
investment during the base period, raising that sum to a power equal to 365/7,
and subtracting one from the result.
OTHER PORTFOLIOS:
(a) A Portfolio's yield is presented for a specified 30-day period
(the "base period"). Yield is based on the amount determined by: (i)
calculating the aggregate of dividends and interest earned by the Portfolio
during the base period, less expenses accrued for that period and (ii)
dividing that amount by the product of (A) the average daily number of shares
of the Portfolio outstanding during the base period and entitled to receive
dividends, and (B) the net asset value per share of the Portfolio on the last
day of the base period. The result is annualized on a compounding basis to
determine the Portfolio's yield. For this calculation, interest earned on debt
obligations held by a Portfolio is generally calculated using the yield to
maturity (or first expected call date) of such obligations based on their
market values (or, in the case of receivables-backed securities such as Ginnie
Maes, based on cost). Dividends on equity securities are accrued daily at
their stated dividend rates.
As required by regulations of the SEC, the annualized total return of a
Portfolio for a period is computed by assuming a hypothetical initial payment
of $1,000. It is then assumed that all of the dividends and distributions by
the Portfolio over the period are reinvested. It is then assumed that at the
end of the period, the entire amount is redeemed. The annualized total return
is then calculated by determining the annual rate required for the initial
payment to grow to the amount which would have been received upon redemption.
Investment operations for the Portfolios depicted in the chart below commenced
on October 10, 1995, for the Money Market Portfolio; on October 20, 1995, for
the BEA Growth and Income, Credit Suisse International Equity, and Global
Advisors Growth Equity Portfolios; on January 2, 1996 for the BlackRock
Managed Bond, EliteValue Asset Allocation, and Van Kampen American Capital
Emerging Growth Portfolios; and on February 6, 1996, for the Salomon Brothers
U.S. Government Securities Portfolio. The performance figures shown for the
Portfolios in the chart below reflect the actual fees and expenses paid by the
Portfolios.
AVERAGE TOTAL RETURN FOR THE PERIOD INDICATED
<TABLE>
<CAPTION>
Inception to 12 Months Ended Inception to
Portfolio 12/31/96 12/31/96 12/31/95
<S> <C> <C> <C>
BEA Growth and Income Portfolio 17.41% 13.82% 6.57%
BlackRock Managed Bond Portfolio 3.76 N/A N/A
Credit Suisse International Equity Portfolio 17.23 16.50 3.93
EliteValue Asset Allocation Portfolio 26.70 N/A N/A
Global Advisors Growth Equity Portfolio 20.94 21.36 3.57
Global Advisors Money Market Portfolio 5.19 5.19 1.17
Salomon Brothers U.S. Government
Securities Portfolio 3.40 N/A N/A
Van Kampen American Capital Emerging
Growth Portfolio 19.06 N/A N/A
</TABLE>
From time to time, the Adviser may reduce its compensation or assume expenses
with respect to the operations of a Portfolio in order to reduce the
Portfolio's expenses. Any such waiver or assumption would increase a
Portfolio's yield and total return during the period of the waiver or
assumption.
SHAREHOLDER COMMUNICATIONS
Owners of Variable Annuity contracts issued by the Life Company for which
shares of one or more Portfolios are the investment vehicles are entitled to
receive from the Life Company unaudited semi-annual financial statements and
audited year-end financial statements certified by the Trust's independent
public accountants. Each report will show the investments owned by the
Portfolio and the market value thereof and will provide other information
about the Portfolio and its operations.
ORGANIZATION AND CAPITALIZATION
The Trust is an open-end investment company established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated December 12,
1994, as amended April 19, 1995.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionately; however, a separate vote will be taken by each
Portfolio on matters affecting an individual Portfolio. For example, a change
in a fundamental investment policy for the BEA Growth and Income Portfolio
would be voted upon only by shareholders of that Portfolio. Additionally,
approval of the Investment Advisory Agreement is a matter to be determined
separately by each Portfolio. Approval by the shareholders of one Portfolio is
effective as to that Portfolio. Shares have noncumulative voting rights.
Although the Trust is not required to hold annual meetings of its
shareholders, shareholders have the right to call a meeting to elect or remove
Trustees or to take other actions as provided in the Declaration of Trust.
Shares have no preemptive or subscription rights, and are transferable. Shares
are entitled to dividends as declared by the Trustees, and if a Portfolio were
liquidated, the shares of that Portfolio would receive the net assets of that
Portfolio. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
Additional Portfolios may be created from time to time with different
investment objectives or for use as funding vehicles for different variable
life insurance policies or variable annuity contracts. Any additional
Portfolios may be managed by investment advisers or sub-advisers other than
the current Adviser and Sub-Advisers. In addition, the Trustees have the
right, subject to any necessary regulatory approvals, to create more than one
class of shares in a Portfolio, with the classes being subject to different
charges and expenses and having such other different rights as the Trustees
may prescribe and to terminate any Portfolio of the Trust.
PORTFOLIO TURNOVER
The portfolio turnover rate of a Portfolio is defined by the SEC as the ratio
of the lesser of annual sales or purchases to the monthly average value of the
portfolio, excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less. Under that
definition, the Global Advisors Money Market Portfolio would not calculate
portfolio turnover. Portfolio turnover generally involves some expense to a
Portfolio, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and reinvestment in other
securities. The portfolio turnover rate of each of the Portfolios for the
period ended December 31, 1995, for the applicable Portfolios and December 31,
1996, for all Portfolios is set forth under "Financial Highlights" in the
Prospectus.
CUSTODIAN
State Street Bank and Trust Company is the custodian of the Trust's assets.
The custodian's responsibilities include safeguarding and controlling the
Trust's cash and securities, handling the receipt and delivery of securities,
and collecting interest and dividends on the Trust's investments. The Trust
may employ foreign sub-custodians that are approved by the Board of Trustees
to hold foreign assets.
LEGAL COUNSEL
Legal matters in connection with the offering are being passed upon by
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut.
INDEPENDENT AUDITORS
The Trust has selected Coopers & Lybrand L.L.P. as the independent auditors to
audit the annual financial statements of the Trust.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of a
Portfolio's property for all loss and expense of any shareholder held
personally liable for the obligations of a Portfolio. Thus the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio would be unable to meet its
obligations.
DESCRIPTION OF NRSRO RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
Aaa - Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in "Aaa" securities.
A - Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated "Baa" are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and, in fact, have speculative characteristics as
well.
Ba - Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well-safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated "Caa" are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated "C" are the lowest-rated class of bonds. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF S&P'S CORPORATE RATINGS
AAA - Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest-rated issues only in small degree.
A - Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher-rated
categories.
BBB - Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they 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 bonds in this category than for bonds in higher-rated
categories.
BB, B, CCC, CC and C- Bonds rated "BB," "B," "CCC," "CC," and "C" are
regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the least 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. A rating of "C"
is typically applied to debt subordinated to senior debt which is assigned an
actual or implied "CCC" rating. It may also be used to cover a situation where
a bankruptcy petition has been filed, but debt service payments are continued.
DESCRIPTION OF DUFF CORPORATE RATINGS
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - Risk is modest but may vary slightly from time to time because of
economic conditions.
A - Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB - Investment-grade. Considerable variability in risk during economic
cycles.
BB - Below investment-grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
B - Below investment-grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions, and/or company fortunes. Potential
exists for frequent changes in quality rating within this category or into a
higher- or lower-quality rating grade.
Substantial Risk - Well below investment-grade securities. May be in
default or have considerable uncertainty as to timely payment of interest,
preferred dividends, and/or principal. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry conditions, and/or with
favorable company developments.
DESCRIPTION OF FITCH CORPORATE RATINGS
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 issues is generally
rated "[-]+."
A - Bonds considered to be investment-grade and of high credit quality.
The obligor's ability to pay interest and to 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 effect 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.
BB - Bonds considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
B - Bonds considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the
issue and repay principal when due.
CCC - Bonds which may have certain identifiable characteristics which, if
not remedied, could lead to the possibility of default in either principal or
interest payments.
CC - Bonds which are minimally protected. Default in payment of interest
and/or principal seems probable.
C - Bonds which are in imminent default in payment of interest or
principal.
DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS
AAA - Long-term, fixed-income securities that are rated "AAA" indicate
that the ability to repay principal and interest on a timely basis is very
high.
AA - Long-term, fixed-income securities that are rated "AA" indicate a
superior ability to repay principal and interest on a timely basis with
limited incremental risk vs. issues rated in the highest category.
TBW may apply plus ("+") and minus ("-") modifiers in the "AAA" and "AA"
categories to indicate where within the respective category the issued
security is placed.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS
AAA - Obligations which are rated "AAA" are considered to be of 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 which are rated "AA" are considered to be of 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.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS
Commercial paper rated "A-1" by S&P indicates that the degree of safety
regarding timely payments is either over-whelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted "A-1+."
Capacity for timely payment on commercial paper rated "A-2" is strong, but the
relative degree of safety is not as high as for issues designated "A-1." An
"A-3" designation indicates an adequate capacity for timely payment. Issues
with this designation, however, are more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
"B" issues are regarded as having only speculative capacity for timely
payment. "C" issues have a doubtful capacity for payment. "D" issues are in
payment default. The "D" rating category is used when interest payments or
principal payments are not made on the due date, even if the applicable grace
period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace period.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating "Prime-1" is the highest commercial paper rating assigned by
Moody's. Issuers rated "Prime-1" (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated "Prime-2" (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 of
issuers rated "Prime-1" but to a lesser degree. Earnings trend 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. "P-3" issuers have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in 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
issuers do not fall within any of the Prime rating categories.
DESCRIPTION OF DUFF COMMERCIAL PAPER RATINGS
The rating "Duff-1" is the highest commercial paper rating assigned by
Duff & Phelps. Paper rated "Duff-1" is regarded as having very high certainty
of timely payment with excellent liquidity factors which are supported by
ample asset protection. Risk factors are minor. Paper rated "Duff-2" is
regarded as having good certainty of timely payment, good access to capital
markets, and sound liquidity factors and company fundamentals. Risk factors
are small.
DESCRIPTION OF FITCH COMMERCIAL PAPER RATINGS
The rating "Fitch-1" (Highest Grade) is the highest commercial paper
rating assigned by Fitch. Paper rated "Fitch-1" is regarded as having the
strongest degree of assurance for timely payment. The rating "Fitch-2" (Very
Good Grade) is the second highest commercial paper rating assigned by Fitch
which reflects an assurance of timely payment only slightly less in degree
than the strongest issues.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS
A1 - Short-term obligations rated "A1" are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.
A2 - Short-term obligations rated "A2" are supported by a strong capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic, or financial conditions.
DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS
TBW-1 - Short-term obligations rated "TBW-1" indicate a very high degree
of likelihood that principal and interest will be paid on a timely basis.
TBW-2 - Short-term obligations rated "TBW-2" indicate 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."
FINANCIAL STATEMENTS
The Trust's financial statements and notes thereto for the period ended
December 31, 1996, are incorporated by reference to the WNL Series Trust 1996
Annual Report filed as of March 14, 1997.