<PAGE> 1
M FUND
PROSPECTUS
MAY 1, 1998
M Fund, Inc. (the "Company") is an investment company consisting of four
separate diversified investment portfolios or funds (the "Funds"). These Funds
are available through the purchase of variable life insurance and variable
annuity policies issued by certain insurance companies ("Participating Insurance
Companies"). The Funds are intended to be offered in addition to other
portfolios offered by the Participating Insurance Companies. Shares of the Funds
may also be sold to qualified pension and retirement plans.
Each of the Funds seeks long-term capital appreciation or total return, and
each Fund will invest primarily in stocks and other equity securities. However,
the Funds will use different investment techniques or strategies, and each
Fund's Portfolio Manager has a different investment style.
EDINBURGH OVERSEAS EQUITY FUND invests outside of the United States, and
when appropriate will focus on small- to medium-capitalization companies and
emerging markets.
TURNER CORE GROWTH FUND emphasizes common stocks of U.S. companies that
show strong earnings potential and also have reasonable valuations.
FRONTIER CAPITAL APPRECIATION FUND invests in common stock of U.S.
companies of all sizes, with emphasis on stocks of small- to
medium-capitalization companies.
ENHANCED U.S. EQUITY FUND invests primarily in common stock of U.S.
companies perceived to provide an opportunity for higher rates of return than
the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500" or the
"Index") while maintaining risk characteristics which approximate those of the
Index.
This Prospectus briefly describes the information that investors should
know before investing in these Funds, including the risks associated with
investing in each. Investors should read and retain this Prospectus for future
reference. A Statement of Additional Information dated May 1, 1998 (the "SAI"),
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. The SAI is available without charge, upon
request by writing to the Company at River Park Center, 205 S.E. Spokane Street,
Portland, Oregon 97202, Attn: M Fund Administrator, or by calling (888)
736-2878.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
FOR THE INSURANCE OR ANNUITY POLICIES.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION................................................ 3
FINANCIAL HIGHLIGHTS........................................ 4
INVESTMENT OBJECTIVES AND POLICIES.......................... 7
Edinburgh Overseas Equity Fund......................... 7
Turner Core Growth Fund................................ 8
Frontier Capital Appreciation Fund..................... 8
Enhanced U.S. Equity Fund.............................. 9
INVESTMENT RESTRICTIONS..................................... 9
MANAGEMENT.................................................. 9
Directors and Officers................................. 9
Investment Adviser..................................... 10
Portfolio Managers..................................... 11
INVESTMENT METHODS AND RISKS................................ 12
Foreign Investments.................................... 12
Investing in Small-Capitalization Companies............ 14
Asset Growth........................................... 14
Securities Lending..................................... 15
Other Investments...................................... 15
PERFORMANCE INFORMATION..................................... 15
M Fund Performance..................................... 15
Private Account Performance............................ 16
DETERMINATION OF NET ASSET VALUE............................ 18
OFFERING, PURCHASE AND REDEMPTION OF SHARES................. 18
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............ 19
TAXES....................................................... 19
OTHER INFORMATION........................................... 20
Reports................................................ 20
Voting and Other Rights................................ 20
Distributor............................................ 21
Administrative and Other Services...................... 21
</TABLE>
2
<PAGE> 3
INTRODUCTION
M Fund, Inc. (the "Company") is an open-end management investment company,
commonly known as a mutual fund. The Company consists of four separate
investment portfolios or funds (each a "Fund" and, collectively, the "Funds"),
each of which is, in effect, a separate mutual fund. (Additional Funds may be
created from time to time.) By investing in a Fund, an investor becomes entitled
to a pro rata share of all dividends and distributions arising from the net
income and capital gains on the investments of that Fund. Likewise, an investor
shares pro rata in any losses of that Fund.
The Funds are available to the public through the purchase of variable life
insurance and variable annuity policies offered by members of M Financial
Holdings Incorporated, which does business under the name M Financial Group ("M
Financial Group") and issued by certain insurance companies ("Participating
Insurance Companies"). M Financial Group is an independent life insurance
producer group, specializing in the distribution of life insurance to persons of
substantial financial means. The Funds can be selected by policyholders in
addition to other portfolios offered by the Participating Insurance Companies.
Pursuant to an investment advisory agreement and subject to the authority
of the Company's board of directors (the "Board of Directors"), M Financial
Investment Advisers, Inc. (the "Adviser") serves as the Company's investment
adviser and conducts the business and affairs of the Company. The Adviser has
engaged the following portfolio managers ("Portfolio Managers") to act as
sub-advisers to provide the day-to-day portfolio management for the respective
Funds.
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGER
---- -----------------
<S> <C>
Edinburgh Overseas Equity Fund Edinburgh Fund Managers plc
Turner Core Growth Fund Turner Investment Partners, Inc.
Frontier Capital Appreciation Fund Frontier Capital Management Company,
Inc.
Enhanced U.S. Equity Fund Franklin Portfolio Associates LLC
</TABLE>
The Funds' Portfolio Managers have been selected, and are reviewed and
monitored, by the Adviser, whose Board of Directors consists of members from M
Financial Group.
The Company currently offers its shares to separate accounts of
Participating Insurance Companies as funding vehicles for certain variable life
insurance or variable annuity policies (the "Policies"). The Company may also
offer its shares to qualified pension and retirement plans. The Company does not
offer its shares directly to the general public. A separate prospectus, which
accompanies this Prospectus, describes the applicable Policies and the separate
accounts through which they are funded.
The Funds' shares are sold with no sales load, no redemption fees, and no
"12b-1" or other distribution fees. However, various fees and charges (possibly
including sales loads) are imposed with respect to each Policy, as described in
the prospectus for the applicable Policy.
3
<PAGE> 4
FINANCIAL HIGHLIGHTS
The following selected financial highlights are derived from the Company's
audited financial statements included in the Company's Annual Report to
Shareholders. The financial statements and report of Coopers & Lybrand L.L.P.,
independents accountants, included in the Annual Report to Shareholders for the
Company's fiscal year ended December 31, 1997 are incorporated by reference into
the Statement of Additional Information. The following data should be read in
conjunction with such financial statements, related notes, and other financial
information contained in the Annual Report. The Annual Report contains
additional performance information about the Funds and is available without
charge and upon request by calling (888) 736-2878.
4
<PAGE> 5
M FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
EDINBURGH OVERSEAS TURNER CORE
EQUITY FUND GROWTH FUND
---------------------------- ----------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996(a) 1997 1996(a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $ 9.88 $ 10.00 $ 11.60 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)........... 0.07 0.06 0.04 0.06
Net realized and unrealized gain (loss)
on investments....................... 0.15 (0.12) 3.22 1.94
------- ------- ------- -------
Total from investment
operations...................... 0.22 (0.06) 3.26 2.00
------- ------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............. (0.07) (0.06) (0.04) (0.06)
In excess of net investment income..... (0.03) -- -- --
From net realized capital gains........ -- -- (1.22) (0.34)
In excess of net realized capital
gains................................ -- -- (0.10) --
Tax return of capital.................. (0.04) -- -- --
------- ------- ------- -------
Total distributions............... (0.14) (0.06) (1.36) (0.40)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD............. $ 9.96 $ 9.88 $ 13.50 $ 11.60
======= ======= ======= =======
TOTAL RETURN............................... 2.26% (0.63)%* 28.32% 19.99%*
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)...... $ 6,034 $ 3,177 $ 3,820 $ 2,003
Net expenses to average daily net
assets before interest expense**..... 1.30% 1.30% 0.70% 0.70%
Net expenses to average daily net
assets after interest expense**...... 1.30% 1.30% 0.70% 0.78%
Net investment income (loss) to average
daily net assets**................... 0.83% 0.67% 0.34% 0.55%
Portfolio turnover rate................ 74% 65% 206% 258%
Average commission rate paid***........ $0.0342 $0.0474 $0.0598 $0.0600
Without the reimbursement of expenses
by the adviser, the ratio of net
expenses and net investment income
(loss) to average net assets would
have been:
Expenses before interest
expense:........................ 4.94% 7.34% 6.20% 8.51%
Net investment income (loss):..... (2.81)% (5.37)% (5.16)% (7.26)%
</TABLE>
(a) Funds commenced operations on January 4, 1996
* Not annualized
** Annualized for periods less than one year
*** Average commission rate paid is computed by dividing the total dollar amount
of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
Amount is computed on a non annualized basis.
5
<PAGE> 6
M FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FRONTIER CAPITAL ENHANCED U.S.
APPRECIATION FUND EQUITY FUND
---------------------------- ----------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996(a) 1997 1996(a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $ 12.52 $ 10.00 $ 11.85 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)........... 0.00 0.00 0.08 0.12
Net realized and unrealized gain (loss)
on investments....................... 2.76 3.03 3.78 2.25
------- ------- ------- -------
Total from investment
operations...................... 2.76 3.03 3.86 2.37
------- ------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............. -- -- (0.09) (0.12)
In excess of net investment income..... -- -- -- --
From net realized capital gains........ (0.36) (0.51) (0.53) (0.40)
In excess of net realized capital
gains................................ -- -- -- --
Tax return of capital.................. -- -- -- --
------- ------- ------- -------
Total distributions............... (0.36) (0.51) (0.62) (0.52)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD............. $ 14.92 $ 12.52 $ 15.09 $ 11.85
======= ======= ======= =======
TOTAL RETURN............................... 22.13% 30.31%* 32.68% 23.67%*
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)...... $16,628 $ 3,006 $ 7,345 $ 1,582
Net expenses to average daily net
assets before interest expense**..... 1.15% 1.15% 0.80% 0.80%
Net expenses to average daily net
assets after interest expense**...... 1.15% 1.20% 0.80% 0.80%
Net investment income (loss) to average
daily net assets**................... (0.13)% (0.30)% 1.17% 1.43%
Portfolio turnover rate................ 61% 140% 52% 79%
Average commission rate paid***........ $0.0422 $0.0362 $0.0273 $0.0227
Without the reimbursement of expenses
by the adviser, the ratio of net
expenses and net investment income
(loss) to average net assets would
have been:
Expenses before interest
expense......................... 2.86% 8.19% 5.42% 12.45%
Net investment income (loss):..... (1.84)% (7.34)% (3.45)% (10.22)%
</TABLE>
(a) Funds commenced operations on January 4, 1996
* Not annualized
** Annualized for periods less than one year
*** Average commission rate paid is computed by dividing the total dollar amount
of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
Amount is computed on a non annualized basis.
6
<PAGE> 7
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has an investment objective and related investment policies and
uses various investment techniques to pursue its objective and policies. THERE
CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
Investors should not consider any one Fund alone to be a complete investment
program. Each of the Funds is subject to the risk of changing economic
conditions, as well as the risk inherent in the ability of the Portfolio Manager
to make changes in the portfolio composition of the Fund in anticipation of
changes in economic, business, and financial conditions. As with any security, a
risk of loss is inherent in an investment in the shares of any of the Funds.
The different types of securities, investments, and investment techniques
used by each Fund all have attendant risks of varying degrees. For example, with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt securities,
there exists the risk that the issuer of the security may not be able to meet
its obligations on interest or principal payments at the time required by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with prevailing current interest rates. As described below, an
investment in certain of the Funds entails additional risks as a result of the
Funds' ability to invest a substantial portion of their assets in either foreign
investments or small-capitalization issuers or both. See "Investment Methods and
Risks."
Certain types of investments and investment techniques common to one or
more Funds are described in greater detail, including the risks of each, under
"Investment Methods and Risks" below and in the SAI. The Funds are also subject
to certain investment restrictions that are described under the caption
"Investment Restrictions" in either this Prospectus or the SAI.
The investment objective of each Fund, as well as investment policies that
are not fundamental, may be changed by the Board of Directors without
shareholder approval. See "Investment Restrictions."
EDINBURGH OVERSEAS EQUITY FUND
The Edinburgh Overseas Equity Fund's investment objective is long-term
capital appreciation with reasonable investment risk through active management
and investment in common stock and common stock equivalents of foreign issuers.
Current income, if any, is incidental.
The Fund seeks to achieve this objective by focusing on areas of the market
that the Portfolio Manager believes are inefficiently priced. These include
smaller, often emerging markets, and smaller companies.
The investment process utilized by the Portfolio Manager, Edinburgh Fund
Managers plc, combines decisions on country weightings, sector allocations, and
stock selection strategies. Sector weightings are based on research into demand
and supply factors and external independent studies. The stock selection process
is fundamentally driven and focuses on four factors: quality of management,
financial health, long-term industry prospects and valuation relative to the
stock's market price. Research is generally on less-followed small- to
medium-sized companies and, when economic conditions are deemed appropriate, the
Fund may hold up to 30% of its assets in small-cap stocks (i.e., stocks of
companies capitalized at less than $500 million).
The Edinburgh Overseas Equity Fund will hold on average 60 to 100 different
stocks. Under normal market conditions, it will have at least 80% of the value
of its total assets invested in at least four different countries outside the
United States, but it may "concentrate" its investments by investing a
substantial portion of its assets (e.g., more than 25%) in only one or a few
countries or regions. Securities issued by U.S. based companies will ordinarily
not be purchased by the Fund. The Fund expects generally to be fully invested
but may maintain temporary cash balances pending investment or for liquidity
purposes.
7
<PAGE> 8
TURNER CORE GROWTH FUND
The Turner Core Growth Fund's investment objective is long-term capital
appreciation through investment in a diversified portfolio of common stocks that
show strong earnings potential with reasonable market prices. The Portfolio
Manager's style is core "growth at a reasonable price" and is based on the
philosophy that earnings expectations are the primary determinant of stock
prices.
The Portfolio Manager, Turner Investment Partners, Inc., uses a bottom-up
discipline (i.e., an individual stock selection process, rather than a top-down
industry sector selection process) utilizing sophisticated analytical tools to
screen over 10,000 securities for both attractive growth and value
characteristics. Growth factors include increasing earnings estimates and
results, while value measures include price/earnings ratio to growth rate, ratio
of market price to book value, and dividend yield. The first step is a computer
ranking based upon a proprietary model: stocks ranked in the 35th percentile or
above qualify for purchase, while current holdings that fall to the 55th
percentile or below generally will be sold sometime thereafter.
Stocks eligible for purchase are then subjected to rigorous fundamental and
technical analyses. The fundamental analysis focuses on a company's earnings
prospects relative to analysts' consensus expectations, while the technical
analysis evaluates support for a stock based on price and volume patterns.
The Fund purchases stocks with favorable rankings, earnings prospects, and
positive technical indicators. Conversely, stocks are sold when earnings
prospects are deteriorating, as indicated by a ranking below the 55th percentile
(i.e., below 55% of the stocks screened), deteriorating earnings forecasts, or a
worsening of technical indicators.
Generally, the Turner Core Growth Fund will be fully invested, with an
individual security constituting no more than 2% of the net asset value of the
Fund (except for issues comprising more than 2% of the S&P 500 Index, in which
case the Turner Core Growth Fund may hold up to 120% of the issues' index
weighting), and will generally contain 100 to 120 holdings. The Fund may retain
a portion of assets in cash or cash equivalents pending investment or for
liquidity purposes.
FRONTIER CAPITAL APPRECIATION FUND
The Frontier Capital Appreciation Fund's investment objective is maximum
capital appreciation through investment in common stock of companies of all
sizes, with emphasis on stocks of small- to medium-capitalization companies
(i.e., companies capitalized at less than $3 billion). Importance is placed on
an evaluation of earnings per share, growth and price appreciation potential,
rather than income.
The Portfolio Manager, Frontier Capital Management Company, Inc., seeks to
identify companies with unrecognized earnings potential. The investment process
emphasizes earnings growth potential and valuation of those companies which tend
to be less well followed by Wall Street analysts and have a relatively low level
of ownership by other institutional investors. The process combines traditional
fundamental research with a valuation model that screens dividend valuation,
equity valuation, earnings growth, earnings momentum, and unexpectedly high or
low earnings.
The Fund's portfolio is not restricted to any one segment of the market;
however, generally a majority of its portfolio will consist of stocks of small-
to medium-capitalization companies. The Fund's portfolio will typically consist
of 80 to 120 stocks. The Fund may maintain a portion of assets in cash or cash
equivalents pending investment or for liquidity purposes.
Stocks are sold if earnings growth potential is realized, when the
fundamental reasons for purchase are no longer valid, or when a more attractive
situation is identified.
8
<PAGE> 9
ENHANCED U.S. EQUITY FUND
The Enhanced U.S. Equity Fund's investment objective is above-market total
return through investment in common stock of companies perceived to provide a
total return higher than that of the S&P 500 at approximately the same level of
investment risk as the S&P 500.
The Fund's Portfolio Manager, Franklin Portfolio Associates LLC ("Franklin
Associates"), uses a quantitative process that seeks to identify those stocks
with the highest expected returns. The Portfolio Manager uses proprietary
software to construct a portfolio which is intended to have similar risk
characteristics to those of the S&P 500. The S&P 500 represents a sampling of
the stocks of the largest U.S. corporations along with stocks of certain foreign
corporations that are publicly traded in the United States.
Valuation models which the Portfolio Manager uses to rank the universe of
stocks focus on fundamental momentum, relative value, future cash flow, and
supplementary factors (e.g., trading by officers or directors of the company
being analyzed and short-term price momentum). Stocks which fall below the
median ranking in this process are sell candidates. A proprietary optimizer is
used to construct the portfolio. The optimizer is a risk management system
comprised of proprietary software created by Franklin Associates. It categorizes
both the portfolio and the S&P 500 into 55 industry groups and 13 general risk
categories. Stocks are then selected from the top deciles in Franklin
Associates' ranking process so that the portfolio reflects similar
characteristics to those of the industry groups and risk characteristics of the
S&P 500. Thus, industry and sector allocations are actively neutralized,
permitting Franklin Associates' investment process to remain focused on
individual stock selection.
The Fund will contain approximately 150 stocks. Under normal market
conditions, it will have at least 65% of the value of its total assets invested
in equity securities of U.S. based companies. The Fund may maintain a portion of
assets in cash or cash equivalents pending investment or for liquidity purposes.
INVESTMENT RESTRICTIONS
Each of the Funds is subject to certain investment restrictions which have
been adopted by the Company for each Fund as fundamental policies that cannot be
changed without the approval of a majority of the outstanding votes attributable
to shares of that Fund. Among other such fundamental restrictions, a Fund may
not, with respect to 75% of the value of its total assets, purchase the
securities of any one issuer (except U.S. Government securities) if more than 5%
of the value of the Fund's assets would be invested in such issuer or if more
than 10% of the outstanding voting securities of that issuer would be owned by
the Fund. Similarly, it is a fundamental investment restriction that none of the
Funds may invest more than 25% of its total assets in securities of issuers in
any one industry, except that this limitation does not apply to U.S. Government
securities. For a more complete description of the investment restrictions to
which each Fund is subject, see the SAI.
MANAGEMENT
DIRECTORS AND OFFICERS
The Board of Directors is responsible for deciding matters of general
policy and reviewing the actions of the Adviser and the Portfolio Managers, the
custodian, accounting and administrative services provider and other providers
of services to the Company. The officers of the Company supervise the Company's
daily business operations. The SAI contains information as to the identity of,
and other information about, the directors and officers of the Company.
9
<PAGE> 10
INVESTMENT ADVISER
M Financial Investment Advisers, Inc. (the "Adviser") is the investment
adviser of the Company and its Funds. The Adviser is an affiliate of M Life
Insurance Company ("M Life"), a Colorado stock insurance company.
M Life is an agent-owned reinsurance company in that its capital stock is
indirectly owned, in part, by independent participating insurance agents who are
engaged primarily in selling insurance policies, including variable insurance
policies which will be invested in the Funds. M Life, for a fee paid by the
insurance carriers, reinsures a portion of the mortality risk on insurance
policies sold by its shareholder-agents.
The Adviser and M Life are controlled by M Financial Holdings Incorporated,
which does business under the name M Financial Group ("M Financial Group"). M
Financial Group is engaged in providing product development and marketing
support services for participating insurance agents, who, collectively, own a
majority of the outstanding stock of M Financial Group. M Financial Group
receives from insurance carriers compensation based, in part, upon the volume of
insurance premiums generated by its participating agents.
The Adviser, located at River Park Center, 205 S.E. Spokane Street,
Portland, Oregon 97202, began managing the Company at its commencement of
operations (January 4, 1996) but otherwise has no previous experience in
providing investment advisory services.
The Adviser has entered into an investment advisory agreement with the
Company under which the Adviser assumes overall responsibility, subject to the
ongoing supervision of the Company's Board of Directors, for administering all
operations of the Company and for monitoring and evaluating the management of
the assets of each of the Funds by the Portfolio Managers. The Adviser provides
or arranges for the provision of the overall business management and
administrative services necessary for the Company's operations and furnishes or
procures any other services and information necessary for the proper conduct of
the Company's business. The Adviser also acts as liaison among, and supervisor
of, the various service providers to the Company, including the custodian,
transfer agent, administration agent, and accounting services agent. The Adviser
is also responsible for overseeing the Company's compliance with the
requirements of applicable law and with each Fund's investment objective,
policies, and restrictions.
For its services to the Company, the Adviser receives an advisory fee that
is based on the average daily net assets of each of the Funds, deducted daily
from the assets of each of the Funds, and paid to the Adviser quarterly.
The following annual rates represent total advisory fees for each Fund:
<TABLE>
<CAPTION>
FUND TOTAL ADVISORY FEES
---- -------------------
<S> <C>
Edinburgh Overseas Equity Fund................. 1.05% on the first $10 million
0.90% on the next $15 million
0.75% on the next $75 million
0.60% on amounts above $100 million
Turner Core Growth Fund........................ 0.45%
Frontier Capital Appreciation Fund............. 0.90%
Enhanced U.S. Equity Fund...................... 0.55% on the first $25 million
0.45% on the next $75 million
0.30% on amounts above $100 million
</TABLE>
The investment advisory agreement does not place limits on the operating
expenses of the Company or of any Fund. However, the Adviser has voluntarily
undertaken to pay any such expenses (but not including the advisory fee,
brokerage or other portfolio transaction expenses or expenses for litigation,
indemnifica-
10
<PAGE> 11
tion, taxes or other extraordinary expenses) to the extent that such expenses,
as accrued for each Fund through December 31, 1998, exceed 0.25% of that Fund's
estimated average daily net assets on an annualized basis.
PORTFOLIO MANAGERS
EDINBURGH FUND MANAGERS PLC ("Edinburgh") is the Portfolio Manager of the
Edinburgh Overseas Equity Fund. Edinburgh's principal business address is
Donaldson House, 97 Haymarket Terrace, Edinburgh EH12 5HD, Scotland, and
Edinburgh maintains a non-investment branch at 600 Peachtree Street, N.E., Suite
3820, Atlanta, Georgia 30308. Edinburgh was formed in 1969 and registered as an
investment adviser with the Securities and Exchange Commission in 1984. As of
December 31, 1997, Edinburgh managed approximately $11.5 billion of assets.
Edinburgh manages the Fund on a team basis. The Chief Investment Director
of Edinburgh is Michael Balfour, CA (Chartered Accountant). Mr. Balfour holds a
B.Comm. degree from Edinburgh University. He joined Edinburgh in 1985 and became
Manager of the Pacific Rim Department the following year. He was involved in the
launching of Edinburgh Pacific Fund and the Edinburgh Dragon Trust in 1987. In
1992, he was appointed a director of Edinburgh responsible for overseas
investment, and in 1995 he became Chief Investment Director responsible for all
investment departments and Chair of the asset allocation committee.
TURNER INVESTMENT PARTNERS, INC. ("Turner") is the Portfolio Manager of the
Turner Core Growth Fund. Turner's principal business address is 1235 Westlakes
Drive, Suite 350, Berwyn, Pennsylvania 19312. Turner is a professional
investment management firm founded in 1990. Robert E. Turner is the controlling
shareholder of Turner. Turner has provided investment advisory services to
investment companies since 1992. At December 31, 1997, Turner managed
approximately $2.7 billion of assets.
Mr. Turner, CFA (Chartered Financial Analyst), Chairman and Chief
Investment Officer of Turner, is the person primarily responsible for the
day-to-day management of the Fund's investment portfolio. Mr. Turner holds a
B.S. degree in accounting and an M.B.A. degree in finance from Bradley
University and has over 15 years of investment experience. He is a member of the
Association for Investment Management and Research and is active with the
Financial Analysts of Philadelphia and the Technology Council of Greater
Philadelphia. Prior to forming Turner, Mr. Turner was employed as Senior
Investment Manager with Meridian Investment Company (1985 to 1990), Portfolio
Manager/Analyst with Integon Corporation (1983 to 1985), and Analyst with
McMillion/Eubanks (1981 to 1983), and he served as a consultant with Andersen
Consulting (1979 to 1981).
FRONTIER CAPITAL MANAGEMENT COMPANY, INC. ("Frontier") is the Portfolio
Manager of the Frontier Capital Appreciation Fund. Frontier's principal business
address is 99 Summer Street, Boston, Massachusetts 02110. Frontier's investment
process combines its fundamental in-depth research effort with a proprietary
computer model to identify areas of investment opportunity. Frontier was founded
in 1980. As of December 31, 1997, Frontier managed a total of $3.3 billion.
Michael A. Cavarretta, CFA, is the person primarily responsible for the
day-to-day management of the Fund's investment portfolio. Mr. Cavarretta holds a
B.S. degree from the University of Maine and an M.B.A. degree from Harvard
Business School. He joined Frontier in 1988 and has served as sole portfolio
manager for Frontier's capital appreciation portfolios for the past six years.
Prior to attending Harvard Business School, Mr. Cavarretta was employed as a
Financial Analyst with General Electric Company (1981-1986).
FRANKLIN PORTFOLIO ASSOCIATES LLC ("Franklin") is the Portfolio Manager of
the Enhanced U.S. Equity Fund. Franklin's principal business address is Two
International Place, 22nd Floor,
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<PAGE> 12
Boston, Massachusetts 02110. Franklin is a professional investment counseling
firm which specializes in the management of common stock portfolios through the
use of quantitative investment models. Founded in 1982, Franklin, a
Massachusetts Limited Liability Company, is a wholly-owned indirect subsidiary
of Mellon Bank Corporation. As of December 31, 1997, Franklin provided
investment advisory services with respect to approximately $10.2 billion of
client assets. Franklin employs proprietary computer models in selecting
individual equity securities and in structuring investment portfolios for its
clients, including the Fund.
John J. Nagorniak, CFA, President of Franklin, is the person primarily
responsible for the day-to-day management of the Fund's investment portfolio; he
will oversee the application of Franklin's quantitative techniques to the Fund's
assets. Mr. Nagorniak and the other investment principals of Franklin are
responsible for the ongoing development and enhancement of Franklin's
quantitative investment techniques. Mr. Nagorniak is a graduate of Princeton
University and has received a M.S. degree from the Sloan School at the
Massachusetts Institute of Technology. Prior to joining Franklin, he was
associated with State Street Bank and Trust Company as Chief Investment Officer
(1979 to 1981). Prior to that, he was Director of Investment Management
Technology for John Hancock Mutual Life Insurance Company (1970 to 1979). He is
past President of the Investment Technology Association and has been on the
Council of that organization and the Council of the Quantitative Discussion
Group. Mr. Nagorniak is on the Board of Directors and is past President of the
Boston Security Analysts Society. He has over 25 years of investment experience.
Investment Sub-Advisory Agreements. Each Portfolio Manager has entered
into an investment sub-advisory agreement with the Adviser under which the
Portfolio Manager, subject to the general supervision of the Adviser and the
Company's Board of Directors, manages the investment portfolio of the Fund of
which it is the Portfolio Manager. Under the investment sub-advisory agreements,
the Portfolio Managers are responsible for making investment decisions for the
Funds and for placing the purchase and sale orders for the portfolio
transactions of each Fund. In this capacity, the Portfolio Managers obtain and
evaluate appropriate economic, statistical, timing, and financial information
and formulate and implement investment programs in furtherance of each Fund's
investment objective. The Portfolio Managers may place orders for portfolio
transactions with any broker including, to the extent and in the manner
permitted by applicable law, affiliated brokers. As compensation for their
services, each Portfolio Manager receives a fee (paid by the Adviser) based on
the average daily net assets of the applicable Fund. See the SAI for more
detailed information about the investment sub-advisory fees and agreements.
Change of Portfolio Managers. The Company and the Adviser have applied for
an exemptive order from the SEC that would permit the Adviser, with the approval
of the Company's Board of Directors, to retain a different Portfolio Manager for
a Fund without submitting the investment sub-advisory agreements to a vote of
the Fund's shareholders. The Company will notify shareholders in the event of
any change in the identity of the Portfolio Manager of a Fund. Until or unless
this exemptive order is granted, if a duly appointed Portfolio Manager is
terminated or otherwise ceases to advise a Fund, the Company will propose that a
new Portfolio Manager be engaged to manage the Fund's assets. The Company would
then be required to submit to the vote of the Fund's shareholders the approval
of an investment sub-advisory agreement with the new Portfolio Manager.
INVESTMENT METHODS AND RISKS
FOREIGN INVESTMENTS
Investments in the securities of companies organized outside the United
States or of companies whose securities are principally traded outside the
United States ("foreign issuers"), or investments in securities denominated or
quoted in a currency other than the U.S. dollar ("non-dollar securities"), may
present
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<PAGE> 13
potential benefits and risks not associated with investments solely in
securities of domestic issuers or U.S. dollar-denominated securities. Each of
the Funds may invest in securities of foreign issuers. The Frontier Capital
Appreciation Fund and the Turner Core Growth Fund may invest up to 10% of the
value of their total assets in securities of foreign issuers that are listed on
United States exchanges or are represented by American Depository Receipts
("ADRs"). The Edinburgh Overseas Equity Fund also may invest in non-dollar
securities. (However, the Edinburgh Overseas Equity Fund may not invest in
Canadian government securities, and the Enhanced U.S. Equity Fund, the Turner
Core Growth Fund and the Frontier Capital Appreciation Fund may not invest in
any foreign government securities.) Benefits of investing in foreign issuers or
non-dollar securities may include the opportunity to invest in foreign issuers
that appear, in the opinion of the Portfolio Manager, to offer better
opportunity for long-term capital appreciation or current earnings than
investments in domestic issuers, the opportunity to invest in foreign countries
with economic policies or business cycles different from those of the United
States, and the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign securities markets that do not necessarily move in a manner
parallel to U.S. markets.
Investing in non-dollar securities or in the securities of foreign issuers
involves significant risks that are not typically associated with investing in
U.S. dollar-denominated securities or in securities of domestic issuers. Such
investments may be affected by changes in currency rates, changes in foreign or
U.S. laws or restrictions applicable to such investments and in exchange control
regulations (e.g., currency blockage). For example, a decline in the exchange
rate would reduce the value of certain portfolio investments. In addition, if
the exchange rate for the currency in which a Fund receives dividend or interest
payments declines against the U.S. dollar before such interest is paid as a
dividend to the Fund's shareholders, the Fund may have to sell portfolio
securities to obtain sufficient cash to pay the dividend. The Edinburgh Overseas
Equity Fund may engage in forward foreign currency exchange contracts to hedge
its foreign currency exposure; however, such investments also entail certain
risks (described in the Statement of Additional Information). Some foreign stock
markets may have substantially less volume than, for example, the New York Stock
Exchange, and securities of some foreign issuers may be less liquid than
securities of comparable domestic issuers. Commissions and dealer mark-ups on
transactions in foreign investments may be higher than for similar transactions
in the United States. In addition, clearance and settlement procedures may be
different in foreign countries and, in certain markets, on certain occasions,
such procedures have been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions. For
example, delays in settlement could result in temporary periods when a portion
of the assets of a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended investments due to settlement problems
could cause it to miss attractive investment opportunities. Inability to dispose
of portfolio securities or other investments due to settlement problems could
result either in losses to a Fund due to subsequent declines in value of the
portfolio investment or, if the Fund has entered into a contract to sell the
investment, could result in possible liability to the purchaser.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There may be less publicly available information about a foreign
issuer than about a domestic one. In addition, there is generally less
government regulation of stock exchanges, brokers, and listed and unlisted
issuers in foreign countries than in the United States. Furthermore, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, limitations on the removal of funds or other assets of a Fund, or
political or social instability or diplomatic developments which could affect
investments in those countries. Individual foreign economies also may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
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<PAGE> 14
Many securities of foreign issuers are represented by ADRs, which represent
the right to receive securities of foreign issuers deposited in a domestic bank
or foreign correspondent bank. Prices of ADRs are quoted in U.S. dollars.
Additional information regarding ADRs and other aspects of foreign securities
can be found in the Statement of Additional Information.
Emerging Market Securities. The Edinburgh Overseas Equity Fund may invest
up to 25% of its assets in countries or regions with relatively low gross
national product per capita compared to the world's major economies, and in
countries or regions with the potential for rapid economic growth (emerging
markets). The risks of investing in foreign securities may be intensified in the
case of investments in emerging markets. Emerging markets securities may be less
liquid and more volatile than securities of comparable domestic issuers and have
different clearance and settlement procedures that may not keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when a
portion of the assets of the Fund is uninvested and no return is earned thereon.
The inability to dispose of portfolio securities due to settlement problems
could result in losses to the Fund.
Securities prices in emerging markets can be significantly more volatile
than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present greater risk of nationalization of businesses, restrictions
on foreign ownership, or prohibitions on repatriation of assets, and may have
less protection of property rights than more developed countries. Also, issuers
located in emerging markets may have limited marketability and may be subject to
more abrupt or erratic price movements. A more detailed discussion of the risks
associated with investing in emerging markets can be found in the Statement of
Additional Information.
INVESTING IN SMALL-CAPITALIZATION COMPANIES
All of the Funds may invest in small-capitalization companies (generally
considered to be companies with a capitalization of less than $500 million).
Investing in securities of smaller, lesser-known companies involves greater
risks than investing in larger, more mature, better known issuers, including an
increased possibility of portfolio price volatility. Historically,
small-capitalization stocks and stocks of recently organized companies, in which
all of the Funds may also invest, have been more volatile in price than the
larger-capitalization stocks (such as those included in the S&P 500). Among the
reasons for the greater price volatility of the stocks of these smaller
companies are the less certain growth prospects of smaller firms, the lower
degree of liquidity in the markets for such stocks, and the greater sensitivity
of smaller companies to changing economic conditions. For example, such
companies may be subject to greater business risks resulting from their limited
product lines, markets, distribution channels, and financial and managerial
resources.
The stock prices of smaller companies may fluctuate independently of larger
company stock prices. Thus, small company stocks may decline in price as large
company stock prices rise, or rise in price as large company stock prices
decline. Investors should, therefore, expect that to the extent a Fund invests
in stock of small-capitalization companies, the net asset value of that Fund's
shares may be more volatile than, and may fluctuate independently of, broad
stock market indices such as the S&P 500. Furthermore, the securities of
companies with small stock market capitalizations may trade less frequently and
in limited volumes.
ASSET GROWTH
The Funds' present asset size may not be sufficient to invest in the number
of different stocks indicated above or to take advantage of certain investment
opportunities, and they may not be as diversified as other mutual fund
portfolios. There is no certainty as to how rapidly a Fund's assets will
increase.
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<PAGE> 15
SECURITIES LENDING
All Funds may seek to increase their income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. A Fund may experience a loss or delay in
the recovery of its securities if the institution with which it has engaged in a
portfolio security loan transaction breaches its agreement with the Fund. If the
Portfolio Manager determines to make securities loans, the value of the
securities loaned will not exceed one-third of the value of the total assets of
the Fund making the loan.
OTHER INVESTMENTS
Some or all of the Funds may also utilize the following investment
techniques or make the following types of investments. However, it is
anticipated that no Fund will have more than 5% of its assets invested in any
one of the following:
- Foreign Government Obligations
- Sovereign Debt Obligations (Brady Bonds)
- American Depository Receipts, European Depository Receipts,
International Depository Receipts, and Global Depository Receipts
- Forward Foreign Currency Exchange Contracts
- Short-Term Bank and Corporate Obligations
- Zero Coupon Bonds
- Warrants and Rights
- Convertible Securities
- Repurchase Agreements
- Restricted and Illiquid Securities
- Borrowing
The Statement of Additional Information contains descriptions of these
investments and investment techniques.
PERFORMANCE INFORMATION
M FUND PERFORMANCE
Performance figures for one or more of the Funds will not be disseminated
directly to the public by the Company unless accompanied by appropriate
disclosure regarding the performance of the separate accounts offered by the
Participating Insurance Companies.
Average annual total return is determined by computing the annual
percentage change in value of $1,000 invested for specified periods ending with
the most recent calendar quarter, assuming reinvestment of all dividends and
distributions at net asset value. The annual average total return calculation
assumes a complete redemption of the investment at the end of the relevant
period.
Year-by-year total return, cumulative total return and yield information
may be provided for various specified periods by means of quotations, charts,
graphs or schedules. Year-by-year total return and cumulative total return for a
specified period are each derived by calculating the percentage rate required to
make a $1,000 investment in a Fund (assuming all distributions are reinvested)
at the beginning of such period equal to the actual total value of such
investment at the end of such period.
The Funds also may advertise their yields. Yield is computed by dividing
net investment income earned during a recent 30-day period by the product of the
average daily number of shares outstanding and
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<PAGE> 16
entitled to receive dividends during the period and the price per share on the
last day of the relevant period. The results are compounded on a bond-equivalent
(semiannual) basis and then annualized. Net investment income per share is equal
to the dividends and interest earned during the period, reduced by accrued
expenses for the period. The calculation of net investment income for these
purposes may differ from the net investment income determined for accounting
purposes. Performance data for the Funds will not reflect charges deducted under
the Policies. If Policy charges were taken into account, such performance data
would reflect lower returns.
In addition, the Company may from time to time publish the performance of
its Funds relative to certain performance rankings and indices. The investment
results of the Funds will fluctuate over time and any presentation of investment
results for any prior period should not be considered a representation of what
an investment may earn or what a Fund's performance may be in any future period.
In addition to information provided in shareholder reports, the Company may, in
its discretion, from time to time make lists of a Fund's holdings available to
investors upon request.
PRIVATE ACCOUNT PERFORMANCE
The Funds have been in operation since January 4, 1996 and have limited
performance records. However, each of the Funds have investment objectives,
policies and strategies that are substantially similar to those employed by the
Funds' Portfolio Managers with respect to certain Private Accounts which they
manage ("Private Accounts"). The performance information derived from these
Private Accounts may be relevant to prospective investors. The Funds'
performance may vary from the respective Private Account information because its
investments will vary from time to time and will not be identical to the past
portfolio investments of the Private Accounts.
The charts below show actual performance information for M Fund and
performance information derived from historical performance of the Private
Accounts of Edinburgh, Turner, Frontier and Franklin. The performance figures
for the Edinburgh Foreign Equity Composite, the Frontier Capital Appreciation
Composite, the Turner Equity Composite and the Franklin Enhanced S&P Composite
represent the actual calendar year performance results of the comparable Private
Accounts net of M Fund management fees. The performance of these Private
Accounts is not M Fund performance and should not be considered as an indication
of the future performance of the respective Funds.
These figures also do not reflect the deduction of any insurance fees or
charges that are imposed in connection with the sale of variable life insurance
and variable annuity policies by the Participating Insurance Companies.
Investors should refer to the separate account prospectus describing the life
insurance policies and variable annuity contracts for information pertaining to
these insurance fees and charges.
<TABLE>
<CAPTION>
M FUND PERFORMANCE 1996# 1997 SINCE INCEPTION
------------------ ----- ---- ---------------
<S> <C> <C> <C>
Edinburgh Overseas Equity Fund...................... (0.63)% 2.26% 0.81%
Turner Core Growth Fund............................. 19.99% 28.32% 24.20%
Frontier Capital Appreciation Fund.................. 30.31% 22.13% 26.27%
Enhanced US Equity Fund............................. 23.67% 32.68% 28.23%
</TABLE>
# Fund inception date was January 4, 1996. Since Inception returns are
average annual total returns.
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<PAGE> 17
PRIVATE ACCOUNT PERFORMANCE INFORMATION
<TABLE>
<CAPTION>
10 YR/*
SINCE
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 3 YR* 5 YR* INCEPTION**
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Edinburgh Fund Managers/
Edinburgh Foreign Equity
Composite............... --% 21.5% (13.1)% 13.5% (7.7)% 38.8% 1.3% 12.6% 3.9% 2.0% 5.9% 10.5% 6.80%**
EAFE Benchmark............ -- 10.4 (23.6) 12.2 (12.2) 32.7 7.8 11.3 6.1 1.6 6.3 11.4 4.0
Turner Investment
Partners/
Turner Equity
Composite............... -- -- -- 50.4 12.2 15.3 (5.3) 29.6 19.3 32.4 27.0 17.5 20.9**
Wilshire 5000 Stock
Index................... -- -- -- 34.2 9.0 11.3 (0.1) 36.5 21.2 31.3 29.5 19.3 19.8
Frontier Capital
Management/
Frontier Capital
Apprecia-
tion Composite.......... 24.3 31.8 0.2 27.9 22.2 27.9 3.3 31.7 30.7 19.2 27.0 22.0 21.4
Russell 2500 Stock
Index................... 22.7 19.4 (14.9) 46.7 16.2 16.5 (1.1) 31.7 19.0 24.4 24.9 17.6 16.9
Franklin Portfolio
Associates/ Franklin
Enhanced S&P
Composite............... 15.4 31.6 (1.9) 30.7 6.7 13.5 (0.8) 35.7 22.5 35.5 31.1 20.5 18.1
S&P 500 Stock Index....... 16.5 31.6 (3.1) 30.4 7.6 10.1 1.3 37.5 22.8 33.5 31.1 20.2 18.0
</TABLE>
* 3yr, 5yr, 10yr and Since Inception returns are average annual total returns.
** Inception dates for the Edinburgh Foreign Equity Composite and the Turner
Equity Composite are 12/31/88 and 3/31/90 respectively.
See accompanying Notes to M Fund and Private Account Performance Information.
NOTES TO M FUND AND PRIVATE ACCOUNT PERFORMANCE INFORMATION
1. Returns for the M Fund are net of management fees and operating
expenses. Returns for the Edinburgh Foreign Equity Composite, the Turner Equity
Composite, the Frontier Capital Appreciation Composite and the Franklin Enhanced
S&P Composite are net of M Fund management fees: 1.05%, 0.45%, 0.90% and 0.55%
respectively. The operating expenses for all Private Accounts, which may be
different from those of M Fund, have been deducted from the returns of the above
referenced composites.
2. Returns of the Private Accounts are based on accounts managed using
substantially similar investment objectives, policies and strategies and are
based on the following: returns for Edinburgh Fund Managers' Private Accounts
are those of the manager's Foreign Equity Composite; returns for Turner
Investment Partners' Private Accounts are those of the Turner Equity Composite;
returns for Frontier Capital Management's Private Accounts are those of the
manager's Capital Appreciation Composite; returns for Franklin Portfolio
Associates' Private Accounts are those of the manager's Enhanced S&P Composite.
3. Returns of the Private Accounts are based on accounts with
substantially higher net assets than that of the Funds. The Funds commenced
operations on January 4, 1996 and, therefore, are smaller than the managers'
established accounts.
4. Returns for the Edinburgh Foreign Equity Composite, the Turner Equity
Composite, the Frontier Capital Appreciation Composite and the Franklin Enhanced
S&P Composite are based on accounts that are not subject to certain investment
limitations, diversification requirements, and other restrictions imposed by the
Investment Company Act of 1940, as amended, (the "1940 Act") and the Internal
Revenue Code of 1986, as amended (the "Code"), which, if applicable, may have
adversely affected the performance results.
5. The annual return figures for the Frontier Capital Management's private
accounts for 1995, and the Edinburgh Fund Managers' private accounts for
1992-1996 have been changed from the May 1, 1997
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<PAGE> 18
Prospectus. The correct figures are also reflected in the 3, 5 and 10 year
averages. No changes have been made with respect to the data for M Fund, Inc.
6. The Morgan Stanley Capital International Europe, Australia, and Far
East Index (EAFE) is the arithmetic, market value-weighted average of the
performance of over 900 securities listed on the stock exchanges of 21
countries. It is a widely accepted benchmark for international stock
performance. The Wilshire 5000 Equity Index is a capitalization weighted stock
index representing all domestic common stocks traded regularly on the organized
exchanges. The index is the broadest measure of the aggregate domestic stock
market. The Russell 2500 Index is a capitalization weighted stock index
representing the bottom 500 stocks in the Russell 1000 Index and all stocks in
the Russell 2000. The S&P 500 Stock Index is a capitalization weighted index of
500 large stocks, representing approximately 70% of the broad U.S. equity
market. The stocks represent the largest companies in 88 industries. The S&P 500
Index is calculated on a total return basis, which includes reinvestment of
gross dividends before deduction of withholding taxes.
7. Performance returns for the Private Accounts have been extracted from
performance information that has been prepared and presented in compliance with
the Association for Investment Management and Research (AIMR) Performance
Presentation Standards. Reports on such preparation and presentation are
available to the investor upon request.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is normally determined once
daily as of the close of regular trading on the New York Stock Exchange,
currently 4:00 p.m. New York time (with exceptions), on each day when the New
York Stock Exchange is open. The New York Stock Exchange is scheduled to be open
Monday through Friday throughout the year, except for certain federal and other
holidays. The net asset value of each Fund is determined by dividing the value
of the Fund's securities, cash, and other assets (including accrued but
uncollected interest and dividends), less all liabilities (including accrued
expenses) by the number of shares of the Fund outstanding.
The value of each Fund's securities and assets, except certain short-term
debt securities, is determined on the basis of their market values. Short-term
debt securities having remaining maturities of 60 days or less held by any of
the Funds are valued by the amortized cost method, which approximates market
value. Investments for which market quotations are not readily available are
valued at their fair value as determined in good faith by, or under authority
delegated by, the Board of Directors. See "Determination of Net Asset Value" in
the SAI.
OFFERING, PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are sold in a continuous offering to separate accounts
of the Participating Insurance Companies to support the insurance and annuity
Policies. Net purchase payments under the Policies are placed in one or more
subaccounts of the Participating Insurance Company's separate account, and the
assets of each such subaccount are invested in the shares of the Fund
corresponding to that subaccount. The separate accounts purchase and redeem
shares of the Funds for their subaccounts at net asset value without sales or
redemption charges.
For each day on which a Fund's net asset value is calculated, the separate
accounts transmit to the Transfer Agent any orders to purchase or redeem shares
of the Fund(s) based on the purchase payments, redemption (surrender) requests,
death benefits, Policy charges, and transfer requests from Policy owners,
annuitants and beneficiaries that have been processed on that day. The separate
accounts purchase and redeem shares of each Fund at the Fund's net asset value
per share calculated as of that same day although such purchases and redemptions
may be executed the next morning. The Board of Directors may refuse to
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<PAGE> 19
sell shares of any Fund to any person, or suspend or terminate the offering of
shares of any Fund if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board of
Directors acting in good faith, and in light of their fiduciary duties under
federal and any applicable state laws, necessary in the best interests of the
shareholders of such Fund.
Please refer to the separate prospectus for the Policies (and the separate
account through which they are funded) for a more detailed description of the
procedures whereby a Policy owner, annuitant, or beneficiary may allocate his or
her interest in the separate account to a subaccount using the shares of one of
the Funds as an underlying investment medium.
The Company may also offer shares of one or more of the Funds (including
new Funds that might be added to the Company) to qualified pension and
retirement plans.
A potential for certain conflicts may exist between the interests of
variable annuity contract owners, variable life insurance policy owners and plan
participants. The Company currently does not foresee any disadvantage to owners
of the Policies arising from the fact that shares of any Fund might be held by
such entities. The Board of Directors, however, will monitor the Funds in order
to identify any material irreconcilable conflicts of interest which may possibly
arise, and to determine what action, if any, should be taken in response to any
such conflicts.
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Company will pay dividends for each Fund from that Fund's net
investment income and will make distributions from net realized securities
gains, if any, once a year, but may make distributions on a more frequent basis
to comply with the distribution requirements of the Code, in all events in a
manner consistent with the provisions of the 1940 Act. The Company will not make
distributions from net realized securities gains unless capital loss carryovers,
if any, have been utilized or have expired. Dividends are automatically
reinvested in additional Company shares at net asset value unless payment in
cash is selected.
Notice as to the tax status of dividends and distributions will be given to
shareholders (i.e. Participating Insurance Companies) annually. Dividends from
net investment income, together with distributions of net realized short-term
securities gains and gains from certain market discount bonds, generally are
taxable as ordinary income whether received in cash or reinvested in additional
shares. Distributions from net realized long-term securities gains generally are
taxable as long-term capital gains whether received in cash or reinvested in
additional shares. Since the Company's shareholders are the Participating
Insurance Companies and their separate accounts, no discussion is included
herein as to the federal income tax consequences to variable life insurance or
annuity policy holders. For information concerning the federal income tax
consequences to such holders, see the prospectus for such contract or policy.
TAXES
Tax Status. The Company believes that each Fund will qualify as a
regulated investment company under Subchapter M, Chapter 1, Subtitle A of the
Code, and each Fund intends to distribute substantially all of its net income
and net capital gain to its shareholders. As a result, under the provisions of
Subchapter M, there should be little or no income or gains taxable to the Fund.
In addition, each Fund intends to comply with certain other distribution rules
specified in the Code so that it will not incur a 4% nondeductible federal
excise tax that otherwise would apply. Under current law, the net income of the
Funds, including net capital gain, is not taxed to Participating Insurance
Companies to the extent that it is applied to increase the reserves held by the
Participating Insurance Company in respect of the Policies.
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<PAGE> 20
Foreign Investments. Funds investing in foreign securities or currencies
may be required to pay withholding or other taxes to foreign governments.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of the Funds that invest in
foreign securities or currencies will be reduced by these foreign taxes.
Shareholders will bear the cost of any foreign tax withholding, but may not be
able to claim a foreign tax credit or deduction for these foreign taxes. Funds
investing in securities of passive foreign investment companies may be subject
to U.S. federal income taxes and interest charges, and the investment yield of
the Funds making such investments will be reduced by these taxes and interest
charges. Shareholders will bear the cost of these taxes and interest charges,
but will not be able to claim a deduction for these amounts.
Additional Tax Considerations. If a Fund fails to qualify as a regulated
investment company, owners of Policies supported by the Fund (1) might be taxed
currently on the investment earnings under their Policies and thereby lose the
benefit of tax deferral, and (2) the Fund might incur additional taxes. In
addition, if a Fund fails to comply with the diversification requirements of
Section 817(h) of the Code, owners of Policies supported by the Fund would be
taxed on the investment earnings under their Policies and thereby lose the
benefit of tax deferral. Accordingly, compliance with the above rules is
carefully monitored by the Portfolio Managers and the Adviser, and it is
intended that the Funds will comply with these rules as they exist or as they
may be modified from time to time. In order to comply with the diversification
and other requirements of Subchapter M and Section 817(h), a Fund may not be
able to buy or sell certain securities at certain times, so the investments
utilized (and the time at which such investments are purchased and sold) may be
different from what the Portfolio Manager might otherwise believe to be
desirable.
For more information regarding the tax implications for the purchaser of a
Policy who allocates investments to the Funds, please refer to the prospectus
for the Policy.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisers. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and Regulations are subject to change.
OTHER INFORMATION
REPORTS
Annual Reports containing audited financial statements of the Company and
Semiannual Reports containing unaudited financial statements, as well as proxy
materials, are sent to Policy owners, annuitants or beneficiaries, as
appropriate. Inquiries may be directed to the Company at the telephone number or
address set forth on the cover page of this Prospectus.
VOTING AND OTHER RIGHTS
Each share outstanding is entitled to one vote on all matters submitted to
a vote of shareholders (of a Fund or the Company) and is entitled to a pro rata
share of any distributions made by the applicable Fund and, in the event of
liquidation, of its net assets remaining after satisfaction of outstanding
liabilities. Each share (of each Fund), when issued, is nonassessable and has no
preemptive or conversion rights. The shares have noncumulative voting rights.
The Participating Insurance Companies will vote shares of a Fund held by their
separate accounts which are attributable to Policies in accordance with
instructions received from Policy owners, annuitants and beneficiaries as
provided in the prospectus for the Policies. Fund shares held by the separate
accounts as to which no instructions have been received will be voted for or
against any proposition, or in abstention, in the same proportion as the shares
of that separate account as to which
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instructions have been received. Fund shares held by a Participating Insurance
Company that are not attributable to Policies will also be voted for or against
any proposition in the same proportion as the shares for which voting
instructions are received by that company. However, if a Participating Insurance
Company determines that it is permitted to vote any such shares of a Fund in its
own right, it may elect to do so, subject to the then-current interpretation of
the 1940 Act and the rules thereunder.
As a Maryland corporation, the Company is not required to, and does not
intend to, hold regular annual shareholder meetings. The Company is, however,
required to hold shareholder meetings for the following purposes: (i) approving
investment advisory and sub-advisory agreements as required by the 1940 Act
(unless, with respect to sub-advisory agreements, the Company and the Adviser
obtain the SEC exemptive order referred to above); (ii) changing any fundamental
investment policy or restriction of any Fund; and (iii) filling vacancies on the
Board of Directors in the event that less than a majority of the Company's
directors were elected by shareholders. Directors may also be removed by
shareholders by a vote of two-thirds of the outstanding votes attributable to
shares at a meeting called at the request of holders of 10% or more of such
votes. The Company has the obligation to assist in shareholder communications.
At December 31, 1997, the ownership of each Fund was as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF OWNERSHIP
--------------------------------------------------------
NEW YORK
M LIFE JOHN HANCOCK LIFE
INSURANCE VARIABLE LIFE PACIFIC LIFE INSURANCE
CO. INSURANCE CO. INSURANCE CO. COMPANY
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Edinburgh Overseas Equity Fund........... 33.7% 56.7% 9.6% --
Turner Core Growth Fund.................. 40.3% 37.9% 21.8% --
Frontier Capital Appreciation Fund....... 9.6% 51.6% 38.6% 0.2%
Enhanced U.S. Equity Fund................ 22.3% 6.8% 70.6% 0.3%
</TABLE>
DISTRIBUTOR
M Holdings Securities, Inc. acts as the distributor (the "Distributor") for
each of the Funds. The Distributor is a wholly-owned subsidiary of M Financial
Group. The principal executive offices of the Distributor are located at River
Park Center, 205 SE Spokane Street, Portland, Oregon 97202. The Distributor is
registered with the SEC as a broker-dealer under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers ("NASD").
ADMINISTRATIVE AND OTHER SERVICES
Pursuant to a custody agreement with the Company, Investors Bank & Trust
Company ("Investors Bank") serves as the custodian of the Funds' assets.
Investors Bank also performs certain accounting services for the Company.
These services include maintaining and keeping current the Company's books,
accounts, records, journals and other records of original entry related to the
Company's business, performing certain daily functions related thereto,
including calculating each Fund's daily net asset value. Investors Bank is
responsible for providing certain administrative services to the Company, such
as calculating each Fund's standardized performance information, preparing
annual and semiannual reports to shareholders and the SEC, preparing each Fund's
tax returns, monitoring compliance and performing other administrative duties.
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Pursuant to a Transfer Agency and Service Agreement with the Company,
Investors Bank also acts as a transfer, redemption and dividend disbursing agent
for the Company. Investors Bank's principal business address is 200 Clarendon
Street, Boston, Massachusetts 02116.
Investors Bank is not involved in the investment decisions made by the
Portfolio Managers.
The Company was incorporated in Maryland on August 11, 1995. It has no
employees and relies on the Adviser and other service providers for its
day-to-day operations.
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