-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, s1pFZSoJMPBMwnaf+KpDNiXsa/DleT7oyYHzW8hFSCQXycXD1bx51fCdILOqCMCh g7Ccy98+cYFBXBlE59Xgow== 0000752737-94-000014.txt : 19940915 0000752737-94-000014.hdr.sgml : 19940915 ACCESSION NUMBER: 0000752737-94-000014 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19940914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPPENHEIMER VARIABLE ACCOUNT FUNDS CENTRAL INDEX KEY: 0000752737 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 840974272 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-93177 FILM NUMBER: 94548927 BUSINESS ADDRESS: STREET 1: 3410 S GALENA ST CITY: DENVER STATE: CO ZIP: 80231 BUSINESS PHONE: 3036713200 MAIL ADDRESS: STREET 2: 3410 S GALENA ST CITY: DENVER STATE: CO ZIP: 80231 FORMER COMPANY: FORMER CONFORMED NAME: OPPENHEIMER VARIABLE LIFE FUNDS DATE OF NAME CHANGE: 19860609 497 1 OPPENHEIMER VARIABLE ACCOUNT FUNDS Investors are advised to read and retain this Prospectus for future reference. OPPENHEIMER VARIABLE ACCOUNT FUNDS 3410 South Galena Street Denver, Colorado 80231 1-800-525-7048 OPPENHEIMER VARIABLE ACCOUNT FUNDS (the "Trust") is a diversified open-end investment company consisting of eight separate funds. Three of these funds are available for use with Massachusetts Mutual Life Insurance Company's Flex Extra Annuity. The three available Oppenheimer funds (collectively the "Funds") are as follows: OPPENHEIMER CAPITAL APPRECIATION FUND ("Capital Appreciation Fund") seeks to achieve capital appreciation by investing in "growth-type" companies. OPPENHEIMER GLOBAL SECURITIES FUND ("Global Securities Fund") seeks long- term capital appreciation by investing a substantial portion of assets in securities of foreign issuers, "growth-type" companies, cyclical industries and special situations which are considered to have appreciation possibilities. Current income is not an objective. These securities may be considered to be speculative. OPPENHEIMER STRATEGIC BOND FUND ("Strategic Bond Fund") seeks a high level of current income principally derived from interest on debt securities and seeks to enhance such income by writing covered call options on debt securities. The Fund intends to invest principally in: (i) foreign government and corporate debt securities, (ii) U.S. Government securities, and (iii) lower-rated high yield domestic debt securities, commonly known as "junk bonds", which are subject to a greater risk of loss of principal and nonpayment of interest than higher-rated securities. These securities may be considered to be speculative. Shares of the Funds are sold only to provide benefits under variable life insurance policies and variable annuity contracts (collectively, the "Accounts"). The Accounts invest in shares of one or more of the Funds in accordance with allocation instructions received from Account owners. Such allocation rights are further described in the accompanying Account Prospectus. Shares are redeemed to the extent necessary to provide benefits under an Account. This Prospectus sets forth concisely information about the Trust and the Funds that prospective investors should know before investing. A Statement of Additional Information about the Trust and the Funds (the "Additional Statement") dated May 1, 1994, has been filed with the Securities and Exchange Commission ("SEC") and is available without charge upon request to Oppenheimer Shareholder Services (the "Transfer Agent"), P.O. Box 5270, Denver, Colorado 80217, or by calling the toll-free number shown above. The Statement of Additional Information (which is incorporated in its entirety by reference in this Prospectus) contains more detailed information about the Trust, the Funds and their management. 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 is effective May 1, 1994 as amended September 15, 1994. Table Of Contents Page Financial Highlights Performance Information The Funds and Their Investment Policies Introduction Investment Policies - Strategic Bond Fund Risk Factors Investment Policies - Capital Appreciation Fund and Global Securities Fund Capital Appreciation Fund Global Securities Fund Special Investment Methods Borrowing Small, Unseasoned Companies Participation Interests Foreign Securities Warrants and Rights Repurchase Agreements Restricted and Illiquid Securities Loans of Portfolio Securities When-Issued Securities Writing Covered Calls Hedging Interest Rate Futures Bond Index Futures Stock Index Futures Purchasing Calls on Securities and Futures Puts on Securities and Futures Foreign Currency Options Forward Contracts Interest Rate Swap Transactions Risk of Options and Futures Trading Derivatives Portfolio Turnover Short Sales Against-the-Box Investment Restrictions Management of the Funds Management's Discussion of Performance Indices Page Purchase of Shares Redemption of Shares Dividends, Distributions and Taxes Dividends and Distributions of Strategic Bond Fund Dividends and Distributions of Capital Appreciation Fund and Global Securities Fund Dividends and Distributions: General Tax Treatment to the Account as Shareholder Tax Status of the Funds Additional Information Description of the Trust and its Shares Shareholder Inquires The Custodian and the Transfer Agent Appendix A - Description of Terms Appendix B - Description of Securities Rating Financial Highlights Selected data for a share of beneficial interest outstanding throughout each period The information in the following tables has been audited by Deloitte & Touche, independent auditors, whose report on the financial statements of the Funds for the fiscal year ended December 31, 1993, is included in the Statement of Additional Information. Financial Highlights Oppenheimer Variable Account Funds
Oppenheimer Capital Appreciation Fund 1993(2) 1992(3) 1991(3) 1990(3) 1989(3) 1988(3) 1987(3) 1986(2) 1986(1) PER SHARE OPERATING DATA: Net asset value, beginning of period $ 26.04 $ 23.24 $ 15.24 $ 20.40 $ 16.31 $ 14.39 $13.12 $16.21 $13.71 Income (loss) from investment operations: Net investment income .05 .06 .08 .32 .50 .33 .21 .12 .09 Net realized and unrealized gain (loss) on investments 6.71 3.43 8.18 (3.54) 3.93 1.60 1.67 (1.24) 3.40 Total income (loss) from investment operations 6.76 3.49 8.26 (3.22) 4.43 1.93 1.88 (1.12) 3.49 Dividends and distributions to shareholders: Dividends from net investment income (.06) (.14) (.26) (.53) (.34) - (.34) (.21) (.20) Distributions from net realized gain on investments (1.10) (.55) - (1.41) - (.01) (.27) (1.76) (.79) Total dividends and distributions to shareholders (1.16) (.69) (.26) (1.94) (.34) (.01) (.61) (1.97) (.99) Net asset value, end of period $ 31.64 $ 26.04 $ 23.24 $ 15.24 $ 20.40 $ 16.31 $14.39 $13.12 $16.21 TOTAL RETURN, AT NET ASSET VALUE(4) 27.32% 15.42% 54.72% (16.82)% 27.57% 13.41% 14.34% (1.65)% N/A RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $136,885 $83,335 $49,371 $23,295 $27,523 $13,667 $9,692 $4,549 $3,852 Average net assets (in thousands) $ 98,228 $56,371 $34,887 $24,774 $21,307 $13,239 $8,598 $3,099 $2,292 Number of shares outstanding at end of period (in thousands) 4,326 3,201 2,125 1,528 1,349 838 674 347 238 Ratios to average net assets: Net investment income .23% .30% .81% 1.93% 3.27% 2.13% 1.68% 2.36%(5) 2.27% Expenses .47% .54% .63% .71% .68% .73% .75% 1.01%(5) 2.17% Portfolio turnover rate(6) 122.8% 78.9% 122.3% 222.0% 130.5% 128.7% 138.7% 100.1% 464.8%
1. For the year ended June 30, 1986Operating results were achieved by Centennial Capital Appreciation Fund, a separate investment company acquired by OCAP on August14, 1986. 2. For the six months ended December 31, 1986Operating results prior to August 15, 1986 were achieved by Centennial Capital Appreciation Fund, a separate investmentcompany acquired by OCAP on August 14, 1986. 3. For the year ended December 31. 4. Assumes a hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additionalshares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. 5. Annualized. 6. The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation. Financial Highlights (Continued) Oppenheimer Variable Account Funds
Oppenheimer Global Securities Fund 1993(2) 1992(2) 1991(2) 1990(1) PER SHARE OPERATING DATA: Net asset value, beginning of period $ 9.57 $ 10.38 $10.04 $10.00 Income (loss) from investment operations: Net investment income (.02) .07 .04 - Net realized and unrealized gain (loss) on investments 6.75 (.80) .30 .04 Total income (loss) from investment operations 6.73 (.73) .34 .04 Dividends and distributions to shareholders: Dividends from net investment income - (.04) - - Distributions from net realized gain on investments - (.04) - - Total dividends and distributions to shareholders - (.08) - - Net asset value, end of period $ 16.30 $ 9.57 $10.38 $10.04 TOTAL RETURN, AT NET ASSET VALUE(3) 70.32% (7.11)% 3.39% .40% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $96,425 $13,537 $7,339 $ 432 Average net assets (in thousands) $31,696 $11,181 $3,990 $ 263 Number of shares outstanding at end of period (in thousands) 5,917 1,415 707 43 Ratios to average net assets: Net investment income .72% 1.04% .75% .08%(4) Expenses .92% 1.06% 1.32% 6.84%(4) Portfolio turnover rate(5) 65.1% 34.1% 29.5% 0.0%
1. For the period from November 12, 1990 (commencement of operations) to December 31, 1990. 2. For the year ended December 31. 3. Assumes a hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. 4. Annualized. 5. The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation. Financial Highlights (Continued) Oppenheimer Variable Account Funds
Oppenheimer Strategic Bond Fund 1993(1) PER SHARE OPERATING DATA: Net asset value, beginning of period $ 5.00 Income from investment operations: Net investment income .10 Net realized and unrealized gain on investments and foreign currency transactions .11 Total income from investment operations .21 Dividends and distributions to shareholders: Dividends from net investment income (.09) Distributions from net realized gain on investments - Total dividends and distributions to shareholders (.09) Net asset value, end of period $ 5.12 TOTAL RETURN, AT NET ASSET VALUE(2) 4.25% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $9,887 Average net assets (in thousands) $4,259 Number of shares outstanding at end of period (in thousands) 1,930 Ratios to average net assets: Net investment income 5.67%(3) Expenses .96%(3) Portfolio turnover rate(4) 10.9%
1. For the period from May 3, 1993 (commencement of operations) to December 31, 1993. 2. Assumes a hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested inadditional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. 3. Annualized. 4. The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during theperiodof acquisition of one year or less are excluded from the calculation. Performance Information From time to time, the yield of Strategic Bond Fund may be advertised. This yield will be computed in a standardized manner for mutual funds, by dividing that Fund's net investment income per share earned during a 30- day base period by the maximum offering price (equal to the net asset value) per share on the last day of the period. This yield calculation is compounded on a semi-annual basis, and multiplied by 2 to provide an annualized yield. The Statement of Additional Information describes a dividend yield and a distribution return that may also be quoted for this Fund. From time to time the "total return" and "average annual total return" for any of the Funds may be advertised. Each such Fund's "average annual total return" for a particular period is computed by determining the average annual compounded rate of return over the period, using the initial amount invested at the beginning of the period and the redeemable value of the investment at the end of the period. "Total return" for a particular period is a cumulative rate of return over the entire period, also using the initial amount invested and the redeemable value at the end of the period. The redeemable value of the investment assumes that all dividends and capital gains distributions have been reinvested at net asset value without sales charge. Each such Fund's "total return" and "average annual total return" indicate the investment results an investor would have experienced over the stated period from changes in share price and reinvestment of dividends and distributions. All such performance information is based on historical per share earnings and is not intended to indicate future performance. "Performance and Tax Information" in the Statement of Additional Information contains more detailed information about calculating yield and total return information and other investment returns. The Funds and Their Investment Policies Introduction. The Trust is an open-end, diversified management investment company organized as a Massachusetts business trust in 1984. It consists of eight separate Funds - Money Fund, Bond Fund and Growth Fund, all organized in 1984, High Income Fund, Capital Appreciation Fund and Multiple Strategies Fund, all organized in 1986, Global Securities Fund, organized in 1990 and Strategic Bond Fund, organized in 1993. As noted above, this Prospectus describes three of these Funds: Capital Appreciation Fund, Global Securities Fund and Strategic Bond Fund. Each Fund is a separate series of the Trust and has separate assets and liabilities and a separate net asset value per share, and an investor's interest is limited to the Fund in which shares are held. Since market risks are inherent in all securities to varying degrees, assurance cannot be given that the investment objective of any of the Funds will be met. The investment policies and practices described below for each Fund are not "fundamental" policies unless a particular policy is identified as fundamental. "Fundamental" policies are those that cannot be changed without the approval of a "majority," as defined in the Investment Company Act of 1940 (the "Investment Company Act"), of the Fund's outstanding voting securities. The Fund's Board of Trustees may change non-fundamental policies without shareholder approval. Investment Policies - Strategic Bond Fund. The investment objective of Strategic Bond Fund is to seek a high level of current income principally derived from interest on debt securities and to enhance such income by writing covered call options on debt securities. Although the premiums received by Strategic Bond Fund from writing covered calls are a form of capital gain, the Fund will not make investments in securities with the objective of seeking capital appreciation. The Fund intends to invest principally in: (i) lower-rated high yield domestic debt securities; (ii) U.S. Government securities, and (iii) foreign government and corporate debt securities. Under normal circumstances, the Fund's assets will be invested in each of these three sectors. However, Strategic Bond Fund may from time to time invest up to 100% of its total assets in any one sector if, in the judgment of the Manager, the Fund has the opportunity of seeking a high level of current income without undue risk to principal. Accordingly, the Fund's investments should be considered speculative. Distributable income will fluctuate as the Fund assets are shifted among the three sectors. High Yield Securities. The higher yields and high income sought by Strategic Bond Fund are generally obtainable from securities in the lower rating categories of the established rating services, commonly known as "junk bonds." Such securities are rated "Baa" or lower by Moody's or "BBB" or lower by Standard & Poor's. Strategic Bond Fund may invest in securities rated as low as "C" by Moody's or "D" by Standard & Poor's. Such ratings indicate that the obligations are speculative in a high degree and may be in default. Risks of high yield, high risk securities are discussed under "Risk Factors" below. Strategic Bond Fund's portfolio at December 31, 1993, contained securities in the following rating categories as rated by Standard & Poor's (the percentages relate to the weighted average of the bonds in each rating category as a percentage of that Fund's total assets): AAA, 35.51%; BB, 7.57%; B, 27.51%, CCC, 2.07%; and unrated 21.18%. Strategic Bond Fund is not obligated to dispose of securities whose issuers subsequently are in default or if the rating of such securities is reduced. Appendix B of this Prospectus describes these rating categories. Strategic Bond Fund may also invest in unrated securities which, in the opinion of the Manager, offer yields and risks comparable to those of securities which are rated. International Securities. The Fund may invest in foreign government and foreign corporate debt securities (which may be denominated in U.S. dollars or in non-U.S. currencies) issued or guaranteed by foreign corporations, certain supranational entities (such as the World Bank) and foreign governments (including political subdivisions having taxing authority) or their agencies or instrumentalities. These investments may include (i) U.S. dollar-denominated debt obligations known as "Brady Bonds," which are issued for the exchange of existing commercial bank loans to foreign entities for new obligations that are generally collateralized by zero coupon Treasury securities having the same maturity, (ii) debt obligations such as bonds (including sinking fund and callable bonds), (iii) debentures and notes (including variable rate and floating rate instruments), and (iv) preferred stocks and zero coupon securities. Further information about investments in foreign securities is set forth below under "Special Investment Methods - Foreign Securities." U.S. Government Securities. U.S. Government Securities are debt obligations issued by or guaranteed by the United States Government or one of its agencies or instrumentalities. Although U.S. Government Securities are considered among the most creditworthy of fixed-income investments and their yields are generally lower than the yields available from corporate debt securities, the values of U.S. Government Securities (and of fixed- income securities generally) will vary inversely to changes in prevailing interest rates. To compensate for the lower yields available on U.S. Government securities, Strategic Bond Fund will attempt to augment these yields by writing covered call options against them. See "Writing Covered Calls," below. Certain of these obligations, including U.S. Treasury notes and bonds, and mortgage-backed securities guaranteed by the Government National Mortgage Association ("Ginnie Maes"), are supported by the full faith and credit of the United States. Certain other U.S. Government Securities, issued or guaranteed by Federal agencies or government- sponsored enterprises, are not supported by the full faith and credit of the United States. These latter securities may include obligations supported by the right of the issuer to borrow from the U.S. Treasury, such as obligations of Federal Home Loan Mortgage Corporation ("Freddie Macs"), and obligations supported by the credit of the instrumentality, such as Federal National Mortgage Association bonds ("Fannie Maes"). U.S. Government Securities in which the Fund may invest include zero coupon U.S. Treasury securities, mortgage-backed securities and money market instruments. Zero coupon Treasury securities are: (i) U.S. Treasury notes and bonds which have been stripped of their unmatured interest coupons and receipts; or (ii) certificates representing interests in such stripped debt obligations or coupons. Because a zero coupon security pays no interest to its holder during its life or for a substantial period of time, it usually trades at a deep discount from its face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities which make current distributions of interest. Because the Fund accrues taxable income from these securities without receiving cash, the Fund may be required to sell portfolio securities in order to pay cash dividends or to meet redemptions. The Fund may invest up to 50% of its total assets at the time of purchase in zero coupon securities issued by either corporations or the U.S. Treasury. Domestic Securities. The Fund's investments in domestic securities may include preferred stocks, participation interests and zero coupon securities. Domestic investments include fixed-income securities and dividend-paying common stocks issued by domestic corporations in any industry which may be denominated in U.S. dollars or non-U.S. currencies. The Fund's investments may include securities which represent participation interests in loans made to corporations (see "Participation Interests," below) and in pools of residential mortgage loans which may be guaranteed by agencies or instrumentalities of the U.S. Government (e.g. Ginnie Maes, Freddie Macs and Fannie Maes), including collateralized mortgage-backed obligations ("CMOs"), or which may not be guaranteed. Such securities differ from conventional debt securities which provide for periodic payment of interest in fixed amounts (usually semi-annually) with principal payments at maturity or specified call dates. Mortgage-backed securities 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. The Fund's reinvestment of scheduled principal payments and unscheduled prepayments it receives may occur at lower rates than the original investment, thus reducing the yield of the Fund. CMOs in which the Fund may invest are securities issued by a U.S. Government instrumentality or private corporation that are collateralized by a portfolio of mortgages or mortgage-backed securities which may or may not be guaranteed by the U.S. Government. The issuer's obligation to make interest and principal payments is secured by the underlying portfolio of mortgages or mortgage- backed securities. Mortgage-backed securities may be less effective than debt obligations of similar maturity at maintaining yields during periods of declining interest rates. The Fund may invest in CMOs that are "stripped"; that is, the security is divided into two parts, one of which receives some or all of the principal payments and the other which receives some or all of the interest. Stripped securities that receive interest only are subject to increased volatility due to interest rate changes, and have the additional risk that if the principal underlying the CMO is prepaid, which is more likely to happen if interest rates fall, the Fund will lose the anticipated cash flow from the interest on the mortgages that were prepaid. See "Mortgage- Backed Securities" in the Statement of Additional Information for more details. The Fund may also invest in asset-backed securities, which are securities that represent fractional undivided interests in pools of consumer loans and trade receivables, similar in structure to the mortgage-backed securities in which the Fund may invest, described above. Payments of principal and interest are passed through to holders of asset-backed securities and are typically supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or having a priority to certain of the borrower's other securities. The degree of credit enhancement varies, and generally applies to only a fraction of the asset-backed security's par value until exhausted. Risk Factors. The securities in which Strategic Bond Fund principally invests are considered speculative and involve greater risk than lower yielding, higher rated fixed-income securities, while providing higher yield than such securities. Lower rated securities may be less liquid, and significant losses could be experienced if a substantial number of other holders of such securities decide to sell at the same time. Other risks may involve the default of the issuer or price changes in the issuer's securities due to changes in the issuer's financial strength or economic conditions. Issuers of lower rated or unrated securities are generally not as financially secure or creditworthy as issuers of higher-rated securities. Strategic Bond Fund is not obligated to dispose of securities when issuers are in default or if the rating of the security is reduced. These risks are discussed in more detail in the Statement of Additional Information. Investment Policies - Capital Appreciation Fund and Global Securities Fund. Capital Appreciation Fund. In seeking its objective of capital appreciation, Capital Appreciation Fund will emphasize investments in securities of "growth-type" companies. Such companies are believed to have relatively favorable long-term prospects for increasing demand for their goods or services, or to be developing new products, services or markets, and normally retain a relatively larger portion of their earnings for research, development and investment in capital assets. "Growth-type" companies may also include companies developing applications for recent scientific advances. Capital Appreciation Fund may also invest in cyclical industries and in "special situations" that the Manager believes present opportunities for capital growth. "Special situations" are anticipated acquisitions, mergers or other unusual developments which, in the opinion of the Manager, will increase the value of an issuer's securities, regardless of general business conditions or market movements. An additional risk is present in this type of investment since the price of the security may be expected to decline if the anticipated development fails to occur. Global Securities Fund. The objective of the Global Securities Fund is to seek long-term capital appreciation. Current income is not an objective. In seeking its objective, the Fund will invest a substantial portion of its invested assets in securities of foreign issuers, "growth-type" companies (those which, in the opinion of the Manager, have relatively favorable long-term prospects for increasing demand or which develop new products and retain a significant part of earnings for research and development), cyclical industries (e.g. base metals, paper and chemicals) and special investment situations which are considered to have appreciation possibilities (e.g., private placements of start-up companies). The Fund may invest without limit in "foreign securities" (as defined below in "Special Investment Methods - Foreign Securities") and thus the relative amount of such investments will change from time to time. It is currently anticipated that Global Securities Fund may invest as much as 80% or more of its total assets in foreign securities. Under normal market conditions, the Fund will invest its total assets in securities of issuers traded in markets of at least three countries (which may include the United States). See "Special Investment Methods -Foreign Securities," below, for further discussion as to the possible rewards and risks of investing in foreign securities and as to additional diversification requirements for the Fund's foreign investments. Special Investment Methods Borrowing. From time to time, Capital Appreciation Fund and Global Securities Fund may each increase their ownership of securities by borrowing from banks and investing the borrowed funds (on which that Fund will pay interest). Capital Appreciation Fund may borrow, subject to the 300% asset coverage requirement of the Investment Company Act. Global Securities Fund may borrow up to 10% of the value of its total assets. Global Securities Fund will not borrow, if as a result of such borrowing more than 25% of its total assets would consist of investments in when-issued or delayed delivery securities or borrowed funds. Purchasing securities with borrowed funds is a speculative investment method known as "leverage," which may subject a Fund to relatively greater risks and costs than funds that do not use leverage, including possible reduction of income and increased fluctuation of net asset value per share. For further discussion of such risks and other details, see "Investment Objectives and Policies - Borrowing" in the Statement of Additional Information. Pursuant to an undertaking by Capital Appreciation Fund and Global Securities Fund, borrowing by each such Fund is limited to 25% of the value of its net assets, which is further limited to 10% if the borrowing is for a purpose other than to facilitate redemptions. Neither percentage limitation is a fundamental policy. Small, Unseasoned Companies. Capital Appreciation Fund, Global Securities Fund and Strategic Bond Fund may each invest in securities of small, unseasoned companies as well as those of large, well-known companies. Securities of small, unseasoned companies may have a limited trading market and volatile price movements, which may adversely affect their disposition and can result in their being priced lower than might otherwise be the case. Participation Interests. Strategic Bond Fund and Global Securities Fund may acquire participation interests in U.S. dollar-denominated loans that are made to U.S. or foreign companies (the "borrower"). They may be interests in, or assignments of, the loan, and are acquired from banks or brokers that have made the loan or are members of the lending syndicate. The Manager has set certain creditworthiness standards for issuers of loan participations, and monitors their creditworthiness. Some borrowers may have senior securities rated as low as "C" by Moody's or "D" by Standard & Poor's, but may be deemed acceptable credit risks. Participation interests are considered investments in illiquid securities (see "Restricted and Illiquid Securities,"below). Their value primarily depends upon the creditworthiness of the borrower, and its ability to pay interest and principal. Borrowers may have difficulty making payments. If a borrower fails to make scheduled interest or principal payments, the Funds could experience a reduction in their respective income and a decline in the net asset value of their respective shares. Further details are set forth in the Statement of Additional Information under "Investment Objective and Policies." Foreign Securities. Each Fund may purchase "foreign securities" that is, securities of companies organized under the laws of countries other than the United States that are traded on foreign securities exchanges or in the foreign over-the-counter markets. Securities of foreign issuers that are represented by American Depository Receipts ("ADRs"), or that are listed on a U.S. securities exchange or are traded in the United States over-the-counter markets are not considered "foreign securities" for this purpose because they are not subject to many of the special considerations and risks (discussed below and in the Statement of Additional Information) that apply to foreign securities traded and held abroad. If a Fund's securities are held abroad, the countries in which such securities may be held and the sub-custodians holding them must be approved by the Fund's Board of Trustees under applicable SEC rules. Each Fund may also invest in debt obligations issued or guaranteed by foreign corporations, certain supranational entities (such as the World Bank) and foreign governments (including political subdivisions having taxing authority) or their agencies or instrumentalities, subject to the investment policies described above. Foreign securities which the Funds may purchase may be denominated in U.S. dollars or in non-U.S. currencies. The Funds may convert U.S. dollars into foreign currency, but only to effect securities transactions and not to hold such currency as an investment. It is currently intended that Capital Appreciation Fund will invest no more than 25% of its total assets in foreign securities or in government securities of any foreign country or in obligations of foreign banks. Neither Global Securities Fund nor Strategic Bond Fund has any restrictions on the amount of its assets that may be invested in foreign securities. Investments in securities of issuers in non-industrialized countries generally involve more risk and may be considered highly speculative. The Funds have undertaken to comply with the foreign country diversification guidelines of Section 10506 of the California Insurance Code, as follows: Whenever a Fund's investment in foreign securities exceeds 25% of its net assets, it will invest its assets in securities of issuers located in a minimum of two different foreign countries; this minimum is increased to three foreign countries if foreign investments comprise 40% or more of a Fund's net assets, to four if 60% or more and to five if 80% or more. In addition, no such Fund will have more than 20% of its net assets invested in securities of issuers located in any one foreign country; that limit is increased to 35% for Australia, Canada, France, Japan, the United Kingdom or Germany. The percentage of each Fund's assets that will be allocated to foreign securities will vary depending on the relative yields of foreign and U.S. securities, the economies of foreign countries, the condition of their financial markets, the interest rate climate of such countries, and the relationship of such countries' currency to the U.S. dollar. These factors are judged on the basis of fundamental economic criteria (e.g., relative inflation levels and trends, growth rate forecasts, balance of payments status, and economic policies) as well as technical and political data. Subsequent foreign currency losses may result in a Fund having previously distributed more income in a particular period than was available from investment income, which could result in a return of capital to shareholders. Each such Fund's portfolio of foreign securities may include those of a number of foreign countries or, depending upon market conditions and subject to the above diversification requirements those of a single country. In summary, foreign securities markets may be less liquid and more volatile than the markets in the U.S. Risks of foreign securities investing may include foreign withholding taxation, changes in currency rates or currency blockage, currency exchange costs, difficulty in obtaining and enforcing judgments against foreign issuers, relatively greater brokerage and custodial costs, risk of expropriation or nationalization of assets, less publicly available information, and differences between domestic and foreign legal, auditing, brokerage and economic standards. See "Investment Objectives and Policies - Foreign Securities" in the Statement of Additional Information for further details. Warrants and Rights. Each of the Funds may invest up to 5% of its total assets in warrants and rights other than those that have been acquired in units or attached to other securities. No more than 2% of each such Fund's total assets may be invested in warrants that are not listed on either the New York or American Stock Exchanges. For further details, see "Warrants and Rights" in the Statement of Additional Information. Repurchase Agreements. Each Fund may acquire securities that are subject to repurchase agreements to generate income while providing liquidity. There is no limit on the amount of any Fund's net assets that may be subject to repurchase agreements having a maturity of seven days or less. No Fund will enter into repurchase agreements which will cause more than 15% of its net assets to be invested in repurchase agreements having a maturity beyond seven days. Repurchase agreements must be fully collateralized. However, if the vendor fails to pay the resale price on the delivery date, the Fund may experience costs in disposing of the collateral, and losses if there is any delay in doing so. Restricted and Illiquid Securities. Under the supervision of the Board of Trustees, the Manager determines the liquidity of a Fund's investments. Investments may be illiquid because of the absence of a trading market, making it difficult to value them or dispose of them promptly at an acceptable price. A restricted security is one that has a contractual restriction on resale or cannot be sold publicly until it is registered under the Securities Act of 1933. No Fund will purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in securities that are illiquid by virtue of the absence of a readily available market or because of legal or contractual restrictions on resale ("restricted securities"). This policy applies to participation interests, bank time deposits, master demand notes and repurchase transactions maturing in more than seven days, over-the-counter ("OTC") options held by any Fund and that portion of assets used to cover such OTC options [Global Securities and Strategic Bond Funds]. This policy is not a fundamental policy and does not limit purchases of restricted securities eligible for resale to qualified institutional purchasers pursuant to Rule 144A under the Securities Act of 1933 that are determined to be liquid by the Board of Trustees or by the Manager under Board-approved guidelines. Such guidelines take into account trading activity for such securities and the availability of reliable pricing information, among other factors. If there is a lack of trading interest in particular Rule 144A securities, a Fund's holdings of those securities may be illiquid. There may be undesirable delays in selling such securities at a price representing their fair value. None of the Funds presently intend to invest more than 10% of its net assets in illiquid or restricted securities; restricted securities eligible for resale pursuant to Rule 144A are not included within this limitation. Loans of Portfolio Securities. To attempt to increase income, each Fund may lend its portfolio securities if the loan is collateralized in accordance with applicable regulatory requirements and if after any loan, the value of the securities loaned does not exceed 25% of the value of that Fund's total assets. In connection with securities lending, a Fund might experience risks of delay in receiving additional collateral, or risks of delay in recovery of the securities, or loss of rights in the collateral should the borrower fail financially. The Funds presently do not intend that the value of securities loaned will exceed 5% of each Fund's total assets. See "Loans of Portfolio Securities" in the Statement of Additional Information for further information on securities loans. When-Issued Securities. Each Fund may from time to time purchase securities on a "when-issued" basis, and may purchase or sell securities on a "delayed delivery" basis. Debt securities are often issued on this basis. In those transactions, a Fund obligates itself to purchase or sell securities with delivery and payment to occur at a later date to secure what is considered to be an advantageous price and yield at the time the obligation is entered into. The price, which is generally expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment for when-issued securities take place at a later date (normally within 45 days of purchase). During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund from the investment. Although the Fund is subject to the risk of adverse market fluctuation during that period, the Manager does not believe that the net asset value or income of a Fund will be significantly adversely affected by its purchase of securities on a "when-issued" basis. See "When-Issued and Delayed Delivery Transactions" in the Statement of Additional Information Statement for further details. Writing Covered Calls. Capital Appreciation Fund, Global Securities Fund and Strategic Bond Fund may each write, (i.e., sell) call options ("calls") that are traded on a domestic securities exchange or quoted on NASDAQ, that are traded on foreign securities exchanges and domestic, over-the-counter markets or that are traded on foreign over-the-counter markets. Such Funds may also write calls that are traded on foreign over- the-counter markets. All such calls written by these Funds must be "covered" while the call is outstanding (i.e., the Fund must own the securities subject to the call or other securities acceptable for applicable escrow requirements). Calls on Futures (see "Hedging" below) must be covered by deliverable securities or by liquid assets segregated to satisfy the Futures contract. Covered call writing is an attempt to enhance income through the receipt of premiums from expired calls and any net profits from closing purchase transactions. After any such sale, up to 100% of each such Fund's total assets may be subject to calls. If a call written by a Fund is exercised, the Fund forgoes any possible profit from an increase in the market price of the underlying security over the exercise price less the commissions paid on the sale. In addition, the Fund could experience capital losses which might cause previously distributed short-term capital gains to be recharacterized as non-taxable return of capital to shareholders. Hedging. For hedging purposes as a temporary defensive maneuver, Global Securities Fund, Capital Appreciation Fund and Strategic Bond Fund may use Stock Index Futures. Global Securities Fund and Strategic Bond Fund may also use Interest Rate Futures and Bond Index Futures (together with Stock Index Futures, referred to as "Futures"), Forward Contracts (defined below), and call and put options on securities, Futures (as applicable), broadly-based indices and foreign currencies. Strategic Bond Fund may also enter into Interest Rate Swap transactions (all of the foregoing are referred to as "Hedging Instruments"). Hedging Instruments may be used to attempt to: (i) protect against declines in the market value of a Fund's portfolio securities or Futures, and thus protect that Fund's net asset value per share against downward market trends, (ii) protect a Fund's unrealized gains in the value of its securities which have appreciated, (iii) facilitate selling portfolio securities for investment reasons, (iv) establish a position in the securities markets as a temporary substitute for purchasing particular securities, or (v) reduce the risk of adverse currency fluctuations. A call or put may be purchased only if, after such purchase, the value of all call and put options held by that Fund would not exceed 5% of its total assets. The Funds will not use Futures and options on Futures for speculation. The Hedging Instruments which the Funds may use are described below. Interest Rate Futures. Global Securities Fund and Strategic Bond Fund may buy and sell futures contracts that relate to debt securities ("Interest Rate Futures"). An Interest Rate Future obligates the seller to deliver and the purchaser to take a specific type of debt security at a specific future date for a fixed price. That obligation may be satisfied by actual delivery of the debt security or by entering into an offsetting contract. Bond Index Futures. Global Securities Fund and Strategic Bond Fund may buy and sell futures contracts that relate to bond indices ("Bond Index Futures"). A bond index assigns relative values to the bonds included in that index and is used as a basis for trading long-term Bond Index Futures contracts. Bond Index Futures reflect the price movements of bonds included in the index. They differ from Interest Rate Futures in that settlement is made in cash rather than by delivery. Stock Index Futures. The Funds may buy and sell futures contracts that relate to broadly-based stock indices ("Stock Index Futures"). A stock index is "broadly-based" if it includes stocks that are not limited to issuers in any particular industry or group of industries. Stock Index Futures obligate one party to accept, and the other party to make, delivery of cash equal to the difference between the stock index value at the close of trading of the contract and the exercise price of the futures contract times a specified multiple (the "multiplier") which determines the total dollar value for each point of difference. No physical delivery of the underlying stocks in the index is made. Generally, contracts are closed out prior to the expiration date of the contract. Purchasing Calls on Securities and Futures. Each Fund may purchase calls on securities or on Futures that are traded on U.S. and foreign securities or commodities exchanges, or the U.S. over-the-counter markets or foreign over-the-counter markets or foreign over-the-counter markets in order to protect against the possibility that its portfolio will not fully participate in an anticipated rise in value of the long-term securities market. The value of debt securities underlying calls will not exceed the value of the portion of the Fund's portfolio invested in cash or cash equivalents (i.e. securities with maturities of less than one year). Puts on Securities and Futures. Each Fund may purchase put options ("puts") which relate to securities (whether or not it holds such securities in its portfolio) or Futures. They may also write puts on securities or Futures only if such puts are covered by segregated liquid assets. None of the Funds will write puts if, as a result, more than 50% of its net assets would be required to be segregated liquid assets. In writing puts, there is the risk that a Fund may be required to buy the underlying security at a disadvantageous price. Foreign Currency Options. Each Fund may purchase and write puts and calls on foreign currencies that are traded on a securities or commodities exchange or quoted by major recognized dealers in such options, for the purpose of protecting against declines in the dollar value of foreign securities owned by such Fund or in the dollar value of payments on such securities and against increases in the dollar cost of foreign securities to be acquired. If a rise is anticipated in the dollar value of a foreign currency in which securities to be acquired are denominated, the increased cost of such securities may be partially offset by purchasing calls or writing puts on that foreign currency. If a decline in the dollar value of a foreign currency is anticipated, the decline in value of portfolio securities denominated in that currency may be partially offset by writing calls or purchasing puts on that foreign currency. However, in the event of currency rate fluctuations adverse to a Fund's position, it would lose the premium it paid and transactions costs. Forward Contracts. Each Fund may enter into foreign currency exchange contracts ("Forward Contracts"), which obligate the seller to deliver and the purchaser to take a specific amount of foreign currency at a specific future date for a fixed price. Any of these Funds may enter into a Forward Contract in order to "lock in" the U.S. dollar price of a security denominated in a foreign currency, which it has purchased or sold but which has not yet settled, or to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and a foreign currency. There is a risk that use of Forward Contracts may reduce the gain that would otherwise result from a change in the relationship between the U.S. dollar and a foreign currency. Forward Contracts include standardized foreign currency futures contracts which are traded on exchanges and are subject to procedures and regulations applicable to other Futures. The Funds may also enter into Forward Contracts to sell a foreign currency denominated in a currency other than that in which the underlying security is denominated. This is done in the expectation that there is a greater correlation between the foreign currency of the Forward Contract and the foreign currency of the underlying investment than between the U.S. dollar and the foreign currency of the underlying investment. This technique is referred to as "cross hedging." The Funds may also cross hedge by entering into a Forward Contract to sell a foreign currency and receive a second foreign currency, both of which differ from the foreign currency in which the underlying security is denominated. This is done in the expectation that there is a greater correlation between the foreign currencies of the Forward Contract and the foreign currency of the underlying investment than between the U.S. dollar and the foreign currency of the underlying investment. The success of cross hedging is dependent on many factors, including the ability of the Manager to correctly identify and monitor the correlation between foreign currencies and the U.S. dollar. To the extent that the correlation is not identical, that Fund may experience losses or gains on both the underlying security and the cross currency hedge. Neither of these Funds will speculate in foreign currency exchange contracts. There is no limit as to the percentage of these Funds' assets that may be committed to foreign currency exchange contracts. The Funds do not enter into such forward contracts or maintain a net exposure in such contracts where that Fund would be obligated to deliver an amount of foreign currency in excess of the value of that Fund's portfolio securities denominated in that currency or, enter into a cross hedge unless it is denominated in a currency or currencies that the Manager believes will have price movements that tend to correlate closely with the currency in which the investment being hedged is denominated. Interest Rate Swap Transactions. Strategic Bond Fund may enter into interest rate swaps. Interest rate swaps are subject to interest rate risks, in that the Fund could be obligated to pay more under its swap agreements than it receives, as a result of interest rate changes. In an interest rate swap, the Fund and another party exchange their respective commitments to pay or receive interest on a security (e.g., an exchange of floating rate payments for fixed rate payments). Strategic Bond Fund will not use interest rate swaps for leverage. Swap transactions will be entered into only as to security positions held by the Fund. Strategic Bond Fund may not enter into swap transactions with respect to more than 50% of its total assets. The Fund will segregate liquid assets (e.g., cash, U.S. Government securities or other appropriate high grade debt obligations) equal to the net excess, if any, of its obligations over its entitlements under the swap and will mark to market that amount daily. There is a risk of loss on a swap equal to the net amount of interest payments that the Fund is contractually obligated to make. The credit risk of an interest rate swap depends on the counterparty's ability to perform. The value of the swap may decline if the counterparty's creditworthiness deteriorates. If the counterparty defaults, the Fund risks the loss of the net amount of interest payments that it is contractually entitled to receive. The Fund may be able to reduce or eliminate its exposure to losses under swap agreements either by assigning them to another party, or by entering into an offsetting swap agreement with the same counterparty or another creditworthy counterparty. See "Hedging" in the Statement of Additional Information for further details. Risks of Options and Futures Trading. The Statement of Additional Information contains more information about options and Futures, Forward Contracts, segregation arrangements for Forward Contracts and Futures, the payment of premiums for option trades, the tax effects, risks and possible benefits to the Funds from options trading and information as to the Fund's other limitations on investments in Futures and options thereon. These limitations and the restrictions described in the preceding paragraph on cross hedging are not fundamental policies of the Funds. There are certain risks in writing calls. If a call written by the Funds is exercised, the Fund foregoes any profit from any increase in the market price above the call price of the underlying investment on which the call was written. In addition, the Funds could experience capital losses that might cause previously distributed short-term capital gains to be re- characterized as non-taxable return of capital to shareholders. In writing puts, there is the risk that the Fund may be required to buy the underlying security at a disadvantageous price. The principal risks of Futures trading are: (a) possible imperfect correlation between the prices of the Futures and the market value of the debt securities in the Fund's portfolio; (b) possible lack of a liquid secondary market for closing out a Futures position; (c) the need for additional skills and techniques beyond those required for normal portfolio management; and (d) losses on Futures resulting from interest rate movements not anticipated by the Manager. Derivatives. The most common derivatives, also known as structured financial products, in which the Funds may invest include: (i) index- linked notes whose final payouts are dependent upon the performance of one or more market indices, and (ii) relative performance options whose cash settlement is a function of the differential returns between two market indices. A risk of these derivatives is a decline in value of the underlying instrument due to adverse movements in the index. Investments in derivatives will be consistent with the Funds' respective investment policies. Portfolio Turnover. The Funds may engage frequently in short-term trading. High turnover and short-term trading involve correspondingly greater commission expenses and transaction costs for Capital Appreciation Fund and Global Securities Fund and to a lesser extent, higher transaction costs for Strategic Bond Fund. Portfolio turnover rates are set forth under "Financial Highlights" for each Fund. If any Fund derives 30% or more of its gross income from the sale of securities held less than three months, it may fail to qualify under the tax laws as a regulated investment company (see "Dividends, Distributions and Taxes," below). Short Sales Against-the-Box. Each Fund may sell securities short in "short sales against-the-box." No more than 15% of any Fund's net assets will be held as collateral for such short sales at any one time. See "Investment Objectives and Policies -- Short Sales Against-the-Box" in the Statement of Additional Information for further information. Investment Restrictions Each of the Funds has certain investment restrictions which, together with its investment objective, are fundamental policies, that is, subject to change only by approval of a majority of the outstanding voting securities of the appropriate Fund. Under some of those restrictions, each Fund cannot: (1) with respect to 75% of its total assets, invest in securities (except those of the U.S. Government or its agencies or instrumentalities) of any issuer if immediately thereafter, either (a) more than 5% of that Fund's total assets would be invested in securities of that issuer, or (b) that Fund would then own more than 10% of that issuer's voting securities or 10% in principal amount of the outstanding debt securities of that issuer (the latter limitation on debt securities does not apply to Strategic Bond Fund); (2) lend money except in connection with the acquisition of debt securities which a Fund's investment policies and restrictions permit it to purchase; the Funds may also make loans of portfolio securities (see "Loans of Portfolio Securities"); (3) pledge, mortgage or hypothecate any assets to secure a debt; the escrow arrangements which are involved in options trading are not considered to involve such a mortgage, hypothecation or pledge; (4) concentrate investments in any particular industry; therefore these Funds will not purchase the securities of issuers primarily engaged in the same industry if more than 25% of the total value of that Fund's assets would (in the absence of special circumstances) consist of securities of companies in a single industry; (5) deviate from the percentage requirements and other restrictions listed under "Warrants and Rights," and the first paragraph under "Borrowing". None of the percentage limitations and restrictions described above and in the Statement of Additional Information for the Funds with respect to writing covered calls, hedging, short sales and derivatives is a fundamental policy. The percentage restrictions described above and in the Statement of Additional Information, other than those described under "Special Investment Methods -- Borrowing," apply only at the time of investment and require no action by a Fund as a result of subsequent changes in value of the investment or the size of that Fund. A supplementary list of investment restrictions is contained in the Statement of Additional Information, which also contains further information regarding the Funds' investment policies. The Trustees of the Trust are required to monitor events to identify any irreconcilable conflicts which may arise between the variable life insurance policies and variable annuity contracts that invest in the Funds. Should any conflict arise which ultimately requires that any substantial amount of assets be withdrawn from any Fund, its operating expenses could increase. Management Of The Funds The Board of Trustees has overall responsibility for the management of each Fund under the laws of Massachusetts governing the responsibilities of trustees of business trusts. Subject to the authority of the Board of Trustees, the Manager is responsible for the day-to-day management of the Funds' business, supervises the investment operations of each Fund and the composition of its portfolio and furnishes advice and recommendations with respect to investments, investment policies and the purchase and sale of securities, pursuant to an investment advisory agreement with each Fund (the "Agreements"). Effective September 1, 1994, the monthly management fee payable to the Manager is computed separately on the net assets of each Fund as of the close of business each day. The management fee rates that became effective that day are as follows (i) for Capital Appreciation and Global Securities Fund: 0.75% of the first $200 million of net assets, 0.72% of the next $200 million, 0.69% of the next $200 million, 0.66% of the next $200 million, and 0.60% of net assets over $800 million; and (ii) for Strategic Bond Fund: 0.75% of the first $200 million of net assets, 0.72% of the next $200 million, 0.69% of the next $200 million, 0.66% of the next $200 million of net assets, 0.60% of the next $200 million, and 0.50% of net assets over $1 billion. The management fee rates in effect during the Funds' fiscal year ended December 31, 1993 are in Note 6 to the financial statements included in the Trust's Statement of Additional Information. During the fiscal year ended December 31, 1993, the management fee (computed on an annualized basis as a percentage of the net assets of all the Funds as of the close of business each day) and the total operating expenses as a percentage of average net assets of each Fund, when restated to reflect the current management fee rates described above and the current limitation on expenses described in the Statement of Additional Information, were as follows: Management Total Operating Fund Fees Expenses Capital Appreciation Fund .75% .80% Global Securities Fund .75% .96% Strategic Bond Fund(1) .69% 1.00% (1) Annualized. Total Operating Expenses would have been 1.06% in the absence of the Manager's voluntary expense limitation. The Manager is authorized by the Agreements to employ such brokers or dealers as may in its best judgment, based on all relevant factors, implement the policy of the Funds to obtain, at reasonable expense, the "best execution" (prompt and reliable execution at the most favorable price obtainable) of the Funds' portfolio transactions. Subject to the Agreements, the Manager may also consider sales of shares of the Funds and other funds advised by the Manager or its affiliates as a factor in the selection of broker-dealers for portfolio transactions. As most purchases by Strategic Bond Fund are principal transactions at net prices, these Funds incur little or no brokerage costs, and the mark-up (the difference or spread between the dealer's purchase and sale price) that they pay on principal transactions is smaller than that paid by most individual investors. "Investment Management Services" in the Statement of Additional Information contains additional information about the Agreements, including a description of expense arrangements, exculpation provisions, and brokerage practices of the Funds. Mr. David Negri is a Vice President of the Manager who serves as a Portfolio Manager of Strategic Bond Fund. Since May 1993, he has been the person principally responsible for the day-to-day management portfolios of this Funds. During the past five years, he has also served as an officer of other OppenheimerFunds. Mr. George Evans is a Vice President of the Manager who serves as a Portfolio Manager of Global Securities Fund. Since February, 1991, he has been the person principally responsible for the day-to-day management of that Fund's portfolio. During the past five years, he has also served as an international equities portfolio manager/analyst with Brown Brothers Harriman & Co. Mr. Paul LaRocco is an Assistant Vice President and a Portfolio Manager of the Manager who serves as Portfolio Manager of Capital Appreciation Fund. Since January, 1994, he has been the person principally responsible for the day-to-day management of the Fund's portfolio. During the past five years, he has also served as Associate Portfolio Manager for other OppenheimerFunds and formerly served as a securities analyst with Columbus Circle Investors, prior to which he was an investment analyst for Chicago Title & Trust Co. Each of the Portfolio Managers named above are also Vice Presidents of the Trust. For more information about the Trust's other Trustees and Officers, see "Trustees and Officers" in the Statement of Additional Information. The Manager has operated as an investment adviser since April 30, 1959. It and its affiliates currently advise U.S. investment companies with assets aggregating over $27 billion as of December 31, 1993, and having more than 1.8 million shareholder accounts. The Manager is owned by Oppenheimer Acquisition Corp., a holding company owned in part by senior management of the Manager, and ultimately controlled by Massachusetts Mutual Life Insurance Company, a mutual life insurance company which also advises pension plans and investment companies. Management's Discussion of Performance. During the Funds' fiscal year ended December 31, 1993, the Managers emphasized the following investment strategies and techniques. For Capital Appreciation Fund, stocks of companies were emphasized in health care, technology and telecommunications, and specialty retailing, in expectation that an improving economy will support the prospects for stocks of small companies. For Global Securities Fund, banks and financial services in emerging markets and developed countries, consumer industries servicing emerging markets, telecommunications and energy logistics were emphasized in anticipation of increased capital requirements to support development, growth and demand of emerging consumer markets, and an anticipated pick up in global economies and markets. For Strategic Bond Fund, corporate bonds were emphasized in the paper, metals and automotive industries, to take advantage of price appreciation in the event of economic recovery, and foreign fixed income securities were emphasized to take advantage of growth rates in foreign countries (including Europe, Australia, Canada New Zealand, Latin America, Indonesia and Eastern Europe) that are higher than in the U.S. Indices. The S&P 500 Index is an unmanaged index of 500 widely held common stocks traded on the New York and American Stock Exchanges and the over- the-counter market, and is widely recognized as a general measure of stock market performance. The Lehman Brothers Aggregate Bond Index is a broad- based, unmanaged index of U.S. corporate bond issues, U.S. government securities and mortgage-backed securities, widely recognized as a measure of the performance of the domestic debt securities market. The Morgan Stanley World Index is an unmanaged index of issuers listed on the stock exchanges of 20 foreign countries and the U.S., and is widely recognized as a measure of global stock market performance. The Salomon Brothers World Government Bond Index is an unmanaged index of fixed-rate bonds having a maturity of one year or more, and is widely recognized as a benchmark of fixed income performance on a world-wide basis. The performance of each index reflects reinvestment of income but not capital gains or transaction costs, and none of the data shown above shows the effect of taxes. While index comparisons may be useful to provide a benchmark for the Funds' performance, it must be noted that the Funds' investments are not limited to the securities in any one index and the index data does not reflect any assessment of the risk of the investments included in the index. Purchase Of Shares Shares of each Fund are offered only for purchase by Accounts as an investment medium for variable life insurance policies and variable annuity contracts, as described in the accompanying Account Prospectus. The sale of shares will be suspended during any period when the determination of net asset value is suspended and may be suspended by the Board of Trustees whenever the Board judges it in that Fund's best interest to do so. Shares of each Fund are offered at their respective offering price, which (as used in this Prospectus and the Additional Statement) is net asset value (without sales charge). All purchase orders are processed at the offering price next determined after receipt by the Trust of a purchase order in proper form. The offering price (and net asset value) is determined as of 4:00 P.M., New York time, each day the New York Stock Exchange is open. Net asset value per share of each Fund is determined by dividing the value of that Fund's net assets by the number of its shares outstanding. The Board of Trustees has established procedures for valuing each Fund's securities. In general, those valuations are based on market value, with special provisions for: (i) securities not having readily available market quotations; (ii) short- term debt securities; and (iii) calls and Hedging Instruments. Further details are in "Purchase, Redemption and Pricing of Shares" in the Statement of Additional Information. Redemption Of Shares Payment for shares tendered by an Account for redemption is made ordinarily in cash and forwarded within seven days after receipt by the Trust's transfer agent, Oppenheimer Shareholder Services (the "Transfer Agent"), of redemption instructions in proper form, except under unusual circumstances as determined by the SEC. The Trust understands that payment to the Account owner will be made in accordance with the terms of the accompanying Account Prospectus. The redemption price will be the net asset value next determined after the receipt by the Transfer Agent of a request in proper form. The market value of the securities in the portfolio of the Funds is subject to daily fluctuations and the net asset value of the Funds' shares will fluctuate accordingly. Therefore, the redemption value may be more or less than the investor's cost. Dividends, Distributions and Taxes Dividends and Distributions of Strategic Bond Fund. The Trust intends to declare Strategic Bond Fund dividends quarterly, payable in March, June, September and December. Dividends and Distributions of Capital Appreciation Fund and Global Securities Fund. The Trust intends to declare Capital Appreciation Fund and Global Securities Fund dividends on an annual basis. Dividends and Distributions: General. Any Fund may make a supplemental distribution annually in December out of any net short-term or long-term capital gains derived from the sale of securities, premiums from expired calls written by the Fund, and net profits from hedging transactions, realized from November 1 of the prior year through October 31 of the current year. Each such Fund may also make a supplemental distribution of capital gains and ordinary income following the end of its fiscal year. All dividends and capital gains distributions paid on shares of any of the Funds are automatically reinvested in additional shares of that Fund at net asset value determined on the distribution date. There are no fixed dividend rates and there can be no assurance as to the payment of any dividends or the realization of any capital gains. Tax Treatment to the Account As Shareholder. Dividends paid by each Fund from its ordinary income and distributions of each Fund's net realized short-term or long-term capital gains are includable in gross income of the Accounts holding such shares. The tax treatment of such dividends and distributions depends on the tax status of that Account. Tax Status of the Funds. If the Funds qualify as "regulated investment companies" under the Internal Revenue Code, the Trust will not be liable for Federal income taxes on amounts paid as dividends and distributions from any of the Funds. The Funds did qualify during their last fiscal year and the Trust intends that they will qualify in current and future years. However, the Code contains a number of complex tests relating to qualification which any Fund might not meet in any particular year (see, e.g., "The Funds and Their Investment Policies - Portfolio Turnover"). If any Fund does not so qualify, it would be treated for tax purposes as an ordinary corporation and would receive no tax deduction for payments made to shareholders of that Fund. The above discussion relates solely to Federal tax laws. This discussion is not exhaustive and a qualified tax adviser should be consulted. Additional Information Description of the Trust and its Shares. The Declaration of Trust permits the Board of Trustees to issue an unlimited number of full and fractional shares of beneficial interest of separate series, without par value, and from time to time to create additional series and to fix and determine the relative rights and preferences among the different series. Shares of eight series have been authorized, which constitute interests in the Funds; the Trustees have authority to create additional series (without shareholder approval) which would constitute new funds. Shares of each Fund represent an interest in that Fund proportionately equal to the interest of each other share of that Fund and entitle their holders to one vote per share (with proportionate voting for fractional shares) on matters submitted to their vote, as explained in the Statement of Additional Information. Shares do not have cumulative voting rights, or conversion, preemptive or subscription rights, and are fully transferable. Shares of each Fund have liquidation rights as to the assets of that Fund. It is not contemplated that regular annual meetings of shareholders will be held. Under certain circumstances, shareholders have the right to remove a Trustee. See "Additional Information - Description of the Trust" in the Statement of Additional Information for details. As of December 31, 1993, Bankers Security Variable Annuity Funds P and Q may be deemed to control Capital Appreciation Fund; Nationwide's Separate Accounts I and II may be deemed to control Global Securities Fund; and Confederation Life Insurance and Annuity Company's Separate Account A may be deemed to control Capital Appreciation Fund, Global Securities Fund and Strategic Bond Fund; in each case by virtue of owning more than 25% of the shares of such Fund. See "Trustees and Officers - Fund Shareholders" in the Statement of Additional Information. Except as provided under the Investment Company Act, the Accounts will vote their shares in accordance with instructions received from Account Policyowners; this is explained further in the accompanying Account Prospectus. Shareholder Inquiries. Inquiries by policyowners for Account information are to be directed to the insurance company issuing the Account at the address or telephone number shown on the first page of the accompanying Account Prospectus. The Custodian and the Transfer Agent. The Custodian of the assets of the Trust is The Bank of New York. The Manager and its affiliates have banking relationships with the Custodian. See "Additional Information" in the Statement of Additional Information for further details. Cash balances with the Custodian in excess of $100,000 are not protected by Federal deposit insurance. Such uninsured balances may at times be substantial. Oppenheimer Shareholder Services, a division of the Manager, acts as transfer agent on an at-cost basis for the Trust. It also acts as transfer agent and shareholder servicing agent for certain other open-end funds advised by the Manager. Appendix A - Description of Terms Some of the terms used in the Prospectus and the Statement of Additional Information are described below: Bank obligations include certificates of deposit which are negotiable certificates evidencing the indebtedness of a commercial bank to repay funds deposited with it for a definite period of time (usually 14 days to one year) at a stated interest rate. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft which has been drawn on it by a customer; these instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Bank notes are short-term direct credit obligations of the issuing bank or bank holding company. Commercial paper consists of short-term (usually 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. Variable rate master demand notes are obligations that permit the investment of fluctuating amounts at varying rates of interest pursuant to direct arrangement between the holder and the borrower. The holder has the right to increase the amount under the note at any time up to the face amount, or to decrease the amount borrowed, and the borrower may repay up to the face amount of the note without penalty. Corporate obligations are bonds and notes issued by corporations and other business organizations, including business trusts, in order to finance their long-term credit needs. Letters of credit are obligations by the issuer (a bank or other person) to honor drafts or other demands for payment upon compliance with specified conditions. Securities issued or guaranteed by the United States Government or its agencies or instrumentalities include issues of the United States Treasury, such as bills, certificates of indebtedness, notes and bonds, and issues of agencies and instrumentalities established under the authority of an act of Congress. Such agencies and instrumentalities include, but are not limited to, Bank for Cooperatives, Federal Financing Bank, Federal Home Loan Bank, Federal Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage Association and Tennessee Valley Authority. Issues of the United States Treasury are direct obligations of the United States Government. Issues of agencies or instrumentalities are (i) guaranteed by the United States Treasury, or (ii) supported by the issuing agency's or instrumentality's right to borrow from the United States Treasury, or (iii) supported by the issuing agency's or instrumentality's own credit. Appendix B - Description of Securities Ratings This is a description of (i) the two highest rating categories for Short Term Debt and Long Term Debt by the Rating Organizations referred to under Investment Policies -- Money Fund, and (ii) additional rating categories that apply principally to investments by High Income Fund, Strategic Bond Fund and Bond Fund. The rating descriptions are based on information supplied by the Rating Organizations to subscribers. Short Term Debt Ratings. Moody's Investors Service, Inc. ("Moody's"): The following rating designations for commercial paper (defined by Moody's as promissory obligations not having original maturity in excess of nine months), are judged by Moody's to be investment grade, and indicate the relative repayment capacity of rated issuers: Prime-1: Superior capacity for repayment. Capacity will normally be evidenced by the following characteristics: (a) leveling market positions in well-established industries; (b) high rates of return on funds employed; (c) conservative capitalization structures with moderate reliance on debt and ample asset protection; (d) broad margins in earning coverage of fixed financial charges and high internal cash generation; and (e) well established access to a range of financial markets and assured sources of alternate liquidity. Prime-2: Strong capacity for repayment. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Standard & Poor's Corporation ("S&P"): The following ratings by S&P for commercial paper (defined by S&P as debt having an original maturity of no more than 365 days) assess the likelihood of payment: A-1: Strong capacity for timely payment. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2: Satisfactory capacity for timely payment. However, the relative degree of safety is not as high as for issues designated "A-1". Fitch Investors Service, Inc. ("Fitch"): Fitch assigns the following short-term ratings to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes: F-1+: Exceptionally strong credit quality; the strongest degree of assurance for timely payment. F-1: Very strong credit quality; assurance of timely payment is only slightly less in degree than issues rated "F-1+". F-2: Good credit quality; satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-1+" or "F-1" ratings. Duff & Phelps, Inc. ("Duff & Phelps"): The following ratings are for commercial paper (defined by Duff & Phelps as obligations with maturities, when issued, of under one year), asset-backed commercial paper, and certificates of deposit (the ratings cover all obligations of the institution with maturities, when issued, of under one year, including bankers' acceptance and letters of credit): Duff 1+: Highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1: Very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Duff 1-: High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small. Duff 2: Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. IBCA Limited or its affiliate IBCA Inc. ("IBCA"): Short-term ratings, including commercial paper (with maturities up to 12 months), are as follows: A1+: Obligations supported by the highest capacity for timely repayment. A1: Obligations supported by a very strong capacity for timely repayment. A2: Obligations supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic, or financial conditions. Thomson BankWatch, Inc. ("TBW"): The following short-term ratings apply to commercial paper, certificates of deposit, unsecured notes, and other securities having a maturity of one year or less. TBW-1: The highest category; indicates the degree of safety regarding timely repayment of principal and interest is very strong. TBW-2: The second highest rating category; while the degree of safety regarding timely repayment of principal and interest is strong, the relative degree of safety is not as high as for issues rated "TBW-1". Long Term Debt Ratings. These rating categories apply principally to investments by High Income Fund, Strategic Bond Fund and Bond Fund. For Money Fund only, the two highest rating categories of each Rating Organization are relevant for securities purchased with a remaining maturity of 397 days or less, or for rating issuers of short-term obligations. Moody's: Bonds (including municipal bonds) are rated as follows: Aaa: Judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong positions of such issues. Aa: 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 fluctuations 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: 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: Considered medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and have speculative characteristics as well. Ba: Judged to have speculative elements; their future cannot be considered well-assured. Often the protection of interest and principal payments may be very moderate and not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds rated "B" generally lack characteristics of 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: Of poor standing and may be in default or there may be present elements of danger with respect to principal or interest. Ca: Represent obligations which are speculative in a high degree and are often in default or have other marked shortcomings. C: Bonds rated "C" can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies numerical modifiers "1", "2" and "3" in each generic rating classification from "Aa" through "B" in its corporate bond rating system. The modifier "1" indicates that the security ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that the issue ranks in the lower end of its generic rating category. Standard & Poor's: Bonds are rated as follows: AAA: The highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA: A strong capacity to pay interest and repay principal and differ from "AAA" rated issues only in small degree. A: Have a strong capacity to pay principal and interest, although they are somewhat more susceptible to adverse effects of change in circumstances and economic conditions. BBB: Regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this capacity than for bonds in the "A" category. BB, B, CCC, CC: 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 lowest degree of speculation and "CC" the highest degree. While such bonds will likely have some equality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C, D: Bonds on which no interest is being paid are rated "C." Bonds rated "D" are in default and payment of interest and/or repayment of principal is in arrears. Fitch: AAA: 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: 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". Plus (+) and minus (-) signs are used in the "AA" category to indicate the relative position of a credit within that category. Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+". Duff & Phelps: AAA: The highest credit quality. The risk factors are negligible, being only slightly more than the risk-free U.S. Treasury debt. AA: High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. Plus (+) and minus (-) signs are used in the "AA" category to indicate the relative position of a credit within that category. IBCA: Long-term obligations (with maturities of more than 12 months) are rated as follows: AAA: The lowest expectation for 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 risks significantly. AA: A very low expectation for investment risk. Capacity for timely repayment of principal and interest is substantial. Adverse changes in business, economic, or financial conditions may increase investment risk albeit not very significantly. A plus (+) or minus (-) sign may be appended to a long term rating to denote relative status within a rating category. TBW: TBW issues the following ratings for companies. These ratings assess the likelihood of receiving payment of principal and interest on a timely basis and incorporate TBW's opinion as to the vulnerability of the company to adverse developments, which may impact the market's perception of the company, thereby affecting the marketability of its securities. A: Possesses an exceptionally strong balance sheet and earnings record, translating into an excellent reputation and unquestioned access to its natural money markets. If weakness or vulnerability exists in any aspect of the company's business, it is entirely mitigated by the strengths of the organization. A/B: The company is financially very solid with a favorable track record and no readily apparent weakness. Its overall risk profile, while low, it not quite as favorable as for companies in the highest rating category. APPENDIX TO PROSPECTUS Graphic material included in Prospectus of Oppenheimer Variable Account Funds: "Comparison of Total Return of Oppenheimer Variable Account Funds with Broad-Based Indices - Changes in Value of a $10,000 Hypothetical Investment" Linear graphs will be included in the Prospectus of Oppenheimer Variable Account Funds (the "Funds") depicting the initial account value and subsequent account value of a hypothetical $10,000 investment in shares of the Funds for the life of each Fund and comparing such values with the same investments over the same time periods in the Broad-Based Indices. Set forth below are the relevant data points that will appear on the linear graphs. Additional information with respect to the foregoing, including a description of the S&P 500 Index, is set forth in the Prospectus under "Fund Performance Information - Management's Discussion of Performance."
Fiscal Capital Year Ended Appreciation Fund S&P 500 Index 08/15/86(1) $10,000 $10,000 12/31/86 $ 9,835 $ 9,684 12/31/87 $11,245 $10,192 12/31/88 $12,754 $11,880 12/31/89 $16,269 $15,638 12/31/90 $13,530 $15,152 12/31/91 $20,938 $19,758 12/31/92 $24,167 $21,261 12/31/93 $30,770 $23,400
Morgan Fiscal Global Stanley Year Ended Securities Fund World Index 11/12/90(1) $10,000 $10,000 12/31/90 $10,040 $10,211 12/31/91 $10,380 $12,148 12/31/92 $ 9,642 $11,582 12/31/93 $16,423 $14,261
Lehman Salomon Brothers Brothers World Fiscal Strategic Aggregate Government Year Ended Bond Fund Bond Index Bond Index 05/03/93(1) $10,000 $10,000 $10,000 12/31/93 $10,425 $10,453 $10,426
________________________ (1) Commencement of operations. OPPENHEIMER VARIABLE ACCOUNT FUNDS Investment Adviser Oppenheimer Management Corporation Two World Trade Center New York, New York 10048-0203 Transfer Agent Oppenheimer Shareholder Services P.O. Box 5270 Denver, Colorado 80217 Custodian of Portfolio Securities The Bank of New York One Wall Street New York, New York 10015 Independent Auditors Deloitte & Touche 1560 Broadway Denver, Colorado 80202 Legal Counsel Myer, Swanson & Adams, P.C. 1600 Broadway Denver, Colorado 80202 No dealer, salesperson or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus or the Statement of Additional Information, and if given or made, such information and representations must not be relied upon as having been authorized by Oppenheimer Variable Account Funds, Oppenheimer Management Corporation or any affiliate thereof. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any state to any person to whom it is unlawful to make such an offer in such state. -----END PRIVACY-ENHANCED MESSAGE-----