As filed with the U.S. Securities and Exchange Commission on June 26, 1998
Securities Act File No. 333-____
Investment Company Act File No. 811-____
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
Registration Statement Under The Securities Act of 1933 X
Pre-Effective Amendment No. ___
Post-Effective Amendment No. ___
and/or
Registration Statement Under The Investment Company Act of 1940 X
Amendment No. ___
(Check appropriate box or boxes)
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ADVISOR'S FUND
(Exact Name of Registrant as Specified in Charter)
700 SW Harrison Street
Topeka, Kansas 66636-0001
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code:
(785) 431-3112
Keith T. Robinson, Esq. Chris Swickard
Dechert Price & Rhoads Advisor's Fund
1775 Eye Street, N.W. 700 SW Harrison Street
Washington, D.C. 20006 Topeka, Kansas 66636-0001
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this registration statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Cross-Reference Sheet
Required By Rule 495
Under The Securities Act of 1933
PART A
Information Required in Prospectus
Item Number Heading
1 Cover Page
2 Prospectus Summary
3 Not Applicable
4 Prospectus Summary; Investment
Objectives and Policies of the
Series; Investment Methods and Risk
Factors
5 Management of the Fund; Portfolio
Management; Expenses; Trading Practices and Brokerage
5A Not Applicable
6 Prospectus Summary; Sale and
Redemption of Shares; Distributions
and Federal Income Tax Considerations
Tax Consequences of Investments in Shares of
Investment Companies; Foreign Taxes;
Determination of Net Asset Value;
General Information
7 Sale and Redemption of Shares;
Determination of Net Asset Value
8 Sale and Redemption of Shares
9 Not Applicable
<PAGE>
PART B
Information Required in Statement of Additional Information
Item Number Heading
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Methods and Risk Factors;
Investment Policy Limitations
14 Officers and Directors; Remuneration
of Directors and Others
15 Not Applicable
16 Investment Management
17 Portfolio Transactions
18 Capital Stock and Voting
19 Sale and Redemption of Shares;
Determination of Net Asset Value
20 Distributions and Federal Income Tax
Considerations
21 Not Applicable
22 Performance Information
23 Financial Statements
<PAGE>
Advisor's Fund
700 SW Harrison Street, Topeka, Kansas 66636-0001
Prospectus
____________, 1998
Advisor's Fund (the "Fund") is an open-end, diversified management
investment company of the series type currently offering four portfolios with
different investment objectives and strategies (individually and collectively
referred to as the "Series").
Private Consulting Group, Inc. ("PCG" or the "Investment Adviser")
continuously manages each Series' investments. Mench Financial, Inc. ("Mench" or
the "Subadviser") acts as subadviser for PCG Aggressive Growth Series. Security
Management Company, LLC, acts as the administrator for each Series ("Security
Management" or the "Administrator").
PCG Growth Series ("PCG Growth") seeks long-term growth of capital. It
seeks this objective by investing in a broadly-diversified portfolio of equity
securities. PCG Growth will attempt to achieve its investment objective
primarily by means of investments in common stock, but may also include other
types of equity securities as described in further detail under "Investment
Objectives and Policies - PCG Growth."
PCG Aggressive Growth Series ("PCG Aggressive Growth") seeks capital
appreciation. It seeks this objective by investing primarily in a diversified
portfolio of equity securities of companies with small and medium
capitalization. PCG Aggressive Growth will focus primarily on investments in
common stock, but may also include other types of equity securities as described
in further detail under "Investment Objectives and Policies - PCG Aggressive
Growth."
SIM Growth Series ("SIM Growth") seeks long-term growth of capital. It
seeks this objective by investing primarily in shares of other publicly
available investment companies commonly called mutual funds. SIM Growth's
investments are described in further detail under "Investment Objectives and
Policies - SIM Growth."
SIM Conservative Growth Series ("SIM Conservative Growth") seeks total
return by investing primarily in a diversified portfolio of publicly available
mutual funds. SIM Conservative Growth will generally invest between 30% and 70%
of its net assets in mutual funds that primarily invest in equity securities and
the remainder of its assets in mutual funds that primarily invest in investment
grade fixed-income securities. SIM Conservative Growth's investments are
described in further detail under "Investment Objectives and Policies - SIM
Conservative Growth."
The Fund's shares are sold to Security Benefit Life Insurance Company
("SBL") for allocation to one or more separate accounts established for funding
variable annuity contracts and variable life insurance policies issued by SBL
("Separate Accounts")(Holders of contracts or policies funded through the
Separate Accounts are referred to herein as contractowners or shareholders).
Shares of the Fund also may be sold to qualified pension and retirement plans
outside of the separate account context.
This prospectus sets forth concisely the information a prospective
investor should know before investing in the Fund. It should be read and
retained for future reference. A Statement of Additional Information about the
Fund, dated ________________, has been filed with the Securities and Exchange
Commission. The Statement of Additional Information, as it may be supplemented
from time to time, is incorporated by reference in this Prospectus. It is
available at no charge by writing Security Distributors, Inc., 700 SW Harrison
Street, Topeka, Kansas 66636-0001, or by calling (785) 431-3112 or (800)
888-2461.
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THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE
SEPARATE ACCOUNTS. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
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.
AN INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS NOT
A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY ANY BANK. THE FUND IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY.
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<PAGE>
ADVISOR'S FUND CONTENTS
Page
PROSPECTUS SUMMARY........................................................4
Shares Offered.........................................................4
Offering Price.........................................................4
Investment Objectives and Policies of the Series.......................4
Risk Factors...........................................................4
Investment Advisor.....................................................4
Other Information......................................................4
Fund Expenses..........................................................4
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES..........................5
PCG Growth.............................................................5
PCG Aggressive Growth..................................................6
SIM Growth.............................................................6
SIM Conservative Growth................................................6
INVESTMENT METHODS AND RISK FACTORS.......................................7
Investments............................................................7
General.............................................................7
Equity Securities...................................................7
Debt Securities.....................................................7
Convertible Securities..............................................8
Warrants............................................................8
U.S. Government Securities..........................................8
Asset-Backed Securities.............................................9
When-Issued and Forward Commitment Securities ......................9
Illiquid and Restricted Securities..................................9
American Depositary Receipts.......................................10
Zero Coupon Securities ............................................10
Repurchase Agreements, Reverse Repurchase Agreements
and Roll Transactions ...........................................10
Management Practices..................................................11
Borrowing..........................................................11
Lending of Portfolio Securities ...................................11
Forward Currency Transactions .....................................11
Options............................................................11
Futures Contracts and Related Options .............................12
[Swaps, Caps, Floors and Collars ..................................13
Hybrid Instruments ................................................13
Risk Factors..........................................................13
General............................................................13
Equity Securities..................................................13
Specific Risks Pertaining to PCG Aggressive Growth.................13
Investments in Shares of Mutual Funds..............................13
Futures and Options Risk ..........................................14
Foreign Investment Risks ..........................................15
Emerging Markets...................................................15
Currency Risk .....................................................15
Risks Associated with Investments in High-Yield
Lower-Rated Debt Securities .....................................15
Industry Concentration.............................................16
Year 2000 Concerns.................................................17
MANAGEMENT OF THE FUND...................................................17
PORTFOLIO MANAGEMENT.....................................................17
EXPENSES.................................................................18
SALE AND REDEMPTION OF SHARES............................................18
DISTRIBUTIONS AND FEDERAL................................................18
TAX CONSEQUENCES OF INVESTMENTS IN SHARES
OF INVESTMENT COMPANIES................................................19
FOREIGN TAXES............................................................19
DETERMINATION OF NET ASSET VALUE.........................................19
TRADING PRACTICES AND BROKERAGE..........................................20
PERFORMANCE INFORMATION..................................................20
GENERAL INFORMATION......................................................21
Organization..........................................................21
Administrator.........................................................21
Custodian, Transfer Agent and Dividend-Paying Agent...................21
Inquiries.............................................................21
<PAGE>
PROSPECTUS SUMMARY
Shares Offered
Shares of the Advisor's Fund, a Kansas corporation registered with the
Securities and Exchange Commission (the "SEC") as an open-end management
investment company, with four Series, PCG Growth Series, PCG Aggressive Growth
Series, SIM Growth Series, and SIM Conservative Growth Series, are being offered
for sale to SBL for allocation to certain of its Separate Accounts which fund
variable annuity contracts and variable life insurance policies. Shares of the
Fund also may be offered to qualified pension and retirement plans outside of
the separate account context.
It is conceivable that in the future it may be disadvantageous for
variable life insurance separate accounts and variable annuity separate accounts
to invest in the Fund simultaneously. Although neither SBL nor the Fund
currently foresee any such disadvantages, either to variable life insurance
policyowners or to variable annuity contractowners, the Fund's Board of
Directors intends to monitor events in order to identify any material conflicts
between such policyowners and contractowners resulting from changes in state
insurance law, changes in federal income tax regulations, changes in the
investment management of any portfolio of an underlying fund, and the
differences between voting instructions given by variable life insurance
policyowners and variable annuity contractowners. The Board will determine what
action, if any, should be taken in response to any such conflicts. If the Board
of Directors were to conclude that separate funds should be established for
variable life and variable annuity separate accounts, SBL would bear the
attendant expenses, but variable life insurance policyowners and variable
annuity contractowners would no longer have the economies of scale resulting
from a larger combined fund.
Offering Price
The public offering price of each Series is equal to its net asset
value per share. The share price of each Series is expected to fluctuate, and
the price paid may be higher or lower than the price at redemption.
Investment Objectives and Policies of the Series
PCG Growth seeks long-term growth of capital by investing in a
broadly-diversified portfolio of equity securities. PCG Growth will seek its
investment objective by investing primarily in common stock, but may also
include other types of equity securities. See "Investment Objectives and
Policies - PCG Growth."
PCG Aggressive Growth seeks capital appreciation by investing primarily
in a diversified portfolio of equity securities of companies with small and
medium capitalization. PCG Aggressive Growth will seek its investment objective
by focusing primarily on investments in common stock, but may also include other
types of equity securities. See "Investment Objectives and Policies - PCG
Aggressive Growth."
SIM Growth seeks long-term growth of capital by investing primarily in
shares of other publicly available investment companies commonly called mutual
funds. SIM Growth will primarily invest in shares of a variety of mutual funds.
See "Investment Objectives and Policies - SIM Growth."
SIM Conservative Growth seeks total return by investing primarily in a
diversified portfolio of publicly available mutual funds. SIM Conservative
Growth will generally invest between 30% and 70% of its net assets in mutual
funds that primarily invest in equity securities and the remainder in mutual
funds that primarily invest in investment grade fixed-income securities. See
"Investment Objectives and Policies - SIM Conservative Growth."
Risk Factors
An investment in any of the Series involves a certain amount of risk
and may not be suitable for all investors. See "Investment Methods and Risk
Factors." The Series invest, directly or indirectly, in foreign securities,
which may be subject to price volatility, currency fluctuations and other risks.
The Series also invest in various types of equity and debt securities that may
be considered volatile or speculative, as well as in shares of investment
companies, which present certain diversification, management and other risks.
Investment Adviser
PCG continuously manages or oversees each Series' investments. Mench
serves as portfolio manager and subadviser for PCG Aggressive Growth. See
"Management of the Fund" and "Portfolio Management."
Other Information
Investors who have questions regarding the Advisor's Fund may write to
the Fund at 700 SW Harrison Street, Topeka, Kansas 66636-0001, or call (785)
431-3112, or 1-800-888-2461, extension 3112.
Fund Expenses
The following expense table indicates costs and expenses that an
investor should anticipate incurring either directly or indirectly as a
shareholder of the Fund. The information is based on estimated expenses for the
Fund for the current fiscal year.
Annual Fund Operating Expenses
(as a percentage of average net assets annualized)
PCG SIM
PCG Aggressive SIM Conservative
Growth Growth Growth Growth
Investment
Advisory 0.75% 0.75% 0.75% 0.75%
Fees
Other Expenses ___% ___% ____% ____%
Total Fund
Operating ___% ___% ____% ____%
Expenses
The purpose of this table is to assist the prospective investor in
understanding the various costs and expenses that a shareholder in the Fund will
bear. The following Examples illustrate the expenses borne by Fund shareholders.
Examples*
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
PCG SIM
PCG Aggressive SIM Conservative
Growth Growth Growth Growth
1 Year $ $ $ $
3 Years $ $ $ $
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*This example should not be considered a representation of future expenses,
which may be more or less than those shown. The assumed 5% annual return is
hypothetical and should not be considered a representation of past or future
annual return. Actual return may be greater or less than the assumed amount.
ADVISOR'S FUND
Advisor's Fund, a Kansas corporation, was organized on April 29, 1998,
to serve as the investment vehicle for certain of SBL's variable annuity and
variable life insurance Separate Accounts. Shares of the Fund will be sold to
SBL for allocation to such separate accounts established for the purpose of
funding variable annuity contracts and variable life insurance policies issued
by SBL. The Fund reserves the right to expand the class of persons eligible to
purchase shares of any Series of the Fund.
The Fund is subject to certain investment policy limitations which may
not be changed without stockholder approval. Among these limitations, the more
important ones are that the Fund will not, with respect to 75 percent of its
total assets, invest more than 5 percent of the value of its assets in any one
issuer other than the U.S. Government or its agencies or instrumentalities or
investment companies, or purchase more than 10 percent of the outstanding voting
securities of any issuer. In addition, no Series will invest more than 25
percent of its total assets in any one industry (except for the investment
company industry). The full text of the investment policy limitations is set
forth in the Fund's "Statement of Additional Information."
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES
The investment objective of each Series is described below. There are
risks inherent in the ownership of any security and there can be no assurance
that the investment objective of any of the Series will be achieved. Some of the
risks involved are described in "Investment Methods and Risk Factors" and in the
Statement of Additional Information. The investment objective and policies of
each Series may be modified at any time without stockholder approval. However,
each of the Series is subject to certain investment restrictions set forth in
the Statement of Additional Information, which may not be changed without
stockholder approval. Each of the Series may borrow money from banks as a
temporary measure for emergency purposes, to facilitate redemption requests, for
investment purposes or for other purposes consistent with the Series' investment
objective and policies. See the discussion of borrowing under "Investment
Methods and Risk Factors." Pending investment in other securities or to meet
potential redemptions or expenses, each Series may invest in certificates of
deposit issued by banks, bank demand accounts, repurchase agreements and high
quality money market instruments.
PCG Growth
The investment objective of PCG Growth is to seek long-term growth of
capital by investing in those securities which, in the opinion of the Investment
Adviser, have the greatest long-term capital growth potential. PCG Growth seeks
to achieve its objective by investing primarily in a broadly diversified
portfolio of common stocks (which may include American Depositary Receipts
("ADRs")) or securities with common stock characteristics, such as securities
convertible into common stocks. PCG Growth may also make investments in (i)
shares of closed-end and publicly available open-end investment companies (known
as mutual funds); (ii) debt securities issued by corporations organized under
the laws of the United States; (iii) preferred stock; (iv) securities
convertible into common stocks; (v) securities issued by the U.S. government or
any of its agencies or instrumentalities, including Treasury bills, certificates
of indebtedness, notes and bonds; (vi) foreign equity and debt securities
denominated in U.S. dollars; (vii) zero coupon securities; and (viii) higher
yielding, high risk debt securities that are not considered investment grade
(commonly known as "junk bonds"). In selecting its investments, PCG Growth will
emphasize the potential for capital appreciation and will consider current
income only when consistent with its investment objective of long-term capital
appreciation. PCG Growth may invest its assets temporarily in cash and money
market instruments for defensive purposes. PCG Growth may invest up to 5 percent
of its assets in warrants (other than those attached to other securities). From
time to time, PCG Growth may purchase securities on a "when issued" or "delayed
delivery" basis. For a detailed discussion of ADRs and the purchase of
securities on a "when issued" or "delayed delivery" basis, see "Investment
Methods and Risk Factors."
PCG Aggressive Growth
PCG Aggressive Growth has as its investment objective capital
appreciation without regard to current income. It seeks to achieve this
objective by investing mostly in the equity securities of companies with small
or medium capitalization. Generally, the companies will have market
capitalizations of at least $_________ but less than $____ [To be provided]. PCG
Aggressive Growth will seek to achieve its investment objective primarily by
making investments in (i) common stocks, including ADRs, but may also invest in
other types of securities such as (ii) securities convertible into common stock;
(iii) preferred stocks; (iv) debt securities issued by corporations organized
under the laws of the United States; (v) securities issued by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (vi) foreign equity and
debt securities denominated in U.S. dollars; (vii) higher yielding, high risk
debt securities that are not considered investment grade (commonly known as
"junk bonds"); (viii) zero coupon securities and (ix) shares of closed-end and
publicly available open-end investment companies. In selecting its investments,
PCG Aggressive Growth will focus entirely on the potential for long-term capital
appreciation, and any current dividends produced by its investments will be
unintended. Although the types of investments made by PCG Aggressive Growth may
provide enhanced opportunities for capital appreciation because of earnings
potential, they also may involve more risk than larger, established
corporations. PCG Aggressive Growth also may trade its investments more actively
and base investment analysis on short-term appreciation possibilities rather
than a long-term fundamental securities analysis which may render its
investments to be more speculative than a Fund with a longer-term investment
horizon. The risks associated with PCG Aggressive Growth's investments are
described in "Investment Methods and Risk Factors."
SIM Growth
SIM Growth's investment objective is long-term growth of capital. It
seeks to achieve this objective by investing primarily in shares of other
publicly available investment companies, or mutual funds. SIM Growth may invest
in underlying mutual funds which invest primarily in (i) common stock and other
equity securities, or securities convertible into or exchangeable for such
securities of U.S. issuers; (ii) common stock and other equity securities, or
securities convertible into or exchangeable for such securities, of foreign
issuers; (iii) securities of particular industries; (iv) "hybrid" or "balanced"
funds that invest in equity, fixed income, and money market securities; (v)
bonds and other fixed income securities of corporate issuers; (vi) multi-sector
funds that invest in a variety of fixed income securities from domestic and
foreign corporate and governmental issuers; (vii) junk bonds; (viii) money
market securities; (ix) zero-coupon bonds; (x) securities issued or guaranteed
or insured by the U.S. government, its agencies or instrumentalities; and (xi)
municipal bonds. Underlying funds in which SIM Growth invests may also make
margin deposits in connection with futures transactions and related options. To
the extent SIM Growth makes investments in fixed-income mutual funds it will
primarily invest in mutual funds investing in zero coupon bonds. The underlying
funds in which SIM Growth invests may be authorized to invest up to 100% of
their assets in the securities of foreign issuers and engage in foreign currency
transactions with respect to these investments; invest their assets in warrants;
lend their portfolio securities; sell securities short; borrow money in amounts
up to one-third of their assets for investment purposes; write or purchase call
or put options on securities or stock indexes; concentrate more than 25% of
their assets in one industry; and enter into futures contracts and options on
futures contracts. The risks associated with these investments are described in
"Investment Methods and Risk Factors."
SIM Conservative Growth
SIM Conservative Growth has as its investment objective total return.
It seeks to achieve this objective primarily through investments in shares of
other publicly available investment companies, or mutual funds. Under normal
market conditions, SIM Conservative Growth will allocate between 30% and 70% of
its assets to investments in mutual funds and the remainder in mutual funds that
primarily invest in investment grade fixed-income securities. SIM Conservative
Growth may make investments in underlying mutual funds which invest primarily in
(i) common stock and other equity securities, or securities convertible into or
exchangeable for such securities of U.S. issuers; (ii) common stock and other
equity securities, or securities convertible into or exchangeable of such
securities, of foreign issuers; (iii) securities of particular industries; (iv)
"hybrid" or "balanced" funds that invest in equity, fixed income, and money
market securities; (v) bonds and other fixed income securities of corporate
issuers; (vi) multi-sector funds that invest in a variety of fixed income
securities from domestic and foreign corporate and governmental issuers; (vii)
junk bonds; (viii) money market securities; (ix) zero-coupon bonds; (x)
securities issued or guaranteed or insured by the U.S. government, its agencies
or instrumentalities; and (xi) municipal bonds. SIM Conservative Growth may also
make margin deposits in connection with futures transactions and related
options. The underlying funds in which SIM Conservative Growth invests may be
authorized to invest up to 100% of their assets in the securities of foreign
issuers and engage in foreign currency transactions with respect to these
investments; invest their assets in warrants; lend their portfolio securities;
sell securities short; borrow money in amounts up to one-third of their assets
for investment purposes; write or purchase call or put options on securities or
stock indexes; concentrate more than 25% of their assets in one industry; and
enter into futures contracts and options on futures contracts. SIM Conservative
Growth is structured to balance the appreciation of equity securities with the
income benefits and principal stability offered by bonds as part of a long-term
investment strategy. As such, SIM Conservative Growth anticipates allocating its
assets so that approximately 50% of the assets will be invested in mutual funds
concentrated in the fixed income sector with the remaining 50% invested in
equity-oriented mutual funds. Of course, in the short-term the asset mix of SIM
Conservative Growth will fluctuate. The risks associated with SIM Conservative
Growth's investments are described in "Investment Methods and Risk Factors."
INVESTMENT METHODS AND RISK FACTORS
The following is a general description of some of the investment
instruments, techniques and methods which may be used by one or more of the
Series. The methods described only apply to those Series which may invest in
such securities and instruments or which use such techniques. Also included is a
description of certain additional risk factors related to various securities,
instruments and techniques in which the Series may invest, either directly or
indirectly through investments in underlying mutual funds. The risks so
described only apply to those Series which may use such methods. Although a
Series may employ the techniques, instruments and methods described below,
consistent with its investment objective and policies and any applicable law, no
Series will be required to do so. Some of the securities, instruments and
techniques that may be used by the Series, and the associated risks, are
described in the "Investment Objectives and Policies" section of this Prospectus
and in the Fund's Statement of Additional Information.
Investments
General -- Each of the Series may, for temporary defensive purposes,
invest in cash reserves without limitation. The Series may establish and
maintain reserves as the Investment Adviser or the Subadviser believes is
advisable to facilitate the Series' cash flow needs. Cash reserves include money
market instruments, including repurchase agreements, in the two highest
categories, bank certificates of deposit, and bank demand accounts. Short-term
securities may be held as collateral for futures contracts. These securities are
segregated and may not be available for the Series' cash flow needs. As a
fundamental policy, for the purpose of realizing additional income, the Series
may lend securities with a value of up to 33 1/3 percent of its total assets to
broker-dealers, institutional investors, or other persons. Any such loan will be
continuously secured by collateral at least equal to the value of the securities
loaned. For a discussion of the limitations on lending and risks of lending, see
"Investment Methods and Risk Factors" -- "Lending of Portfolio Securities."
Equity Securities -- The Series may invest directly or indirectly in
all types of equity securities, including, but not limited to, common stocks,
preferred stocks, convertible securities, warrants, options, and restricted
securities.
Debt Securities -- The Series may invest directly in, or may invest in
underlying mutual funds which invest in, debt securities within any particular
rating classification. See the Statement of Additional Information for a
description of corporate bond ratings. The Series may invest in securities which
are, at the time of purchase, rated Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Ratings Services ("S&P"). In addition,
the Series may invest in underlying funds which invest in higher yielding,
longer-term fixed-income securities in the lower rating (higher risk) categories
of the recognized rating services (commonly referred to as "junk bonds"). These
include securities which are at the time of purchase rated Ba or lower by
Moody's or BB or lower by S&P. However, the Investment Adviser or Subadviser
will not rely principally on the ratings assigned by the rating services and
therefore the success of these investments may be more dependent on the
Investment Adviser's own credit analysis than would be the case if investing in
higher rated securities.
The Series may invest in corporate debt securities rated Baa or higher
by Moody's or BBB or higher by S&P at the time of purchase, or if unrated, of
equivalent quality as determined by the Investment Adviser or Subadviser. See
Appendix A to the Fund's Statement of Additional Information for a description
of corporate bond ratings. Included in such securities may be convertible bonds
or bonds with warrants attached which are rated at least Baa or BBB at the time
of purchase, or if unrated, of equivalent quality as determined by the
Investment Adviser or Subadviser. Securities rated Baa by Moody's or BBB by S&P
have speculative characteristics.
Certain Series may invest in higher yielding debt securities in the
lower rating (higher risk) categories of the recognized rating services
(commonly referred to as "junk bonds"). Such securities include securities rated
Ba or lower by Moody's or BB or lower by S&P and are regarded as predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. The Series will not invest in junk bonds which are rated in
default at the time of purchase.
The Series may purchase securities which are obligations of, or
guaranteed by, the Dominion of Canada or a province thereof, and Canadian
corporate debt securities. Canadian securities will not be purchased if subject
to the foreign interest equalization tax and unless they are payable in U.S.
dollars. The Series may invest in Yankee CDs which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the U.S. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Series also may invest in debt securities
issued by foreign governments, their agencies and instrumentalities and foreign
corporations denominated in U.S. dollars.
Convertible Securities -- Each of the Series may invest directly in, or
may invest in underlying mutual funds which invest in, convertible securities. A
convertible security is a fixed income security or a preferred stock that may be
converted at either a stated price or stated rate into underlying shares of
common stock. Convertible securities have general characteristics similar to
both debt obligations and equity securities. Although to a lesser extent than
with debt obligations generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock, and therefore, will also react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all debt obligations, there can be no assurance of
current income because the issuers of the convertible securities may default on
their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. There can be
no assurance of capital appreciation, however, because the market value of
securities will fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Warrants -- Each of the Series may invest directly in, or may invest in
underlying mutual funds which invest in, warrants. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
U.S. Government Securities -- Each Series may, directly and/or
indirectly though investments in mutual funds, invest in U.S. Government
securities which include obligations issued or guaranteed (as to principal and
interest) by the United States Government or its agencies (such as the Small
Business Administration, the Federal Housing Administration, and Government
National Mortgage Association), or instrumentalities (such as Federal Home Loan
Banks and Federal Land Banks), and instruments fully collateralized with such
obligations, such as repurchase agreements. U.S. Government securities are
obligations of or guaranteed by the U.S. Government, its agencies or
instrumentalities. These include bills, certificates of indebtedness, notes and
bonds issued by the Treasury or by agencies or instrumentalities of the U.S.
Government. Some U.S. Government securities, such as Treasury bills and bonds,
are supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. Although
U.S. Government securities are guaranteed by the U.S. Government, its agencies
or instrumentalities, shares of the Series are not so guaranteed in any way. The
diversification rules under Section 817(h) of the Internal Revenue Code limit
the ability of the Series to invest more than 55 percent of its assets in the
securities of any one U.S. Government agency or instrumentality. Government
National Mortgage Association (GNMA) certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely payment
of interest and principal is guaranteed by the full faith and credit of the U.S.
Government. Although U.S. Government securities are guaranteed by the U.S.
Government, its agencies or instrumentalities, shares of the Series are not so
guaranteed in any way.
Asset-Backed Securities -- Each of the Series may invest directly in,
or may invest in underlying mutual funds which invest in, asset-backed
securities. Asset-backed securities represent a participation in, or are secured
by and payable from, a stream of payments generated by particular assets, for
example, automobile, credit card or trade receivables. Asset-backed commercial
paper, one type of asset-backed security, is issued by a special purpose entity,
organized solely to issue the commercial paper and to purchase interests in the
assets. The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If the
credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement.
When Issued and Forward Commitment Securities -- Each of the Series may
invest directly in, or may invest in underlying mutual funds which invest in,
when-issued and forward commitment securities. Purchase or sale of securities on
a "forward commitment" basis may be used to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Series will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be; however, a Series
may dispose of a commitment prior to settlement if the Investment Adviser or
Subadviser deems it appropriate to do so. No income accrues on securities which
have been purchased pursuant to a forward commitment or on a when-issued basis
prior to delivery of the securities. If a Series disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its right
to deliver or receive against a forward commitment, it may incur a gain or loss.
At the time a Series enters into a transaction on a when-issued or forward
commitment basis, a segregated account consisting of cash or liquid securities
equal to the value of the when-issued or forward commitment securities will be
established and maintained with its custodian and will be marked to market
daily. There is a risk that the securities may not be delivered and that the
Series may incur a loss.
Iliquid and Restricted Securities -- Each of the Series may invest
directly in, or may invest in underlying mutual funds which invest in, illiquid
securities. The Series may acquire illiquid securities in an amount not
exceeding 15 percent of net assets. Because an active trading market does not
exist for such securities the sale of such securities may be subject to delay
and additional costs.
Restricted securities are acquired through private placement
transactions, directly from the issuer or from security holders, generally at
higher yields or on terms more favorable to investors than comparable publicly
traded securities. However, the restrictions on resale of such securities may
make it difficult for a Series to dispose of such securities at the time
considered most advantageous, and/or may involve expenses that would not be
incurred in the sale of securities that were freely marketable. Restricted
securities cannot be sold to the public without registration under the
Securities Act of 1933, as amended ("1933 Act"). Unless registered for sale,
restricted securities can be sold only in privately negotiated transactions or
pursuant to an exemption from registration. Restricted securities are generally
considered illiquid and, therefore, subject to the Series' limitation on
illiquid securities.
Trading restricted securities pursuant to Rule 144A of the 1933 Act may
enable a Series to dispose of restricted securities at a time considered to be
advantageous and/or at a more favorable price than would be available if such
securities were not traded pursuant to Rule 144A. However, the Rule 144A market
is relatively new and liquidity of a Series' investment in such market could be
impaired if trading does not develop or declines. Risks associated with
restricted securities include the potential obligation to pay all or part of the
registration expenses in order to sell certain restricted securities. A
considerable period of time may elapse between the time of the decision to sell
a security and the time a Series may be permitted to sell it under an effective
registration statement. If during a period adverse conditions were to develop, a
Series might obtain a less favorable price than that prevailing when it decided
to sell.
The Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A securities
purchased directly by the Series. As permitted by Rule 144A, the Board of
Directors has delegated this responsibility to the Investment Adviser and
Subadviser. In making the determination regarding the liquidity of Rule 144A
securities, the Investment Adviser or Subadviser will consider trading markets
for the specific security taking into account the unregistered nature of a Rule
144A security. In addition, the Investment Adviser or Subadviser may consider:
(1) the frequency of trades and quotes; (2) the number of dealers and potential
purchasers; (3) dealer undertakings to make a market; and (4) the nature of the
security and of the market place trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Investing in Rule 144A securities could have the effect of increasing the amount
of a Series' assets invested in illiquid securities to the extent that qualified
institutional buyers become uninterested, for a time, in purchasing these
securities.
Non-publicly traded securities (including Rule 144A Securities) may
involve a high degree of business and financial risk which may result in
substantial losses. The securities may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Series. In particular, Rule 144A Securities may be resold
only to qualified institutional buyers in accordance with Rule 144A under the
Securities Act of 1933. Unregistered securities may also be sold abroad pursuant
to Regulation S under the 1933 Act. Companies whose securities are not publicly
traded are not subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
Acting pursuant to guidelines established by the Board of Directors, some
restricted securities and Rule 144A Securities may be considered liquid.
American Depositary Receipts (ADRs) -- ADRs are dollar-denominated
receipts issued generally by U.S. banks and which represent the deposit with the
bank of a foreign company's securities. ADRs are publicly traded on exchanges or
over-the-counter in the United States. Investors should consider carefully the
substantial risks involved in investing in securities issued by companies of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. See "Foreign Investment Risks," below.
Zero Coupon Securities -- Each of the Series may invest directly in, or
may invest in underlying mutual funds which invest in zero coupon securities.
The Series may invest in certain zero coupon securities that are "stripped" U.S.
Treasury notes and bonds or zero coupon and other deep discount securities
issued by foreign governments and domestic and foreign corporations, including
payment-in-kind securities. Zero coupon securities pay no interest to holders
prior to maturity, and payment-in-kind securities pay interest in the form of
additional securities. However, a portion of the original issue discount on zero
coupon securities and the "interest" on payment-in-kind securities will be
included in the investing Series' income. Accordingly, for a Series to qualify
for tax treatment as a regulated investment company and to avoid certain taxes
(see "Distributions and Federal Income Tax Considerations" below), the Series
may be required to distribute an amount that is greater than the total amount of
cash it actually receives. These distributions must be made from the Series'
cash assets or, if necessary, from the proceeds of sales of portfolio
securities. A Series will not be able to purchase additional income-producing
securities with cash used to make such distributions and its current income
ultimately may be reduced as a result. Zero coupon and payment-in-kind
securities usually trade at a deep discount from their 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 that make current
distributions of interest in cash.
Repurchase Agreements -- Each of the Series may enter directly into, or
may invest in underlying mutual funds which enter into, repurchase agreements,
reverse repurchase agreements and roll transactions. A repurchase agreement is a
contract under which a Series would acquire a security for a relatively short
period (usually not more than 7 days) subject to the obligation of the seller to
repurchase and the Series to resell such security at a fixed time and price. The
resale price is in excess of the purchase price and reflects an agreed-upon
market rate unrelated to the coupon rate of the purchased security. Repurchase
agreements will be fully collateralized, including interest earned thereon,
during the entire term of the agreement. If the institution defaults on the
repurchase agreement, the Series will retain possession of the underlying
securities. If bankruptcy proceedings are commenced with respect to the seller,
realization on the collateral by the Series may be delayed or limited and the
Series may incur additional costs. In such case, the Series will be subject to
risks associated with changes in market value of the collateral securities. To
the extent possible, each of the Series intends to limit repurchase agreements
to institutions believed by the Investment Adviser or Subadviser to present
minimal credit risk.
The Series may also enter into reverse repurchase agreements with the
same parties with whom they may enter into repurchase agreements. Under a
reverse repurchase agreement, a Series would sell securities and agree to
repurchase them at a particular price at a future date. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by the Series may decline below the price of the securities the
Series has sold but is obligated to repurchase. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Series' obligation to repurchase the
securities, and the Series' use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
The Series also may enter into "dollar rolls," in which a Series sells
fixed income securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Series would
forego principal and interest paid on such securities. The Series would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale.
At the time a Series enters into reverse repurchase agreements or
dollar rolls, it will establish and maintain a segregated account with its
custodian containing cash or liquid securities having a value not less than the
repurchase price, including accrued interest.
Management Practices
Borrowing -- Each Series may directly or by means of its investments in
underlying mutual funds, borrow money from banks as a temporary measure for
emergency purposes, to facilitate redemption requests, or for other purposes
consistent with the Series' investment objective and program. Such borrowings
may be collateralized with Series assets. To the extent that a Series purchases
securities while it has outstanding borrowings, it is using leverage, i.e.,
using borrowed funds for investment. Leveraging will exaggerate the effect on
net asset value of any increase or decrease in the market value of a Series'
portfolio. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by appreciation of the securities purchased; in
certain cases, interest costs may exceed the return received on the securities
purchased. A Series also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
Lending of Portfolio Securities -- Each Series may directly, or by
means of its investments in underlying mutual funds, lend securities to
broker-dealers, institutional investors, or other persons to earn additional
income. The principal risk is the potential insolvency of the broker-dealer or
other borrower. In this event, the Series could experience delays in recovering
its securities and possibly capital losses. Any loan will be continuously
secured by collateral at least equal to the value of the security loaned. Such
lending could result in delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially.
Forward Currency Transactions -- In seeking to protect against currency
exchange rate or interest rate changes that are adverse to their present or
prospective positions, mutual funds in which the Series invest may employ
certain risk management practices involving the use of forward currency
contracts and options contracts, futures contracts and options on futures
contracts on U.S. and foreign government securities and currencies. There can be
no assurance that such risk management practices will succeed. Only a limited
market, if any, currently exists for forward currency contracts and options and
futures instruments relating to currencies of most emerging markets, to
securities denominated in such currencies or to securities of issuers domiciled
or principally engaged in business in such emerging markets. To the extent that
such a market does not exist, a mutual fund may not be able to effectively hedge
its investment in such emerging markets.
To attempt to hedge against adverse movements in exchange rates between
currencies, an underlying mutual fund may enter into forward currency contracts
for the purchase or sale of a specified currency at a specified future date.
Such contracts may involve the purchase or sale of a foreign currency against
the U.S. dollar or may involve two foreign currencies. An underlying mutual fund
may enter into forward currency contracts either with respect to specific
transactions or with respect to the respective fund's portfolio positions. For
example, when an underlying mutual fund anticipates making a purchase or sale of
a security, it may enter into a forward currency contract in order to set the
rate (either relative to the U.S. dollar or another currency) at which a
currency exchange transaction related to the purchase or sale will be made.
Further, if the adviser of the underlying mutual fund believes that a particular
currency may decline compared to the U.S. dollar or another currency, the
underlying mutual fund may enter into a forward contract to sell the currency
the adviser expects to decline in an amount up to the value of the portfolio
securities held by the underlying fund denominated in a foreign currency.
The use of forward currency contracts or options and futures
transactions by underlying mutual funds in which the Series invest involve
certain investment risks and transaction costs to which they might not otherwise
be subject. These risks include: dependence on the underlying mutual fund's
ability to predict movements in exchange rates; imperfect correlation between
movements in exchange rates and movements in the currency hedged; and the fact
that the skills needed to effectively hedge against the underlying mutual fund's
currency risks are different from those needed to select the securities in which
an underlying mutual fund invests. An underlying mutual fund in which the Series
invest also may conduct foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market.
Options -- Each Series may directly, or by means of its investments in
underlying mutual funds, engage in options. A call option on a security gives
the purchaser of the option, in return for a premium paid to the writer
(seller), the right to buy the underlying security at the exercise price at any
time during the option period. Upon exercise by the purchaser, the writer
(seller) of a call option has the obligation to sell the underlying security at
the exercise price. When a Series purchases a call option, it will pay a premium
to the party writing the option and a commission to the broker selling the
option. If the option is exercised by such Series, the amount of the premium and
the commission paid may be greater than the amount of the brokerage commission
that would be charged if the security were to be purchased directly. By writing
a call option, a Series assumes the risk that it may be required to deliver the
security having a market value higher than its market value at the time the
option was written. A Series will write call options in order to obtain a return
on its investments from the premiums received and will retain the premiums
whether or not the options are exercised. Any decline in the market value of the
Series' portfolio securities will be offset to the extent of the premiums
received (net of transaction costs). If an option is exercised, the premium
received on the option will effectively increase the exercise price.
The Series may write only covered call options. This means that the
Series will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or liquid securities having a value equal to the fluctuating
market value of the optioned securities or currencies. During the option period
the writer of a call option has given up the opportunity for capital
appreciation above the exercise price should market price of the underlying
security increase, but has retained the risk of loss should the price of the
underlying security decline. Writing call options also involves the risk
relating to the Series' ability to close out options it has written.
A call option on a stock index is similar to a call option on an
individual security, except that the value of the option depends on the weighted
value of the group of securities comprising the index and all settlements are
made in cash. A call option may be terminated by the writer (seller) by entering
into a closing purchase transaction in which it purchases an option of the same
series as the option previously written.
A put option on a security gives the purchaser of the option, in return
for premium paid to the writer (seller), the right to sell the underlying
security at the exercise price at any time during the option period. Upon
exercise by the purchaser, the writer of a put option has the obligation to
purchase the underlying security at the exercise price. The Series may write
only covered put options, which means that the Series will maintain in a
segregated account cash or liquid securities in an amount not less than the
exercise price or the Series will own an option to sell the underlying security
or currency subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option at all times which the put
option is outstanding. By writing a put option, the Series assumes the risk that
it may be required to purchase the underlying security at a price in excess of
its current market value.
A put option on a stock index is similar to a put option on an
individual security, except that the value of the option depends on the weighted
value of the group of securities comprising the index and all settlements are
made in cash.
A Series may sell a call option or a put option which it has previously
purchased prior to purchase (in the case of a call) or the sale (in the case of
a put) of the underlying security. Any such sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the call or put which is sold.
Futures Contracts and Related Options -- Each Series may, by means of
its investments in underlying mutual funds, buy and sell futures contracts (and
options on such contracts) to manage exposure to changes in securities prices
and foreign currencies and as an efficient means of adjusting overall exposure
to certain markets. A financial futures contract calls for delivery of a
particular security at a certain time in the future. The seller of the contract
agrees to make delivery of the type of security called for in the contract and
the buyer agrees to take delivery at a specified future time. An underlying fund
may also write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect its shares from a decrease in value.
When an underlying fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a fixed price at any
time during a specified period if the option is exercised. Conversely, the
purchaser of a put option on a futures contract is entitled (but not obligated)
to sell a futures contract at a fixed price during the life of the option.
Financial futures contracts include interest rate futures contracts and
stock index futures contracts. An interest rate futures contract obligates the
seller of the contract to deliver, and the purchaser to take delivery of,
interest rate securities called for in a contract at a specified future time at
a specified price. A stock index assigns relative values to common stocks
included in the index and the index fluctuates with changes in the market values
of the common stocks included. A stock index futures contract is a bilateral
contract pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the stock index value at the close of the last trading day of the contract and
the price at which the futures contract is originally struck. An option on a
financial futures contract gives the purchaser the right to assume a position in
the contract (a long position if the option is a call and a short position if
the option is a put) at a specified exercise price at any time during the period
of the option.
Swaps, Caps, Floors and Collars -- Each Series may, by means of its
investments in underlying mutual funds, enter into interest rate, currency and
index swaps, the purchase or sale of related caps, floors and collars and other
derivative instruments. It is anticipated that underlying funds enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates) or to protect against any increase in the price of
securities the fund anticipates purchasing at a later date.
Interest rate swaps involve the exchange by an underlying fund with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating rate payments for fixed rate payments) with
respect to a notional amount of principal. A currency swap is an agreement to
exchange cash flows on a notional amount based on changes in the values of the
reference indices.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate. The purchase of an
interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
Hybrid Instruments -- Each Series may directly, or by means of its
investments in underlying mutual funds, invest in hybrid instruments. These
instruments (which are derivatives) can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conservation terms of a security could be related to the market price of some
commodity, currency or securities index. The risks of such investments would
reflect the risks of investing in futures, options and securities, including
volatility and illiquidity. Such securities may bear interest or pay dividends
at below market (or even relatively nominal) rates. Under certain conditions,
the redemption value of such an investment could be zero. Hybrids can have
volatile prices and limited liquidity and their use by the Series may not be
successful.
Risk Factors
General -- Each Series' net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions and, if applicable,
its net currency exposure. The value of fixed income securities generally
fluctuates inversely with interest rate movements. Longer term bonds held by a
Series are subject to greater interest rate risk. There is no assurance that any
Series will achieve its investment objective. For all of the Series, but
especially, SIM Growth and SIM Conservative Growth, investments in an underlying
portfolio of mutual funds involves certain additional expenses and certain tax
results which would not be present in a direct investment in the underlying
funds. See "Distributions and Federal Income Tax Considerations."
Equity Securities -- Under normal market conditions, each Series is
expected to be primarily invested directly or indirectly in common stocks and
securities that are convertible into common stocks. Accordingly, an investment
in the Series is subject to the type of market risk that is generally associated
with equity investments. The value of the Series' investments may be affected by
changes in the value of the overall stock market such that the value of an
investment in the Series upon redemption may be more or less than the initial
amount invested.
Specific Risks Pertaining to PCG Aggressive Growth -- Although PCG
Aggressive Growth believes that the small and medium size companies in which it
invests present greater opportunities for capital appreciation because of high
potential earnings growth, these investments also present greater risks because
the value of the stocks of such companies are prone to significant fluctuations.
Moreover, such companies may not have the same asset diversification as larger,
more established businesses and could experience financial difficulties in the
event of an economic downturn generally or in their particular industry. PCG
Aggressive Growth also will employ investment strategies which are considered
speculative and involve substantial risk. In seeking capital appreciation
without regard to current income, PCG Aggressive Growth may focus its
investments on short-term potential return as distinct from long-term investment
prospects.
Investments in Shares of Mutual Funds -- SIM Growth and SIM
Conservative Growth, together with the other Series and any "affiliated persons"
(as defined in the Investment Company Act of 1940, as amended (the "1940 Act"))
may purchase only up to 3% of the total outstanding securities of any underlying
fund. Accordingly, when affiliated persons of a Series hold shares of any of the
underlying funds, each Series' ability to invest fully in shares of those funds
may be restricted, and the Investment Adviser or Subadviser must then, in some
instances, select alternative investments that would not have been its first
preference.
The 1940 Act also provides that an underlying investment company whose
shares are purchased by SIM Growth or SIM Conservative Growth will be obligated
to redeem shares held by such Series only in an amount up to 1% of the
underlying investment company's outstanding securities during any period of less
than 30 days. Shares held by such a Series in excess of 1% of an underlying
investment company's outstanding securities, therefore, may be considered not
readily marketable securities which together with other such securities may not
exceed 15% of that Series' net assets.
Under certain circumstances, an underlying investment company may
determine to make payment of a redemption by a Series wholly or partly by a
distribution in kind of securities from its portfolio, in lieu of cash, in
conformity with the rules of the SEC. In such cases, the Series may hold
securities distributed by an underlying investment company until the Investment
Adviser determines that it is appropriate to dispose of such securities.
Investment decisions made by the investment advisers of the underlying
funds are made independently of the Fund and its Investment Adviser or
Subadviser. Therefore, the investment adviser of one underlying fund may be
purchasing shares of the same issuer whose shares are being sold by the
investment adviser of another such fund. The result of this would be an indirect
expense to a Series without accomplishing an intended investment purpose. To the
extent investment decisions are made by the investment advisers of the
underlying funds independently of the Fund, its Investment Adviser or Subadviser
and the investment objectives of each Series, an underlying fund may, at any one
time, hold larger cash positions or make investments that may compromise the
intended investment objective of a Series.
Under the 1940 Act, a mutual fund must sell its shares at the price
(including sales load, if any) described in its prospectus, and current rules
under the 1940 Act do not permit negotiation of sales charges. Each Series may
purchase shares of underlying funds that are subject to sales charges. The
Series, when appropriate, will take advantage of programs that are available to
reduce the sales charges by the Series. To the extent an underlying fund offers
multiple classes of shares, the Series will purchase the share class available
to it with the lowest sales charges. However, the Series will not invest in
shares of underlying funds which are sold with a contingent deferred sales
charge.
Under certain circumstances, a sales charge incurred by a Series in
acquiring shares of an underlying fund may not be taken into account in
determining the gain or loss for federal income tax purposes on the dispositions
of the shares acquired. If shares are disposed of within 90 days from the date
they were purchased and if shares of a new underlying fund are subsequently
acquired without imposition of a sales charge or imposition of a reduced sales
charge pursuant to a right granted to the Series to acquire shares without
payment of a sales charge or with the payment of a reduced charge, then the
sales charge paid upon the purchase of the initial shares will be treated as
paid in connection with the acquisition of the new underlying fund's shares
rather than the initial shares.
Additional Expenses Associated with Investments in Mutual Funds. As an
investor in the Series, in particular SIM Growth and SIM Conservative Growth,
you should recognize that you may invest directly in mutual funds and that, by
investing in mutual funds indirectly through the Series, you will bear not only
your proportionate shares of the expenses of the Series (including operating
costs and investment advisory and administrative fees) but also, indirectly,
similar expenses of the underlying funds. As a Series contractowner, you also
will bear your proportionate share of any sales charges incurred by the Series
related to the purchase of shares of the underlying funds.
Other Expenses - A contractowner will also bear a proportionate share
of expenses related to the Fund and also may indirectly bear expenses paid by an
underlying fund relating to service activities for or the distribution of its
shares.
Futures and Options Risk -- The Series may invest in underlying funds
which enter into futures contracts to hedge all or a portion of the portfolio,
or as an efficient means of adjusting its exposure to the stock market. Futures
contracts and options can be highly volatile and could result in reduction of an
underlying fund's total return, and an underlying fund's attempt to use such
investments for hedging purposes may not be successful. Successful futures
strategies require the ability to predict future movements in securities prices,
interest rates and other economic factors. Losses from options and futures could
be significant if an underlying fund is unable to close out its position due to
distortions in the market or lack of liquidity. The risk of loss from the use of
futures extends beyond initial investment and could potentially be unlimited.
The use of futures, options and forward contracts involves investment
risks and transaction costs to which an underlying fund would not be subject
absent the use of these strategies. If an investment adviser of an underlying
fund seeks to protect it against potential adverse movements in the securities,
foreign currency or interest rate markets using these instruments, and such
markets do not move in a direction adverse to such fund, the fund could be left
in a less favorable position than if such strategies had not been used. Risks
inherent in the use of futures, options and forward contracts include: (a) the
risk that interest rates, securities prices and currency markets will not move
in the directions anticipated; (b) imperfect correlation between the price of
futures, options and forward contracts and movements in the prices of the
securities or currencies being hedged; (c) the fact that skills needed to use
these strategies are different from those needed to select portfolio securities;
(d) the possible absence of a liquid secondary market for any particular
instrument at any time; and (e) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences. An underlying fund's ability
to terminate option positions established in the over-the-counter market may be
more limited than in the case of exchange-traded options and may also involve
the risk that securities dealers participating in such transactions would fail
to meet their obligations to such underlying fund.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of a hedge. Such correlation,
particularly with respect to options on stock indices and stock index futures,
is imperfect, and such risk increases as the composition of a fund diverges from
the composition of the relevant index. The successful use of these strategies
also depends on the ability of the underlying fund's investment adviser to
correctly forecast interest rate movements and general stock market price
movements.
Foreign Investment Risks -- Investment in foreign securities involves
risks and considerations not present in domestic investments. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The securities of non-U.S. issuers generally are not
registered with the SEC, and the issuers thereof usually are not subject to the
SEC's reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with respect
to U.S. securities and issuers.
Foreign securities markets, while growing in volume, have for the most
part substantially less volume than United States securities markets. Securities
of foreign companies are generally less liquid, and at times their prices may be
more volatile than prices of comparable United States companies. Foreign stock
exchanges, brokers and listed companies generally are subject to less government
supervision and regulation than in the United States. The customary settlement
time for foreign securities may be longer than the customary settlement time for
United States securities.
A Series' indirect income and gains from foreign issuers may be subject
to non-U.S. withholding or other taxes, thereby reducing its income and gains.
In addition, with respect to some foreign countries, there is the increased
possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of an underlying fund, political or social
instability, or diplomatic developments which could affect the investments of
the underlying funds in those countries. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, rate of savings and capital
reinvestment, resource self-sufficiency and balance of payments positions.
Emerging Markets -- Generally included in emerging markets are all
countries in the world except Australia, Canada, Japan, New Zealand, the United
States, and most western European countries. The risks of investing in
developing or emerging markets are similar to, but greater than, the risks of
investing in the securities of developed international markets since emerging or
developing markets tend to have economic structures that are less diverse and
mature, and political systems that are less stable, than developed countries.
Currency Risk -- Underlying mutual funds in which the Series may invest
that invest in securities denominated in currencies other than the U.S. dollar,
will be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rates between such currencies and the U.S. dollar.
Changes in currency exchange rates will influence the value of an underlying
fund's shares, and also may affect the value of dividends and interest earned by
the underlying fund and gains and losses realized by the underlying fund. In
addition, an underlying fund may incur costs in connection with the conversion
or transfer of foreign currencies. Currencies generally are evaluated on the
basis of fundamental economic criteria (e.g., relative inflation and interest
rate levels and trends, growth rate forecasts, balance of payments status and
economic policies) as well as technical and political data. The exchange rates
between the U.S. dollar and other currencies are determined by supply and demand
in the currency exchange markets, the international balance of payments,
governmental intervention, speculation and other economic and political
conditions. If the currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase.
Conversely, a decline in the exchange rate of the currency would adversely
affect the value of the security expressed in U.S. dollars.
Risks Associated with Investments in High-Yield Lower-Rated Debt
Securities -- Investment in debt securities rated below investment grade
involves a high degree of risk. Debt securities rated BB and lower by S&P, and
Ba and lower by Moody's, are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt rated C by
Moody's or S&P is the lowest quality debt that is not in default as to principal
or interest, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions. As
noted above, certain Series may invest in debt securities rated below C, which
are in default as to principal and/or interest. Ratings of debt securities
represent the rating agency's opinion regarding their quality and are not a
guarantee of quality. Rating agencies attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
quality in response to subsequent events, so that an issuer's current financial
condition may be better or worse than a rating indicates.
Description of Corporate Bond Ratings
Moody's Standard & Poor's
Investors Ratings Services
Service, Inc. Definition
Aaa AAA Highest quality
Aa AA High quality
A A Upper medium grade
Baa BBB Medium grade
Ba BB Lower medium grade/
speculative elements
B B Speculative
Caa CCC More speculative/
Ca CC possibly in or
C C high risk of default
--- D In default
Not rated Not rated Not rated
For a more complete description of the corporate bond ratings, see the
Appendix to the Fund's Statement of Additional Information.
The market value of lower quality debt securities tends to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower quality
securities, especially in a thinly traded market.
Lower quality debt securities of corporate issuers frequently have call
or buy-back features which would permit an issuer to call or repurchase the
security from the Series. If an issuer exercises these provisions in a declining
interest rate market, the Series may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Series may have difficulty disposing of lower quality securities because
there may be a thin trading market for such securities. There may be no
established retail secondary market for many of these securities, and the Series
anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market also
may have an adverse impact on market prices of such instruments and may make it
more difficult for the Series to obtain accurate market quotations for purposes
of valuing the securities in the portfolio of the Series.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Series will adversely impact
net asset value of the Series. See "Investment Methods and Risk Factors" in the
Statement of Additional Information. In addition to the foregoing, such factors
may include: (i) potential adverse publicity; (ii) heightened sensitivity to
general economic or political conditions; and (iii) the likely adverse impact of
a major economic recession. A Series also may incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings, and the Series may have limited
legal recourse in the event of a default. Debt securities issued by governments
in foreign markets can differ from debt obligations issued by private entities
in that remedies from defaults generally must be pursued in the courts of the
defaulting government, and legal recourse is therefore somewhat diminished.
Political conditions, in terms of a government's willingness to meet the terms
of its debt obligations, also are of considerable significance. There can be no
assurance that the holders of commercial bank debt may not contest payments to
the holders of debt securities issued by governments in foreign markets in the
event of default by the governments under commercial bank loan agreements.
Industry Concentration -- SIM Growth and SIM Conservative Growth may
invest in underlying funds which concentrate their investments within one
industry. Because the scope of investment alternatives with an industry is
limited, the value of the shares of such an underlying fund may be subject to
greater market fluctuation than an investment in a fund which invests in a
broader range of securities.
Year 2000 Concerns -- The Fund has taken steps designed to address the
technological challenges posed by computer software and hardware systems
registering the year 2000, including making inquiries of its primary service
providers regarding steps taken to address these challenges. The Investment
Adviser will monitor the status of all service providers' year 2000 compliance
efforts and periodically report to the Fund's Board of Directors regarding these
efforts. The Fund has no reason to believe that these steps will not be
sufficient to avoid any material adverse impact on contractowners arising from
the year 2000 issue, although there is no assurance that the Fund will not
experience problems as a result of the year 2000 technological challenges. The
costs or consequences of an incomplete or untimely resolution of the year 2000
issue are unknown to the Fund at this time.
MANAGEMENT OF THE FUND
The management of the Fund's business and affairs is the responsibility
of the Fund's Board of Directors. The Investment Adviser, PCG, 4650 SW Macadam
Avenue, Portland, Oregon 97201, is responsible for selection and management of
the Fund's portfolio investments, except for PCG Aggressive Growth, which shall
be managed by Mench as Subadviser. PCG is a corporation organized under the laws
of the State of Oregon and is a subsidiary of Interwest Financial Group, Inc.
("Interwest"). PCG's principal executive officers and associated persons are
registered representatives of PCG, a broker dealer registered with the NASD. PCG
provides financial planning advice for high net worth individuals and consulting
services. Its principal executive officers are also separately licensed as
registered representatives of a broker dealer and/or insurance agents or brokers
for one or more insurance companies and are licensed as insurance agents for
various insurance companies. While the Investment Adviser managed $____ million
in assets, as of ______, prior to the commencement of operations of the Fund, it
had no experience in providing investment management services to an investment
company.
In accordance with the terms of its investment advisory agreement with
the Fund, PCG manages, or arranges for the management of, the Series' portfolios
in accordance with each Series' stated investment objective and policies and
makes all investment decisions on behalf of the Series. As compensation for its
investment advisory services, PCG receives on an annual basis, an amount equal
to 0.75 percent of the average net assets of each Series, computed on a daily
basis and payable monthly. In addition, PCG may receive payments (up to a
maximum of 1% of the public offering price) on purchases by the Series of shares
issued by mutual funds which have a distribution and/or service plan.
Mench, 30 West Third Street, Fourth Floor, Cincinnati, Ohio, 45202,
through a subadvisory agreement with PCG, will act The Subadviser is a ______
corporation and is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended. The Subadviser acts as Subadviser for other
investment companies and clients of other investment advisers, including PCG.
The Subadviser will be paid from the advisory fee paid to PCG, and not by PCG
Aggressive Growth, for its services on behalf of PCG Aggressive Growth, a
subadvisory fee equal to ___% of the average daily net assets of PCG Aggressive
Growth.
PORTFOLIO MANAGEMENT
Tod Billings and Robert L. Keys of PCG will act as Portfolio Managers
for all of the Series except PCG Aggressive Growth.
Mr. Billings has been employed as a Portfolio Manager for PCG for five
years. He has served as Director of Research and head Portfolio Manager for PCG
for the last two years. Mr. Billings, in conjunction with PCG, has developed a
proprietary individual security selection program which he applies to his duties
as Portfolio Manager. Mr. Billings has a Bachelor of Arts from the University of
Portland in Marketing and Management.
Mr. Keys is President and founder of Interwest Financial Group, Inc.,
the parent company of PCG. He also currently serves as Chief Executive Officer
of PCG. Mr. Keys is a past board member of IAFP (International Association of
Financial Planners) and also serves as a Director of the Executive Committee of
National Network of Estate Planning Attorneys. Mr. Keys is a Certified Financial
Planner and has a Master's degree in Business and Education from the University
of Oregon.
Thomas S. Mench will serve as Portfolio Manager for PCG Aggressive
Growth. Mr. Mench is Chairman-Chief Financial Officer for the Subadviser and has
over twenty years of experience as an investment professional. Mr. Mench is a
certified financial planner and, prior to forming the Subadviser, was employed
by Leshner Financial Services, Inc. as Vice-President and Chief Investment
Officer. Mr. Mench was employed as Trust Officer and a Director of Portfolio
Management at Star Bank N.A. prior to his experience at Leshner Financial
Services, Inc. Mr. Mench has a Bachelor of Arts in Business from Butler
University.
Services Plan - The Fund has adopted a Services Plan (the "Plan") and
related agreement ("Services Agreement") for each Series of the Fund. The Plan
provides that the Fund is authorized to make payments, directly or through PCG,
to Authorized Firms, as defined below. The Plan, which will be administered by
PCG, provides that the fee will be paid to registered investment advisers,
registered broker-dealers, banks, trust companies and other persons or entities
("Authorized Firms") for providing "service activities" with respect to variable
insurance contracts or with respect to Shares held by certain qualified
retirement plans (the holders of these contracts and retirement plans are
considered "investors" with regard to the Plan).
The services provided by the Authorized Firms may include, among other
things, receiving, aggregating and forwarding purchase and redemption orders;
providing and maintaining investor records; communicating periodically with
investors and answering questions and handling correspondence from investors
about their accounts; acting as the nominee for investors; maintaining account
records and providing investors with account statements; processing dividend
payments; issuing investor reports and transaction confirmations; providing
subaccounting services; forwarding shareholder communications to investors;
receiving, tabulating and transmitting proxies executed by investors; general
account administration activities; and providing such similar services as the
Fund may reasonably request to the extent the Authorized Firm is permitted to do
so under applicable statutes, rules or regulation.
Each Series of the Fund pays an aggregate fee in an amount not to
exceed on an annual basis 0.50% of the average daily net asset value of the
shares of each Series of the Fund attributable to variable insurance contracts
or with respect to Shares held by certain qualified retirement plans for which
an Authorized Firm provides services.
Authorized Firms may charge other fees to their clients who are
contractowners in connection with their client accounts. These fees would be in
addition to any amounts received by the Authorized Firms and would be for
services other than those provided under the Services Agreement. Under the terms
of the Services Agreement, Authorized Firms are required to provide their
clients with a schedule of fees charged to such clients which relate to the
investment of customers' assets in shares of the Fund.
Each Series will accrue payments made pursuant to the Plan daily. The
payments under the Plan which are required to be accrued to a Series' shares on
any day will not exceed the distributable income to be accrued to such shares on
that day. All inquiries must be directed to an investor's Authorized Firm.
The Investment Adviser may, from time to time, make payments to banks,
broker-dealers, or other financial intermediaries for certain services for the
Fund and/or contractowners. Such payments are made out of the Investment
Adviser's own resources and do not involve additional costs to the Fund or
contractowners.
EXPENSES
The Fund bears all expenses of its operations other than those assumed
by the Investment Adviser. Expenses of the Fund include, but are not limited to:
the investment advisory fee; administrative, transfer agent, and dividend paying
agent fees; Plan fees; custodian and accounting fees and expenses; legal and
auditing fees; securities valuation expenses; fidelity bonds and other insurance
premiums; expenses of preparing and printing prospectuses; confirmations, proxy
statements, and shareholder reports and notices; registration fees and expenses;
proxy and annual meeting expenses, if any; all federal, state, and local taxes;
organizational costs; and independent directors' fees and expenses.
SALE AND REDEMPTION OF SHARES
Shares of the Fund will be sold to SBL for allocation to Separate
Accounts, or to qualified pension and retirement plans. Shares are sold and
redeemed at their net asset value next determined after receipt of a purchase or
redemption order. See "Determination of Net Asset Value." No sales or redemption
charge is made. The value of shares redeemed may be more or less than the
stockholder's cost, depending upon the market value of the portfolio securities
at the time of redemption. Payment for shares redeemed will be made as soon as
practicable after receipt, but in no event later than seven days after tender,
except that the Fund may suspend the right of redemption during any period when
trading on the New York Stock Exchange is restricted or such Exchange is closed
for other than weekends or holidays, or any emergency is deemed to exist by the
SEC. Contractowners do not deal directly with the Fund to purchase or redeem
shares, and contractowners should refer to the prospectus for the Separate
Account for information on the allocation of premiums and on transfers of
accumulated value among sub-accounts of the Separate Account.
DISTRIBUTIONS AND FEDERAL
INCOME TAX CONSIDERATIONS
The following summarizes certain federal income tax considerations
generally affecting the Series. See the Statement of Additional Information for
further details. No attempt is made to present a detailed explanation of the tax
treatment of the Series or their shareholders, and the discussion here and in
the Statement of Additional Information is not intended as a substitute for
careful tax planning. The discussion is based upon present provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive.
Each Series intends to separately qualify and elect to be treated each
year as a "regulated investment company" under Subchapter M of the Code and,
therefore, generally will not be liable for federal income taxes to the extent
it qualifies and its net investment income and capital gains are distributed.
The Fund expects to distribute, at least once a year, substantially all of each
Series' net investment income and net realized capital gains. Such distributions
will be reinvested on the payable date in additional shares of the respective
Series at the net asset value thereof as of the record date (reduced by an
amount equal to the amount of the distribution). Each Series will be treated
separately in determining the amounts of income and capital gains distributions
to the variable annuity accounts. For this purpose, each Series will reflect
only the income and gains, net of losses, of that Series.
To comply with regulations under Code section 817(h), each Series is
required to diversify its investments. Generally, a Series will be required to
diversify its investments so that on the last day of each quarter of the
calendar year no more than 55 percent of the value of the total assets is
represented by any one investment, no more than 70 percent is represented by any
two investments, no more than 80 percent is represented by any three
investments, and no more than 90 percent is represented by any four investments.
If a Series fails to meet the diversification requirements under Code section
817(h), income with respect to life insurance policies and annuity contracts
invested in the Series at any time during the calendar quarter in which the
failure occurred could become currently taxable to the owners of such contracts
and income for prior periods with respect to the contracts also could be
taxable, most likely in the year of the failure to achieve the required
diversification. Other adverse tax consequences could also ensue. If a Series
fails to qualify as a regulated investment company, the results would be
substantially the same as a failure to meet the diversification requirements
under Code section 817(h).
Certain requirements relating to the qualification of a Series as a
regulated investment company and to the satisfaction of the Code section 817(h)
diversification requirements may limit the extent to which a Series will be able
to engage in certain investment practices, including transactions in options,
futures contracts, forwards, swaps and other types of derivative securities
transactions. In addition, if a Series were unable to dispose of portfolio
securities due to settlement problems relating to foreign investments or due to
the holding of illiquid securities, the Series' ability to qualify as a
regulated investment company and to satisfy the Code section 817(h)
diversification requirements might be affected.
See "Distributions and Federal Income Tax Considerations" in the
Statement of Additional Information for more information on taxes, including
information on the taxation of distributions from a Series. The federal tax
consequences to purchasers of SBL's variable insurance contracts registered
under the Securities Act of 1933 are described in the prospectus applicable to
such contracts.
TAX CONSEQUENCES OF INVESTMENTS IN SHARES OF INVESTMENT COMPANIES
A Series may invest in underlying funds with capital loss
carry-forwards. If such an underlying fund realizes capital gains, it will be
able to offset the gains to the extent of its loss carry-forwards in determining
the amount of capital gains which must be distributed to its shareholders. To
the extent that gains are offset in this manner, the Series will not realize
gains on the related fund until such time as the underlying fund is sold.
Income received from the underlying funds from sources within various
foreign countries may be subject to foreign income taxes withheld at the source.
The underlying funds' transactions in foreign currencies and hedging activities
may give rise to ordinary income or loss to the extent such income or loss
results from fluctuations in the value of the foreign currency concerned. In
addition, such activities will likely produce a difference between book income
and taxable income. This difference may cause a portion of the underlying funds'
income distributions to constitute a return of capital for tax purposes or
require the underlying fund to make distributions exceeding book income to
qualify as a regulated investment company for tax purposes.
FOREIGN TAXES
Investment income and gains received from sources within foreign
countries may be subject to foreign income and other taxes. In this regard,
withholding tax rates in countries with which the United States does not have a
tax treaty are often as high as 30 percent or more. The United States has
entered into tax treaties with many foreign countries which entitle certain
investors to a reduced tax rate (generally 10 to 15 percent) or to certain
exemptions from tax. Each Series intends to operate so as to qualify for such
reduced tax rates or tax exemptions whenever possible. Although contractowners
will indirectly bear the cost of such foreign taxes, they will not be able to
claim foreign tax credits or deductions for taxes paid by a Series.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Series is determined as of the
close of regular trading hours on the New York Stock Exchange on each day that
the Exchange is open for trading (normally 3:00 p.m. Central time). The
determination is made by dividing the value of the portfolio securities of each
Series, plus any cash or other assets, less all liabilities, by the number of
shares of each Series outstanding. Securities listed or traded on a recognized
securities exchange will be valued on the basis of the last sales price. If
there are no sales on a particular day, then the securities are valued at the
last bid price. If a security is traded on multiple exchanges, its value will be
based on prices from the principal exchange where it is traded. All other
securities for which market quotations are available are valued on the basis of
the last current bid price. If there is no bid price or if the bid price is
deemed unsatisfactory by the Board of Directors or by the Administrator, then
the securities are valued in good faith by such method as the Board of Directors
determines will reflect the fair market value.
The Fund will generally value short-term securities at prices based on
market quotations for securities of similar type, yield, quality and duration,
except that securities with 60 days or less to maturity may be valued on the
basis of the amortized cost valuation technique. The amortized cost valuation
technique involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in
periods during which value (as determined by amortized cost) is higher or lower
than the price the Fund would receive if the security were sold.
Generally, trading in foreign securities markets is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of foreign securities used in computing the net asset value
of the shares of Series investing in foreign securities, or the shares of
underlying funds investing in foreign securities, generally are determined as of
the close of such foreign markets or the close of the New York Stock Exchange if
earlier. Foreign currency exchange rates are generally determined prior to the
close of the New York Stock Exchange. Trading on foreign exchanges and in
foreign currencies may not take place on every day the New York Stock Exchange
is open. Conversely trading in various foreign markets may take place on days
when the New York Stock Exchange is not open and on other days when the Fund's
net asset values are not calculated. Consequently, the calculation of the net
asset value may not occur contemporaneously with the determination of the most
current market prices for the securities included in such calculation, and
events affecting the value of such securities and such exchange rates that occur
between the times at which they are determined and the close of the New York
Stock Exchange will not be reflected in the computation of net asset value. If
during such periods, events occur that materially affect the value of such
securities, the securities will be valued at their fair market value.
TRADING PRACTICES AND BROKERAGE
Each Series is actively managed and has no restrictions upon portfolio
turnover, although annual portfolio turnover is expected to be [To be provided.]
A 100% annual portfolio turnover rate would be achieved if each security in a
Series' portfolio (other than securities with less than one year remaining to
maturity) were replaced once during the year. To the extent the Series invest in
shares of mutual funds with sales loads, a higher turnover rate would result in
correspondingly higher sales loads paid by the Series. There is no limit on the
portfolio turnover rates of the underlying funds in which the Series may invest.
The rates of portfolio turnover may be substantially higher during any
period when changing market or economic conditions suggest a shift in portfolio
emphasis.
Transactions in portfolio securities are effected in the manner deemed
to be in the best interest of the Series. In selecting a broker to execute a
specific transaction, all relevant factors will be considered, such as the
broker's ability to obtain the best execution of a particular transaction.
Portfolio transactions may be directed to affiliated broker-dealers (who will
receive brokerage commissions on such transactions), brokers who furnish
investment information or research services to the Investment Adviser or
Subadviser, or who sell contracts, policies, or shares of the Series. Although
the Investment Adviser and Subadviser may consider sales of shares of the Series
in the selection of a broker, this will not be a qualifying or disqualifying
factor.
Securities held by the Fund may also be held by other investment
advisory clients of the Investment Adviser or Subadviser, including other
investment companies, and by SBL. Purchases or sales of the same security
occurring on the same day may be aggregated and executed as a single
transaction, subject to the Investment Adviser's or Subadviser's obligation to
seek best execution. Aggregated purchases or sales are generally effected at an
average price and on a pro rata basis (transaction costs will also be shared on
a pro rata basis) in proportion to the amounts desired to be purchased or sold.
See the Fund's Statement of Additional Information for a more detailed
description of aggregated transactions and allocation of portfolio brokerage.
PERFORMANCE INFORMATION
The Fund may, from time to time, include the average annual total
return and total return of the Series in advertisements or reports to
stockholders or prospective investors. Quotations of average annual total return
for any Series will be expressed in terms of the average annual compounded rate
of return on a hypothetical investment in the Series over a period of 1, 5, and
10 years (up to the life of the Series), and will assume that all dividends and
distributions are reinvested when paid.
Quotations of total return for any Series will be based on a
hypothetical investment in the Series for a certain period, and will assume that
all dividends and distributions are reinvested when paid. The net increase or
decrease in the value of the investment over the period will be divided by its
beginning value to arrive at total return for the period. Total return
calculated in this manner will differ from the average annual total return in
that it is not expressed in terms of an average rate of return.
Performance information for a Series may be compared, in reports and
promotional literature, to: (i) The Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), or other unmanaged indices so that
investors may compare a Series' results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Series. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
Quotations of average annual total return or total return for the Fund
will not take into account charges or deductions against the Separate Accounts
to which the Fund shares are sold or charges and deductions against the policies
or contracts issued by SBL. Performance information for any Series reflects only
the performance of a hypothetical investment in the Series during a particular
time period on which the calculations are based. Performance information should
be considered in light of the Series' investment objectives and policies,
characteristics and quality of the portfolios, and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future. For a description of the methods used to
determine average annual total return and total return for the Series, see the
Statement of Additional Information.
GENERAL INFORMATION
Organization
Advisor's Fund is a Kansas corporation and has authorized the issuance
of an indefinite number of shares of capital stock without par value or stated
capital. The Fund's shares are currently issued in four Series, PCG Growth
Series, PCG Aggressive Growth Series, SIM Growth Series and SIM Conservative
Growth Series. The shares of each Series represent a pro rata beneficial
interest in that Series' net assets and in the earnings and profits or losses
derived from the investment of such assets.
Upon issuance and sale, such shares will be fully paid, nonassessable
and redeemable. These shares have no preemptive rights, but the shareholders of
each Series are entitled to receive dividends as declared for that Series by the
Board of Directors of the Fund.
There shall be no cumulative voting rights for the election of
directors. On matters affecting a particular Series, each share of that Series
has equal voting rights with each other share and there are no preferences as to
conversion, exchange, retirement or liquidation. On other matters, all shares
(irrespective of Series) are entitled to one vote each. Pursuant to the rules
and regulations of the SEC, in certain instances a vote of the outstanding
shares of the combined Series may not modify the rights of holders of a
particular Series without the approval of a majority of the shares of that
Series.
The Fund does not generally hold annual meetings of stockholders for
the election of directors or any other reason, and will do so only when required
by law.
Administrator, Transfer Agent and Dividend-Paying Agent
Security Management, 700 SW Harrison St., Topeka, Kansas 66636-0001,
acts as administrative agent, transfer agent and dividend disbursing agent for
each Series of the Fund, and as such performs administrative functions, fund
accounting, transfer agency, dividend disbursing services, bookkeeping,
accounting and pricing functions for the Fund. For providing these services, the
Administrator receives from each Series of the Fund an annual maintenance fee of
$8.00 per account, an annual accounting fee of the greater of $15,000 or 0.03%
of the average daily net asset value of the Series and an annual administration
fee of 0.045% of the average daily net asset value of the Series. Security
Management also receives a fee per transaction and dividend. Security Management
is a limited liability company which is ultimately controlled by SBL.
Custodian
UMB Bank, N.A. acts as the custodian for the portfolio securities of
the Series.
Inquiries
Investors who have questions concerning the Fund or wish to obtain
additional information, may write to the Advisor's Fund at 700 SW Harrison St.,
Topeka, Kansas 66636-0001, or call (785) 431-3112 or 1-800-888-2461, extension
3112.
<PAGE>
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<PAGE>
ADVISOR'S FUND
Statement of Additional Information
_____________, 1998
(785) 431-3127
(800) 888-2461
- --------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN INDEPENDENT AUDITORS
Private Consulting Group, Inc. UMB Bank, N.A. Ernst & Young, LLP
4650 SW Macadam Avenue 928 Grand Avenue One Kansas City Place
Portland, Oregon 97201 Kansas City, Kansas City,
Missouri 64106 Missouri 64106
FUND ADMINISTRATOR COUNSEL
Security Management Company, Dechert Price & Rhoads
LLC 1775 Eye Street, N.W.
700 SW Harrison Washington, D.C. 20006
Topeka, Kansas 66636
<PAGE>
ADVISOR'S FUND
700 SW Harrison Street, Topeka, Kansas 66636-0001
Statement of
Additional Information
____________, 1998
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with Advisor's Fund Prospectus dated _________, 1998, as it
may be supplemented from time to time. A Prospectus may be obtained free of
charge by writing the Fund at 700 SW Harrison Street, Topeka, Kansas 66636-0001,
or by calling (785) 431-3112 or (800) 888-2461, ext. 3112.
TABLE OF CONTENTS
PAGE
WHAT IS ADVISOR'S FUND?....................................................... 2
INVESTMENT METHODS AND RISK FACTORS........................................... 2
INVESTMENT POLICY LIMITATIONS.................................................23
OFFICERS AND DIRECTORS........................................................24
REMUNERATION OF DIRECTORS AND OTHERS..........................................25
SALE AND REDEMPTION OF SHARES.................................................25
INVESTMENT MANAGEMENT.........................................................25
Portfolio Management.......................................................25
Administrator, Transfer Agent and Dividend Disbursing Agent................25
Distribution...............................................................26
PORTFOLIO TURNOVER............................................................26
DETERMINATION OF NET ASSET VALUE..............................................26
PORTFOLIO TRANSACTIONS........................................................27
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS...........................28
CAPITAL STOCK AND VOTING......................................................31
CUSTODIAN.....................................................................31
INDEPENDENT AUDITORS..........................................................31
PERFORMANCE INFORMATION.......................................................32
FINANCIAL STATEMENTS..........................................................32
APPENDIX......................................................................33
<PAGE>
WHAT IS ADVISOR'S FUND?
Advisor's Fund (the "Fund"), a Kansas corporation, was organized by
Security Benefit Group, Inc. on April 29, 1998, and serves as the investment
vehicle for certain Security Benefit Life Insurance Company ("SBL") variable
annuity and variable life insurance separate accounts. Shares of the Fund will
be sold to SBL for allocation to such separate accounts which are established
for the purpose of funding variable insurance contracts issued by SBL, and to
qualified pension and retirement accounts outside of the separate account
context. The Fund reserves the right to expand the class of persons eligible to
purchase shares of the Fund or to reject any offer.
The Fund is a diversified, open-end management investment company of the
series type registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), which currently issues its shares in four series: PCG Growth Series
("PCG Growth"), PCG Aggressive Growth Series ("PCG Aggressive Growth"), SIM
Growth Series ("SIM Growth"), and SIM Conservative Growth Series ("SIM
Conservative Growth") (collectively, the "Series"). The assets of each Series
are held separate from the assets of the other Series and each Series has
investment objectives which differ from those of the other Series.
SBL, organized originally as a fraternal benefit society under the laws of
the State of Kansas, commenced business February 22, 1892, and became a mutual
life insurance company under its present name on January 2, 1950. Its home
office is located at 700 Harrison Street, Topeka, Kansas. SBL is licensed in the
District of Columbia and all states except New York.
All investment companies are required to operate within the limitations
imposed by their fundamental investment policies. (See "Investment Policy
Limitations.")
As an open-end investment company, the Fund provides an arrangement by
which investors may invest in a company which itself invests in securities. Each
Series represents a diversified securities portfolio under professional
management, and the value of shares held by SBL's separate accounts will
fluctuate with changes in the value of the Series' portfolio securities. As an
open-end company, the Fund is obligated to redeem its shares upon demand at
current net asset value. ( See "Sale and Redemption of Shares.")
Professional investment advice is provided to the Fund and to each Series
by Private Consulting Group, Inc. (the "Investment Adviser"), an Oregon
corporation, which is affiliated with Interwest Financial Advisers, Inc. and is
a subsidiary of Interwest Financial Group, Inc. Mench Financial, Inc. ("Mench"
or the "Subadviser"), an ______________ corporation will act as sub-adviser for
PCG Aggressive Growth Series.
Pursuant to an investment advisory contract with the Fund, the Investment
Adviser is paid an annual advisory fee of 0.75% of the average net assets of
each Series, computed daily and payable monthly. (See "Investment Management"
for a discussion of the Investment Adviser and the investment advisory
contract.) Mench receives a portion of the fee paid to the Investment Adviser
for management of PCG Aggressive Growth equal on an annual basis to ____% of the
average net assets of that Series. The Fund receives administrative, accounting
and transfer agency services from Security Management Company, LLC ("SMC") for
which the Fund pays a fee. SMC is ultimately controlled by SBL.
INVESTMENT METHODS AND RISK FACTORS
The investment objective and policies of each Series is discussed in detail
in the Prospectus under "Investment Objectives and Policies." There are risks
inherent in the ownership of any security and there can be no assurance that
such objectives will be achieved. The objectives and policies, except those
enumerated under "Investment Policy Limitations," may be modified at any time
without stockholder approval.
To comply with regulations under Section 817(h) of the Internal Revenue
Code, each Series of the Fund is required to diversify its investments so that
on the last day of each quarter of a calendar year no more than 55% of the value
of its assets is represented by securities of any one issuer, no more than 70%
is represented by securities of any two issuers, no more than 80% is represented
by securities of any three issuers, and no more than 90% is represented by
securities of any four issuers. As to U.S. Government securities, each U.S.
Government agency and instrumentality is to be treated as a separate issuer.
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Series are described in the
"Investment Objectives and Policies" section of the Prospectus and in this
Statement of Additional Information. The following is a description of certain
additional risk factors related to various securities, instruments and
techniques. The risks so described only apply to those Series which may invest
in such securities and instruments or which use such techniques. Also included
is a general description of some of the investment instruments, techniques and
methods which may be used by one or more of the Series. The methods described
only apply to those Series which may use such methods. Although a Series may
employ the techniques, instruments and methods described below, consistent with
its investment objective and policies and any applicable law, no Series will be
required to do so.
Debt Securities. With respect to investment in debt securities, there is no
percentage limitation on the amount of the Series' assets that may be invested
within any particular rating classification. The Series may invest directly or
indirectly in higher yielding, longer-term fixed-income securities in the lower
rating (higher risk) categories of the recognized rating services (commonly
referred to as "junk bonds"). These include securities rated Ba or lower by
Moody's Investors Service, Inc. ("Moody's") or BB or lower by Standard & Poor's
Ratings Services ("S&P"). Securities rated Ba or lower by Moody's or BB or lower
by S&P are regarded as predominantly speculative with respect to the ability of
the issuer to meet principal and interest payments. (See the Appendix for a
description of the various bond ratings utilized by the rating services.)
To the extent that a Series or an underlying fund in which a Series is
invested invests in the high yield, high risk bonds described above, its share
price and yield are expected to fluctuate more than the share price and yield of
a fund investing in higher quality, shorter-term securities. High yield bonds
may be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade bonds. A projection of an economic
downturn, or higher interest rates, for example, could cause a decline in high
yield bond prices because an advent of such events could lessen the ability of
highly leveraged companies to make principal and interest payments on its debt
securities. In addition, the secondary trading market for high yield bonds may
be less liquid than the market for higher grade bonds, which can adversely
affect the ability of the Series to dispose of its portfolio securities. Bonds
for which there is only a "thin" market can be more difficult to value inasmuch
as objective pricing data may be less available and judgment may play a greater
role in the valuation process. The Series may purchase, directly or indirectly,
securities that are restricted as to disposition under the federal securities
laws, and subject to the Series' policy that not more than 15% of its net assets
will be invested in illiquid securities.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts but
provide for the commencement of regular interest payments at a deferred date.
American Depositary Receipts. Each of the Series of the Fund may purchase
American Depositary Receipts ("ADRs") or invest in underlying funds which
purchase ADRs which are issued generally by U.S. banks and which represent the
deposit with the bank of a foreign company's securities. ADRs are publicly
traded on exchanges or over-the-counter in the United States. Investors should
consider carefully the substantial risks involved in investing in securities
issued by companies of foreign nations, which are in addition to the usual risks
inherent in domestic investments. ADRs and European Depositary Receipts ("EDRs")
or other securities convertible into securities of issuers based in foreign
countries are not necessarily denominated in the same currency as the securities
into which they may be converted. Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets, while EDRs (also referred to as Continental Depositary Receipts
("CDRs"), in bearer form, may be denominated in other currencies and are
designed for use in European securities markets. ADRs are receipts typically
issued by a U.S. bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement. For
purposes of the Series' investment policies, ADRs and EDRs are deemed to have
the same classification as the underlying securities they represent. Thus, an
ADR or EDR representing ownership of common stock will be treated as common
stock.
Depositary receipts are issued through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the deposited
security. Holders of unsponsored depositary receipts generally bear all the cost
of such facilities and the depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through voting rights to the holders
of such receipts in respect of the deposited securities.
Shares of Other Investment Companies. All of the Series may invest in
shares of other investment companies. Investment in the shares of other
investment companies has the effect of requiring shareholders to pay the
operating expenses of two mutual funds.
A Series currently is not able to negotiate the level of the sales charges
at which it will purchase shares of load funds, which may be as great as 8.5% of
the public offering price (or 9.29% of the net amount invested) under the rules
of the National Association of Securities Dealers ("NASD"). Nevertheless, when
appropriate, a Series will purchase such shares pursuant to (i) letters of
intent, permitting it to obtain reduced sales charges by aggregating its
intended purchases over time (generally 13 months from the initial purchase
under the letter); (ii) rights of accumulation, permitting it to obtain reduced
sales charges as it purchases additional shares of an underlying fund; and (iii)
the right to obtain reduced sales charges by aggregating its purchases of
several funds within a family of mutual funds.
Repurchase Agreements. A repurchase agreement involves a purchase by the
Series of a security from a selling financial institution (such as a bank,
savings and loan association or broker-dealer) which agrees to repurchase such
security at a specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. The resale price is in excess of
the purchase price and reflects an agreed upon yield effective for the period of
time the Series' money is invested in the security.
Currently, all of the Series may enter, directly or indirectly by means of
investments in underlying funds, into repurchase agreements only with federal
reserve system member banks with total assets of at least one billion dollars
and equity capital of at least one hundred million dollars and "primary" dealers
in U.S. Government securities. These Series may enter into repurchase
agreements, fully collateralized by U.S. Government or agency securities, only
on an overnight basis.
Repurchase agreements are considered to be loans by the Fund under the
Investment Company Act of 1940. Engaging in any repurchase transaction will be
subject to any rules or regulations of the Securities and Exchange Commission or
other regulatory authorities. Not more than 15% of the net assets of a Series
will be invested in illiquid assets, which include repurchase agreements with
maturities of over seven days.
The Series may enter into repurchase agreements only with (a) securities
dealers that have a total capitalization of at least $40,000,000 and a ratio of
aggregate indebtedness to net capital of no more than 4 to 1, or, alternatively,
net capital equal to 6% of aggregate debit balances, or (b) banks that have at
least $1,000,000,000 in assets and a net worth of at least $100,000,000 as of
its most recent annual report. In addition, the aggregate repurchase price of
all repurchase agreements held by each Series with any broker shall not exceed
15% of the total assets of the Series or $5,000,000, whichever is greater.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Series could experience both delays in liquidating the underlying
securities and losses, including (a) possible decline in the value of the
underlying security during the period while the Series seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing its rights.
Asset-Backed Securities: Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
Asset-backed securities may be classified as pass-through certificates or
collateralized obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support."
Asset-backed securities issued in the form of debt instruments, also known
as collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing such asset-backed securities are pledged
to a trustee or custodian for the benefit of the holders thereof. Such issuers
generally hold no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments on such
asset-backed securities are obligations of the issuers, in the event of defaults
on the underlying assets not covered by any credit support (see "Types of Credit
Support"), the issuing entities are unlikely to have sufficient assets to
satisfy their obligations on the related asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed securities are
issued with only one class of security, many asset-backed securities are issued
in more than one class, each with different payment terms. Multiple class
asset-backed securities are issued for two main reasons. First, multiple classes
may be used as a method of providing credit support. This is accomplished
typically through creation of one or more classes whose right to payments on the
asset-backed security is made subordinate to the right to such payments of the
remaining class or classes. See "Types of Credit Support". Second, multiple
classes may permit the issuance of securities with payment terms, interest rates
or other characteristics differing both from those of each other and from those
of the underlying assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests with respect to
the allocation of interest and principal of the assets backing the security),
and securities with a class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Series may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Series.
Types of Credit Support. Asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that scheduled payments on the underlying pool are made in a
timely fashion. Protection against ultimate default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve Portfolios" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have been
"over collateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security. Additionally, if the letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized.
Mortgage-Backed Securities. Mortgage-backed securities (MBSs), including
mortgage pass-through securities and collateralized mortgage obligations (CMOs),
include certain securities issued or guaranteed by the United States government
or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or
Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; and securities issued by private issuers that represent an
interest in or are collateralized by mortgage loans. A mortgage pass-through
security is a pro rata interest in a pool of mortgages where the cash flow
generated from the mortgage collateral is passed through to the security holder.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities.
Underlying funds in which the Series invest may invest in securities known
as "inverse floating obligations," "residual interest bonds," or "interest-only"
(IO) and "principal-only" (PO) bonds, the market values of which will generally
be more volatile than the market values of most MBSs. An inverse floating
obligation is a derivative adjustable rate security with interest rates that
adjust or vary inversely to changes in market interest rates. The term residual
interest bond is used generally to describe those instruments in collateral
pools, such as CMOs, which receive any excess cash flow generated by the pool
once all other bondholders and expenses have been paid. IOs and POs are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IO) and the other class principal only payments
(PO). MBSs have been referred to as "derivatives" because the performance of
MBSs is dependent upon and derived from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Series may invest
in CMOs which are subject to greater risk of prepayment. Market risk reflects
the chance that the price of the security may fluctuate over time. The price of
MBSs may be particularly sensitive to prevailing interest rates, the length of
time the security is expected to be outstanding and the liquidity of the issue.
In a period of unstable interest rates, there may be decreased demand for
certain types of MBSs, and an underlying fund invested in such securities
wishing to sell them may find it difficult to find a buyer, which may in turn
decrease the price at which they may be sold. IOs and POs are acutely sensitive
to interest rate changes and to the rate of principal prepayments. They are very
volatile in price and may have lower liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit these qualities, especially those
which pay variable rates of interest which adjust inversely with and more
rapidly than short-term interest rates. Credit risk reflects the chance that the
underlying fund may not receive all or part of its principal because the issuer
or credit enhancer has defaulted on its obligations. Obligations issued by U.S.
Government-related entities are guaranteed by the agency or instrumentality, and
some, such as GNMA certificates, are supported by the full faith and credit of
the U.S. Treasury; others are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities, shares
of the Series are not so guaranteed in any way. The performance of private label
MBSs, issued by private institutions, is based on the financial health of those
institutions. There is no guarantee that an underlying fund's investment in MBSs
will be successful, and the Series' total return could be adversely affected as
a result.
Real Estate Securities. Underlying funds in which the Series invest may
invest in equity securities of real estate investment trusts ("REITs") and other
real estate industry companies or companies with substantial real estate
investments and therefore, such Series may be subject to certain risks
associated with direct ownership of real estate and with the real estate
industry in general. These risks include, among others: possible declines in the
value of real estate; possible lack of availability of mortgage funds; extended
vacancies of properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating expenses;
changes in zoning laws; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; casualty or
condemnation losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, as amended (the "Code"). Certain REITs may be
self-liquidating in that a specific term of existence is provided for in the
trust document. Such trusts run the risk of liquidating at an economically
inopportune time.
Emerging Markets. Underlying funds in which the Series may invest may
purchase equity securities of entities located in emerging markets. In certain
emerging market countries, there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers, and listed
companies than in the United States. The economies of emerging market countries
may be predominantly based on a few industries and may be highly vulnerable to
change in local or global trade conditions. The Securities markets of many of
these countries also may be smaller, less liquid, and subject to greater price
volatility than those in the United States. Some emerging market countries also
may have fixed or managed currencies which are not free-floating against the
U.S. dollar. Further, certain emerging market country currencies may not be
internationally trade. Certain of these currencies have experienced a steady
devaluation relative to the U.S. collar. Any devaluations in the currencies in
which portfolio securities are denominated may have an adverse impact on the
underlying fund, including the Series. Finally, many emerging market countries
have experienced substantial, and in some periods, extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in inflation rates
have had, and may continue to have, negative effects on the economies for
individual merging market countries. Moreover, the economies of individual
emerging market countries may differ favorably or unfavorably from the U.S.
economy in such respects as the rate of growth of domestic product, inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. See also "Certain Risks of Foreign Investing."
Eastern Europe. Underlying funds in which the Series may invest may invest
in the markets of Eastern Europe. Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fail, this
could result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend away
from centrally-planned economies and state owned industries. In many of the
countries of Eastern Europe and Russia, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking and
securities infrastructure to handle such trading, and a legal tradition which
does not recognize rights in private property. In addition, these countries may
have national policies which restrict investments in companies deemed sensitive
to the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as custodian
of the Series' assets invested in such countries and these authorities may not
qualify as a foreign custodian under the 1940 Act and exemptive relief from such
Act may be required. All of these considerations are among the factors which
could cause significant risks and uncertainties to investment in Eastern Europe
and Russia. See also "Certain Risks of Foreign Investing."
Brady Bonds. Underlying funds in which the Series invest may invest in
"Brady Bonds," which are debt restructurings that provide or the exchange of
cash and loans for newly issued bonds. Brady Bonds are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructuring under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady. Brady Bonds have been issued by
the governments of Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic,
Ecuador, Jordan, Mexico, Nigeria, Panama, Peru, The Philippines, Uruguay and
Venezuela, and are expected to be issued by other emerging market countries.
Investors should recognize that Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt. The Salomon Brothers Brady Bond Index provides a benchmark that
can be used to compare returns of emerging market Brady Bonds with returns in
other bond markets, e.g., the U.S. bond market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.
Loan Participations and Assignments. Underlying funds in which the Series
invest may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a corporate or foreign entity and one or more
financial institutions ("Lenders"). These investments can be in the form of
participations in Loans ("Participations") and assignments of portions of Loans
from third parties ("Assignments"). Participations typically will result in an
underlying fund Series having a contractual relationship only with the Lender,
not with the borrower. An underlying fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, an
underlying fund generally will have no right to enforce compliance by the
borrower with the terms of the loan agreement relating to the Loan ("Loan
Agreement"), nor any rights of set-off against the borrower, and an underlying
fund may not directly benefit from any collateral supporting the Loan in which
it has purchased the Participation. As a result, the underlying fund will assume
the credit risk of both the borrower and the Lender that is selling the
Participation.
In the event of the insolvency of the Lender selling a Participation, an
underlying fund may be treated as a general creditor of the Lender and may not
benefit from any set-off between the Lender and the borrower. When an underlying
fund purchases Assignments from Lenders, the underlying fund will acquire direct
rights against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and assignors, the
rights and obligations acquired by the underlying fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
An underlying fund may have difficulty disposing of Assignments and
Participations. The liquidity of such securities is limited and such securities
could be sold only to a limited number of institutional investors. The lack of a
liquid secondary market could have an adverse impact on the value of such
securities and on an underlying fund's ability to dispose of particular
Assignments or Participations when necessary to meet an underlying fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for an underlying fund to assign a value to those securities for
purposes of valuing an underlying fund's portfolio and calculating its net asset
value.
Sovereign Debt. Underlying funds in which the Series invest may invest in
sovereign debt securities of emerging market governments, including Brady Bonds
(described above). Investments in such securities involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal or interest when due in
accordance with the terms of such debt. Periods of economic uncertainty may
result in the volatility of market prices of sovereign debt, and in turn the an
underlying fund's net asset value, to a greater extent than the volatility
inherent in domestic fixed income securities. A sovereign debtor's willingness
or ability to repay principal and pay interest in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a
whole, the sovereign debtor's policy toward principal international lenders and
the political constraints to which a sovereign debtor may be subject. Emerging
market governments could default on their sovereign debt. Such sovereign debtors
also may be dependent on expected disbursements from foreign governments,
multilateral agencies and other entities abroad to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a sovereign
debtor's implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due, may result in the cancellation of such third parties' commitments to lend
funds to the sovereign debtor, which may further impair such debtor's ability or
willingness to timely service its debt.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing sovereign debt could adversely affect the Series'
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although the
Investment Adviser intends to manage the Series in a manner that will minimize
the exposure to such risks, there can be no assurance that adverse political
changes will not cause the Series to suffer a loss of interest or principal on
any of its holdings.
Some emerging market countries have encountered difficulties in servicing
their sovereign debt obligations. Some of these countries have withheld payments
of interest and/or principal of sovereign debt. These difficulties have also led
to agreements to restructure external debt obligations--in particular,
commercial bank loans, typically by rescheduling principal payments, reducing
interest rates and extending new credits to finance interest payments on
existing debt. In the future, holders of emerging market sovereign debt
securities may be requested to participate in similar rescheduling of such debt.
Certain emerging market countries are among the largest debtors to commercial
banks and foreign governments. At times certain emerging market countries have
declared a moratorium on the payment of principal and interest on external debt;
such a moratorium is currently in effect in certain emerging market countries.
There is no bankruptcy proceeding by which a creditor may collect in whole or in
part sovereign debt on which an emerging market government has defaulted.
The ability of emerging market governments to make timely payments on their
sovereign debt securities is likely to be influenced strongly by a country's
balance of trade and its access to trade and other international credits. A
country whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of such commodities.
Increased protectionism on the part of a country's trading partners could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any. To the extent that a country receives payment for its
exports in currencies other than hard currencies, its ability to make hard
currency payment could be affected.
Investors should also be aware that certain sovereign debt instruments in
which an underlying fund may invest involve great risk. As noted above,
sovereign debt obligations issued by emerging market governments generally are
deemed to be the equivalent in terms of quality to securities rated below
investment grade by Moody's and S&P. Such securities are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations and involve
major risk exposure to adverse conditions. Some of such securities, with respect
to which the issuer currently may not be paying interest or may be in payment
default, may be comparable to securities rated D by S&P or C by Moody's. The
underlying fund may have difficulty disposing of and valuing certain sovereign
debt obligations because there may be a limited trading market for such
securities. Because there is no liquid secondary market for many of these
securities, the Fund anticipates that such securities held by an underlying fund
could be sold only to a limited number of dealers or institutional investors.
Certain sovereign debt securities may be illiquid.
Debt Obligations. Yields on short, intermediate, and long-term securities
are dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt securities with longer maturities
tend to produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter maturities
and lower yields. The market prices of debt securities usually vary, depending
upon available yields. An increase in interest rates will generally reduce the
value of portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of a Series to achieve
its investment objective is also dependent on the continuing ability of the
issuers of the debt securities in which the Series invest to meet their
obligations for the payment of interest and principal when due.
Special Risks Associated with Low-rated and Comparable Unrated Debt
Securities. The Series may invest in underlying funds which make investments in
unrated or low-rated debt securities. Low-rated and comparable unrated
securities, while generally offering higher yields than investment-grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. The special risk considerations in connection with such investments
are discussed below. See the Appendix of this Statement of Additional
Information for a discussion of securities ratings.
The low-rated and comparable unrated securities market is relatively new,
and its growth paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such a prolonged economic downturn could severely disrupt the market for and
adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher-rated securities,
which react primarily to fluctuations in the general level of interest rates.
Low-rated and comparable unrated securities also tend to be more sensitive to
economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of low-rated and comparable unrated securities
may experience financial stress and may not have sufficient revenues to meet
their payment obligations. The issuer's ability to service its debt obligations
may also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, an underlying fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of low-rated and comparable unrated securities and thus in an
underlying fund's net asset value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will a Series' net asset value.
If an underlying fund experiences unexpected net redemptions in such a market,
it may be forced to liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited liquidity of high-yield
securities (discussed below) an underlying fund may be forced to liquidate these
securities at a substantial discount. Any such liquidation would reduce an
underlying fund's asset base over which expenses could be allocated and could
result in a reduced rate of return for an underlying fund.
Low-rated and comparable unrated securities typically contain redemption,
call, or prepayment provisions which permit the issuer of such securities
containing such provisions to, at their discretion, redeem the securities.
During periods of falling interest rates, issuers of high-yield securities are
likely to redeem or prepay the securities and refinance them with debt
securities with a lower interest rate. To the extent an issuer is able to
refinance the securities or otherwise redeem them, an underlying fund may have
to replace the securities with a lower-yielding security, which would result in
a lower return for an underlying fund.
Credit ratings issued by credit-rating agencies evaluate the safety of
principal and interest payments of rated securities. They do not, however,
evaluate the market value risk of low-rated and comparable unrated securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit-rating agencies may or may not make timely changes in a rating
to reflect changes in the economy or in the condition of the issuer that affect
the market value of the security. Consequently, credit ratings are used only as
a preliminary indicator of investment quality. Investments in low-rated and
comparable unrated securities will be more dependent on the underlying fund`s
investment adviser's credit analysis than would be the case with investments in
investment-grade debt securities.
An underlying fund may have difficulty disposing of certain low-rated and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all low-rated and
comparable unrated securities, there is no established retail secondary market
for many of these securities. The Fund anticipates that such securities held by
an underlying fund could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on the market
price of the security. As a result, an underlying fund's asset value and an
underlying fund's ability to dispose of particular securities, when necessary to
meet an underlying fund's liquidity needs or in response to a specific economic
event, may be impacted. The lack of a liquid secondary market for certain
securities may also make it more difficult for an underlying fund to obtain
accurate market quotations for purposes of valuing its shares. This would have
an impact on the net asset value determination of the Series which are invested
in such funds. Market quotations are generally available on many low-rated and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of low-rated and comparable unrated securities, especially
in a thinly-traded market.
Recent legislation has been adopted and from time to time, proposals have
been discussed regarding new legislation designed to limit the use of certain
low-rated and comparable unrated securities by certain issuers. An example of
legislation is a recent law which requires federally insured savings and loan
associations to divest their investment in these securities over time. New
legislation could further reduce the market because such legislation, generally,
could negatively affect the financial condition of the issuers of high-yield
securities, and could adversely affect the market in general. It is not
currently possible to determine the impact of the recent legislation on this
market. However, it is anticipated that if additional legislation is enacted or
proposed, it could have a material effect on the value of low-rated and
comparable unrated securities and the existence of a secondary trading market
for the securities.
Put and Call Options:
Writing (Selling) Covered Call Options. A call option gives the holder
(buyer) the "right to purchase" a security or currency at a specified price (the
exercise price), at expiration of the option (European style) or at any time
until a certain date (the expiration date) (American style). So long as the
obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing an option identical to that previously sold.
The Series may write (sell) "covered" call options and purchase options to
close out options previously written by the Series. In writing covered call
options, the Series expects to generate additional premium income which should
serve to enhance the Series' total return and reduce the effect of any price
decline of the security. Covered call options will generally be written on
securities which, in the opinion of the Investment Adviser or Subadviser, are
not expected to have any major price increases or moves in the near future but
which, over the long term, are deemed to be attractive investments for the
Series.
The Series will write only covered call options. This means that the Series
will own the security subject to the option or an option to purchase the same
underlying security, having an exercise price equal to or less than the exercise
price of the "covered" option, or will establish and maintain with its custodian
for the term of the option, an account consisting of cash or liquid securities
having a value equal to the fluctuating market value of the optioned securities.
The Series will not write a covered call option if, as a result, the aggregate
market value of all Series securities covering call or put options exceeds 25%
of the market value of the Series' net assets. In calculating the 25% limit, the
Series will offset, against the value of assets covering written calls and puts,
the value of purchased calls and puts on identical securities with identical
maturity dates.
Securities on which call options may be written will be purchased solely on
the basis of investment considerations consistent with the Series' investment
objectives. The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast to the writing
of naked or uncovered options, which the Series will not do), but capable of
enhancing the Series' total return. When writing a covered call option, the
Series, in return for the premium, gives up the opportunity for profit from a
price increase in the underlying security above the exercise price, but
conversely, retains the risk of loss should the price of the security decline.
Unlike one who owns securities not subject to an option, the Series has no
control over when it may be required to sell the underlying securities, since it
may be assigned an exercise notice at any time prior to the expiration of its
obligations as a writer. If a call option which the Series has written expires,
the Series will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security during
the option period. If the call option is exercised, the Series will realize a
gain or loss from the sale of the underlying security.
Call options written by the Series will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, the Series
may purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Series will receive from writing a call option will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. Once the decision to
write a call option has been made, the Investment Adviser or Subadviser, in
determining whether a particular call option should be written on a particular
security, will consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options. The
premium received by the Series for writing covered call options will be recorded
as a liability of the Series. This liability will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Series is computed (close of the
New York Stock Exchange), or, in the absence of such sale, the latest asked
price. The option will be terminated upon expiration of the option, the purchase
of an identical option in a closing transaction, or delivery of the underlying
security upon the exercise of the option.
The Series will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Series.
Writing (Selling) Covered Put Options. A put option gives the purchaser of
the option the right to sell, and the writer (seller) has the obligation to buy,
the underlying security at the exercise price during the option period (American
style) or at the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring him to make payment
of the exercise price against delivery of the underlying security. The operation
of put options in other respects, including their related risks and rewards, is
substantially identical to that of call options. The Series may write American
or European style covered put options and purchase options to close out options
previously written by the Series.
The Series may write put options on a covered basis, which means that the
Series would either (i) maintain in a segregated account cash or liquid
securities in an amount not less than the exercise price at all times while the
put option is outstanding; (ii) sell short the security underlying the put
option at the same or higher price than the exercise price of the put option; or
(iii) purchase an option to sell the underlying security subject to the option
having an exercise price equal to or greater than the exercise price of the
"covered" option at all times while the put option is outstanding. (The rules of
a clearing corporation currently require that such assets be deposited in escrow
to secure payment of the exercise price.) The Series would generally write
covered put options in circumstances where the Investment Adviser or Subadviser
wishes to purchase the underlying security for the Series' portfolio at a price
lower than the current market price of the security. In such event the Series
would write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since the
Series would also receive interest on debt securities maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security would decline below
the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the Series. In addition, the
Series, because it does not own the specific securities which it may be required
to purchase in the exercise of the put, cannot benefit from appreciation, if
any, with respect to such specific securities.
Premium Received from Writing Call or Put Options. A Series will receive a
premium from writing a put or call option, which increases such Series' return
in the event the option expires unexercised or is closed out at a profit. The
amount of the premium will reflect, among other things, the relationship of the
market price of the underlying security to the exercise price of the option, the
term of the option and the volatility of the market price of the underlying
security. By writing a call option, a Series limits its opportunity to profit
from any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, a Series assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss if the purchase price exceeds the market value plus the amount of
the premium received, unless the security subsequently appreciates in value.
Closing Transactions. Closing transactions may be effected in order to
realize a profit on an outstanding call option, to prevent an underlying
security or currency from being called, or to permit the sale of the underlying
security. A Series may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. A Series will realize a
profit or loss from such transaction if the cost of such transaction is less or
more than the premium received from the writing of the option. In the case of a
put option, any loss so incurred may be partially or entirely offset by the
premium received from a simultaneous or subsequent sale of a different put
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the purchase of a call option is likely to be offset in whole or
in part by unrealized appreciation of the underlying security owned by such
Series.
Furthermore, effecting a closing transaction will permit the Series to
write another call option on the underlying security with either a different
exercise price or expiration date or both. If the Series desires to sell a
particular security from its portfolio on which it has written a call option, or
purchased a put option, it will seek to effect a closing transaction prior to,
or concurrently with, the sale of the security. There is, of course, no
assurance that the Series will be able to effect such closing transactions at a
favorable price. If the Series cannot enter into such a transaction, it may be
required to hold a security that it might otherwise have sold. When the Series
writes a covered call option, it runs the risk of not being able to participate
in the appreciation of the underlying securities above the exercise price, as
well as the risk of being required to hold on to securities that are
depreciating in value. This could result in higher transaction costs. The Series
will pay transaction costs in connection with the writing of options to close
out previously written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Purchasing Call Options. The Series may purchase American or European call
options. The Series may enter into closing sale transactions with respect to
such options, exercise them or permit them to expire. The Series may purchase
call options for the purpose of increasing its current return.
Call options may also be purchased by a Series for the purpose of acquiring
the underlying securities for its portfolio. Utilized in this fashion, the
purchase of call options enables the Series to acquire the securities at the
exercise price of the call option plus the premium paid. At times the net cost
of acquiring securities in this manner may be less than the cost of acquiring
the securities directly. This technique may also be useful to a Series in
purchasing a large block of securities that would be more difficult to acquire
by direct market purchases. So long as it holds such a call option rather than
the underlying security itself, the Series is partially protected from any
unexpected decline in the market price of the underlying security and in such
event could allow the call option to expire, incurring a loss only to the extent
of the premium paid for the option.
The Series may also purchase call options on underlying securities it owns
in order to protect unrealized gains on call options previously written by it.
Call options may also be purchased at times to avoid realizing losses. For
example, where the Series has written a call option on an underlying security
having a current market value below the price at which such security was
purchased by the Series, an increase in the market price could result in the
exercise of the call option written by the Series and the realization of a loss
on the underlying security with the same exercise price and expiration date as
the option previously written.
Purchasing Put Options. The Series may purchase American or European style
put options. The Series may enter into closing sale transactions with respect to
such options, exercise them or permit them to expire. A Series may purchase a
put option on an underlying security (a "protective put") owned by the Series as
a defensive technique in order to protect against an anticipated decline in the
value of the security. Such hedge protection is provided only during the life of
the put option when the Series, as the holder of the put option, is able to sell
the underlying security at the put exercise price regardless of any decline in
the underlying security's market price. The premium paid for the put option and
any transaction costs would reduce any capital gain otherwise available for
distribution when the security is eventually sold.
A Series may purchase put options at a time when the Series does not own
the underlying security. By purchasing put options on a security it does not
own, the Series seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price during the life of the put option, the Series will lose
its entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale transaction.
Dealer Options. The Series may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While the Series would
look to a clearing corporation to exercise exchange-traded options, if the
Series were to purchase a dealer option, it would rely on the dealer from whom
it purchased the option to perform if the option were exercised. Exchange-traded
options generally have a continuous liquid market while dealer options have
none. Consequently, the Series will generally be able to realize the value of a
dealer option it has purchased only by exercising it or reselling it to the
dealer who issued it. Similarly, when the Series writes a dealer option, it
generally will be able to close out the option prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the Series
originally wrote the option. While the Series will seek to enter into dealer
options only with dealers who will agree to and which are expected to be capable
of entering into closing transactions with the Series, there can be no assurance
that the Series will be able to liquidate a dealer option at a favorable price
at any time prior to expiration. Failure by the dealer to do so would result in
the loss of the premium paid by the Series as well as loss of the expected
benefit of the transaction. Until the Series, as a covered dealer call option
writer, is able to effect a closing purchase transaction, it will not be able to
liquidate securities (or other assets) used as cover until the option expires or
is exercised. In the event of insolvency of the contra party, the Series may be
unable to liquidate a dealer option. With respect to options written by the
Series, the inability to enter into a closing transaction may result in material
losses to the Series. For example, since the Series must maintain a secured
position with respect to any call option on a security it writes, the Series may
not sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair the Series' ability to
sell portfolio securities at a time when such sale might be advantageous.
The Staff of the Securities and Exchange Commission ("SEC") has taken the
position that purchased dealer options and the assets used to secure the written
dealer options are illiquid securities. The Series may treat the cover used for
written Over-the-Counter ("OTC") options as liquid if the dealer agrees that the
Series may repurchase the OTC option it has written for a maximum price to be
calculated by a predetermined formula. In such cases, the OTC option would be
considered illiquid only to the extent the maximum repurchase price under the
formula exceeds the intrinsic value of the option. To this extent, the Series
will treat dealer options as subject to the Series' limitation on illiquid
securities. If the SEC changes its position on the liquidity of dealer options,
the Series will change its treatment of such instruments accordingly.
Certain Risk Factors in Writing Call Options and in Purchasing Call and Put
Options. During the option period, a Series, as writer of a call option has, in
return for the premium received on the option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that the Series may lose the premium it
paid plus transaction costs. If the Series does not exercise the option and is
unable to close out the position prior to expiration of the option, it will lose
its entire investment.
An option position may be closed out only on an exchange which provides a
secondary market. There can be no assurance that a liquid secondary market will
exist for a particular option at a particular time and that the Series can close
out its position by effecting a closing transaction. If the Series is unable to
effect a closing purchase transaction, it cannot sell the underlying security
until the option expires or the option is exercised. Accordingly, the Series may
not be able to sell the underlying security at a time when it might otherwise be
advantageous to do so. Possible reasons for the absence of a liquid secondary
market include the following: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities; (iv) inadequacy of the
facilities of an exchange or the clearing corporation to handle trading volume;
and (v) a decision by one or more exchanges to discontinue the trading of
options or impose restrictions on orders. In addition, the hours of trading for
options may not conform to the hours during which the underlying securities are
traded. To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets. The
purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Series
securities transactions.
Each exchange has established limitations governing the maximum number of
call options, whether or not covered, which may be written by a single investor
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written on one or more
accounts or through one or more brokers). An exchange may order the liquidation
of positions found to be in violation of these limits and it may impose other
sanctions or restrictions.
Options on Stock Indices. Options on stock indices are similar to options
on specific securities except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike options
on specific securities, all settlements of options on stock indices are in cash
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks. A stock index futures
contract is an agreement in which one party agrees to deliver to the other an
amount of cash equal to a specific amount multiplied by the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made.
No physical delivery of securities is made.
Risk Factors in Options on Indices. Because the value of an index option
depends upon the movements in the level of the index rather than upon movements
in the price of a particular security, whether the Series will realize a gain or
a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon the ability
of the Investment Adviser or Subadviser to predict correctly movements in the
direction of the market generally or in the direction of a particular industry.
This requires different skills and techniques than predicting changes in the
prices of individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Series would not be able to close
out options which it had written or purchased and, if restrictions on exercise
were imposed, might be unable to exercise an option it purchased, which would
result in substantial losses.
Price movements in Series securities will not correlate perfectly with
movements in the level of the index and therefore, a Series bears the risk that
the price of the securities may not increase as much as the level of the index.
In this event, the Series would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of the Series' securities does
not. If this occurred, a Series would experience a loss on the call which would
not be offset by an increase in the value of its securities and might also
experience a loss in the market value of its securities.
Unless a Series has other liquid assets which are sufficient to satisfy the
exercise of a call on the index, the Series will be required to liquidate
securities in order to satisfy the exercise.
When a Series has written a call on an index, there is also the risk that
the market may decline between the time the Series has the call exercised
against it, at a price which is fixed as of the closing level of the index on
the date of exercise, and the time the Series is able to sell securities. As
with options on securities, the Investment Adviser will not learn that a call
has been exercised until the day following the exercise date, but, unlike a call
on securities where the Series would be able to deliver the underlying security
in settlement, the Series may have to sell part of its securities in order to
make settlement in cash, and the price of such securities might decline before
they could be sold.
If a Series exercises a put option on an index which it has purchased
before final determination of the closing index value for the day, it runs the
risk that the level of the underlying index may change before closing. If this
change causes the exercised option to fall "out-of-the-money" the Series will be
required to pay the difference between the closing index value and the exercise
price of the option (multiplied by the applicable multiplier) to the assigned
writer. Although the Series may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
time for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
Trading in Futures. Underlying funds in which the Series invest may enter
into financial futures contracts, including stock and bond index, interest rate
and currency futures ("futures or futures contracts"). A futures contract
provides for the future sale by one party and purchase by another party of a
specified amount of a specific financial instrument (e.g., units of a stock
index) for a specified price, date, time and place designated at the time the
contract is made. Brokerage fees are incurred when a futures contract is bought
or sold and margin deposits must be maintained. Entering into a contract to buy
is commonly referred to as buying or purchasing a contract or holding a long
position. Entering into a contract to sell is commonly referred to as selling a
contract or holding a short position.
Unlike when an underlying fund purchases or sells a security, no price
would be paid or received by the underlying fund upon the purchase or sale of a
futures contract. Upon entering into a futures contract, and to maintain the
underlying fund's open positions in futures contracts, the underlying fund would
be required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash or liquid securities, known as "initial
margin." The margin required for a particular futures contract is set by the
exchange on which the contract is traded, and may be significantly modified from
time to time by the exchange during the term of the contract. Futures contracts
are customarily purchased and sold on margins that may range upward from less
than 5% of the value of the contract being traded.
Margin is the amount of funds that must be deposited by the underlying fund
with its custodian in a segregated account in the name of the futures commission
merchant in order to initiate futures trading and to maintain the underlying
fund's open position in futures contracts. A margin deposit is intended to
ensure the underlying fund's performance of the futures contract. The margin
required for a particular futures contract is set by the exchange on which the
futures contract is traded, and may be significantly modified from time to time
by the exchange during the term of the futures contract.
If the price of an open futures contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the underlying fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The underlying fund
expects to earn interest income on its margin deposits. Although certain futures
contracts, by their terms, require actual future delivery of and payment for the
underlying instruments, in practice most futures contracts are usually closed
out before the delivery date. Closing out an open futures contract purchase or
sale is effected by entering into an offsetting futures contract purchase or
sale, respectively, for the same aggregate amount of the identical securities
and the same delivery date. If the offsetting purchase price is less than the
original sale price, through its investment in the underlying fund the Series
realizes a gain; if it is more, through its investment in the underlying fund
the Series realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, through its investment in the underlying fund
the Series realizes a gain; if it is less, through its investment in the
underlying fund the Series realizes a loss. The transaction costs must also be
included in these calculations. There can be no assurance, however, that the
underlying fund will be able to enter into an offsetting transaction with
respect to a particular futures contract at a particular time. If the underlying
fund is not able to enter into an offsetting transaction, the underlying fund
will continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 500 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 500 Index, contracts are to buy or sell
500 units. Thus, if the value of the S&P 500 Index were $150, one contract would
be worth $75,000 (500 units x $150). The stock index futures contract specifies
that no delivery of the actual stock making up the index will take place.
Instead, settlement in cash occurs. Over the life of the contract, the gain or
loss realized by an underlying fund will equal the difference between the
purchase (or sale) price of the contract and the price at which the contract is
terminated. For example, if an underlying fund enters into a futures contract to
buy 500 units of the S&P 500 Index at a specified future date at a contract
price of $150 and the S&P 500 Index is at $154 on that future date, an
underlying fund will gain $2,000 (500 units x gain of $4). If an underlying fund
enters into a futures contract to sell 500 units of the stock index at a
specified future date at a contract price of $150 and the S&P 500 Index is at
$152 on that future date, an underlying fund will lose $1,000 (500 units x loss
of $2).
Options on futures are similar to options on underlying instruments except
that options on futures give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at any time during
the period of the option. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the futures contract.
Alternatively, settlement may be made totally in cash. Purchasers of options who
fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.
The writer of an option on a futures contract is required to deposit margin
pursuant to requirements similar to those applicable to futures contracts. Upon
exercise of an option on a futures contract, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Commissions on financial futures contracts and related options transactions
may be higher than those which would apply to purchases and sales of securities
directly.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that futures contracts trading in additional financial
instruments will be authorized. The standard contract size is generally $100,000
for futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA pass
through securities and $1,000,000 for the other designated futures contracts. A
public market exists in futures contracts covering a number of indexes,
including, but not limited to, the Standard & Poor's 500 Index, the Standard &
Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite Index and the
New York Stock Exchange Composite Index.
Stock index futures contracts may be used to provide a hedge for a portion
of a fund's portfolio, as a cash management tool, or as an efficient way for the
fund's investment adviser to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contacts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index. The fund may, however,
purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the fund's portfolio successfully, the fund must sell
futures contracts with respect to indexes or subindexes whose movements will
have a significant correlation with movements in the prices of the fund's
securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the underlying fund. In this
regard, the Series could sell interest rate or currency futures as an offset
against the effect of expected increases in interest rates or currency exchange
rates and purchase such futures as an offset against the effect of expected
declines in interest rates or currency exchange rates.
An underlying fund may enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means for an underlying fund to implement its objectives
in these areas.
Certain Risks Relating to Futures Contracts and Related Options. There are
special risks involved in futures transactions.
Volatility and Leverage. The prices of futures contracts are volatile and
are influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international policies and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage (although an underlying fund's use of futures
will not result in leverage, as is more fully described below). As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. However, the
underlying fund would presumably have sustained comparable losses if, instead of
the futures contract, it had invested in the underlying instrument and sold it
after the decline. Furthermore, in the case of a futures contract purchase, in
order to be certain that the underlying fund has sufficient assets to satisfy
its obligations under a futures contract, the underlying fund earmarks to the
futures contract cash or liquid securities equal in value to the current value
of the underlying instrument less the margin deposit.
Liquidity. The underlying fund may elect to close some or all of its
futures positions at any time prior to their expiration. The underlying fund
would do so to reduce exposure represented by long futures positions or increase
exposure represented by short futures positions. The underlying fund may close
its positions by taking opposite positions which would operate to terminate the
underlying fund's position in the futures contracts. Final determinations of
variation margin would then be made, additional cash would be required to be
paid by or released to the underlying fund, and the underlying fund would
realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the underlying fund intends
to purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract at any
particular time. In such event, it might not be possible to close a futures
contract, and in the event of adverse price movements, the underlying fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the underlying fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of the underlying
instruments, if any, might partially or completely offset losses on the futures
contract. However, as described below, there is no guarantee that the price of
the underlying instruments will, in fact, correlate with the price movements in
the futures contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior, market or interest rate trends. There are
several risks in connection with the use by an underlying fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge.
Successful use of futures contracts by underlying funds for hedging
purposes is also subject to the investment adviser's ability to correctly
predict movements in the direction of the market. It is possible that, when the
fund has sold futures to hedge its portfolio against a decline in the market,
the index, indices, or underlying instruments on which the futures are written
might advance and the value of the underlying instruments held in the fund's
portfolio might decline. If this were to occur, the underlying fund would lose
money on the futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a certain degree, it
is believed that over time the value of the underlying fund's portfolio will
tend to move in the same direction as the market indices which are intended to
correlate to the price movements of the underlying instruments sought to be
hedged. It is also possible that if the underlying fund were to hedge against
the possibility of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased, the underlying
fund would lose part or all of the benefit of increased value of those
underlying instruments that it has hedged, because it would have offsetting
losses in its futures positions. In addition, in such situations, if the
underlying fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The underlying fund might have
to sell underlying instruments at a time when it would be disadvantageous to do
so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors might close futures contracts through offsetting transactions which
could distort the normal relationship between the underlying instruments and
futures markets. Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets, and as a result the
futures market might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market might also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and also because of the imperfect correlation between price
movements in the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by the Investment
Adviser of the underlying fund might not result in a successful hedging
transaction over a very short time period.
Certain Risks of Options on Futures Contracts: An underlying fund may seek
to close out an option position by writing or buying an offsetting option
covering the same index, underlying instruments, or contract and having the same
exercise price and expiration date. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
Foreign Futures and Options. Participation in foreign futures and foreign
options transactions involves the execution and clearing of trades on or subject
to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, customers who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations and the rules of
the National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the Commission and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
In particular, funds received from an underlying fund for foreign futures or
foreign options transactions may not be provided the same protections as funds
received in respect of transactions on United States futures exchanges. In
addition, the price of any foreign futures or foreign options contract and,
therefore, the potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time an order is placed and the time it
is liquidated, offset or exercised.
Forward Currency Contracts and Related Options. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are principally traded in the interbank market conducted
directly between currency traders (usually large, commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
Depending on the investment policies and restrictions applicable to an
underlying fund, an underlying fund will generally enter into forward foreign
currency exchange contracts under two circumstances. First, when an underlying
fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency involved in the
underlying security transactions, the underlying fund will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received.
Second, when the investment adviser of the underlying fund believes that
the currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, including the U.S. dollar, it may enter into
a forward contract to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the
underlying fund may hedge all or part of its foreign currency exposure through
the use of a basket of currencies or a proxy currency where such currencies or
currency act as an effective proxy for other currencies. In such a case, the
underlying fund may enter into a forward contract where the amount of the
foreign currency to be sold exceeds the value of the securities denominated in
such currency. The use of this basket hedging technique may be more efficient
and economical than entering into separate forward contracts for each currency
held in the underlying fund. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
At the maturity of a forward contract, the underlying fund may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for an underlying fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the underlying fund is obligated to deliver and if a decision is made
to sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds the
amount of foreign currency the underlying fund is obligated to deliver. However,
as noted, in order to avoid excessive transactions and transaction costs, the
underlying fund may use liquid securities, denominated in any currency, to cover
the amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the underlying fund retains the portfolio security and engages in an
offsetting transaction, the underlying fund will incur a gain or a loss (as
described below) to the extent that there has been movement in forward contract
prices. If the underlying fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between the underlying fund
enters into a forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the underlying fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the underlying fund will suffer a loss
to the extent the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
It also should be realized that this method of hedging against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange at a future date.
Additionally, although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time, they tend to
limit any potential gain which might result from an increase in the value of
that currency.
Purchase and Sale of Currency Futures Contracts and Related Options. As
noted above, a currency futures contract sale creates an obligation by an
underlying fund, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a specified price. A currency futures
contract purchase creates an obligation by an underlying fund, as purchaser, to
take delivery of an amount of currency at a specified future time at a specified
price. Although the terms of currency futures contracts specify actual delivery
or receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. Unlike a currency futures contract, which requires the parties
to buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
Swaps, Caps, Floors and Collars. Underlying mutual funds in which the
Series may invest may enter into interest rate, securities index, commodity, or
security and currency exchange rate swap agreements for any lawful purpose
consistent with the fund's investment objective, such as for the purpose of
attempting to obtain or preserve a particular desired return or spread at a
lower cost to the underlying fund than if the underlying fund had invested
directly in an instrument that yielded that desired return or spread. The
underlying fund also may enter into swaps in order to protect against an
increase in the price of, or the currency exchange rate applicable to,
securities that the underlying fund anticipates purchasing at a later date. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to several years. In a standard
"swap" transaction, two parties agree to exchange the returns (or differentials
in rates of return) earned or realized on particular predetermined investments
or instruments. The gross returns to be exchanged or "swapped" between the
parties are calculated with respect to a "notional amount," i.e., the return on
or increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Swap agreements may include interest rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interests rates exceed a specified rate, or "cap";
interest rate floors under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest rate collars, under which a party
sells a cap and purchases a floor, or vice versa, in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the underlying fund, the
obligations of the parties would be exchanged on a "net basis." Consequently,
the underlying fund's obligation (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative value of the positions held by each party to the
agreement (the "net amount"). The underlying fund's obligation under a swap
agreement will be accrued daily (offset against amounts owed to the underlying
fund) and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities.
Whether an underlying fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on the investment
adviser's ability to predict correctly whether certain types of investments are
likely to produce greater returns than other investments. Swap agreements may be
considered to be illiquid. Moreover, the underlying fund bears the risk of loss
of the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Certain restrictions
imposed on the underlying fund by the Internal Revenue Code may limit an
underlying fund's ability to use swap agreements. The swaps market is largely
unregulated.
Spread Transactions. An underlying fund in which the Series invests may
purchase covered spread options from securities dealers. Such covered spread
options are not presently exchange-listed or exchange-traded. The purchase of a
spread option gives the underlying fund the right to put, or sell, a security
that it owns at a fixed dollar spread or fixed yield spread in relationship to
another security that the underlying fund does not own, but which is used as a
benchmark. The risk to the underlying fund in purchasing covered spread options
is the cost of the premium paid for the spread option and any transaction costs.
In addition, there is no assurance that closing transactions will be available.
The purchase of spread options will be used to protect the underlying fund
against adverse changes in prevailing credit quality spreads, i.e., the yield
spread between high quality and lower quality securities. Such protection is
only provided during the life of the spread option.
Hybrid Instruments. Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument ("Hybrid Instruments"). Often these Hybrid Instruments are indexed to
the price of a commodity or particular currency or a domestic or foreign debt or
equity securities index. Hybrid Instruments may take a variety of forms,
including, but not limited to, debt instruments with interest or principal
payments or redemption terms determined by reference to the value of a currency
or commodity at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. The risks of
investing in Hybrid Instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in this Statement of Additional Information for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Series and the seller of the Hybrid Instrument,
the creditworthiness of the contract party to the transaction would be a risk
factor which the Series would have to consider. Hybrid Instruments also may not
be subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.
Zero Coupon Securities. Zero coupon securities pay no cash income and are
sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
distributions of interest (cash). Zero coupon securities which are convertible
into common stock offer the opportunity for capital appreciation as increases
(or decreases) in market value, of such securities closely follows the movements
in the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks, as they usually are issued with maturities of 15 years or less and are
issued with options and/or redemption features exercisable by the holder of the
obligation entitling the holder to redeem the obligation and receive a defined
cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" (TIGRSTM) and Certificate of Accrual on Treasuries
(CATSTM). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Series, most
likely will be deemed the beneficial holder of the underlying U.S. Government
securities.
The U. S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Series will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry recordkeeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment in the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
When-Issued Securities. The Series may from time to time purchase
securities on a "when-issued" basis. At the time the Series makes the commitment
to purchase a security on a when-issued basis, it will record the transaction
and reflect the value of the security in determining its net asset value. The
Series do not believe that net asset value or income will be adversely affected
by purchase of securities on a when-issued basis. The Series will maintain cash
and marketable securities equal in value to commitments for when-issued
securities.
The price of when-issued securities, which may be expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally, the
settlement date occurs within 90 days of the purchase. During the period between
purchase and settlement no payment is made by the Series to the issuer and no
interest accrues to the Series. Forward commitments involve a risk of loss if
the value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the Series' other
assets. While when-issued securities may be sold prior to the settlement date,
the Series intend to purchase such securities for the purpose of actually
acquiring them unless a sale appears desirable for investment reasons.
Restricted Securities. Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
(the "1933 Act"). Where registration is required, the Series may be obligated to
pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the Series may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Series
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in accordance
with procedures prescribed by the Board of Directors. If through the
appreciation of restricted securities or the depreciation of unrestricted
securities or the depreciation of liquid securities, the Series should be in a
position where more than the percentage of its net assets permitted under the
respective Series operating policy are invested in illiquid assets, including
restricted securities, the Series will take appropriate steps to protect
liquidity.
The Series may purchase securities which while privately placed, are
eligible for purchase and sale under Rule 144A under the 1933 Act. This rule
permits certain qualified institutional buyers, such as the Series, to trade in
privately placed securities even though such securities are not registered under
the 1933 Act. The Investment Adviser, under the supervision of the Fund's Board
of Directors, will consider, with respect to any direct purchases by the Series,
whether securities purchased under Rule 144A are illiquid and thus subject to
the Series' restriction on investment of its assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination, the Investment Adviser or Subadviser will
consider the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Investment Adviser
or Subadviser could consider the (1) frequency of trades and quotes, (2) number
of dealers and potential purchasers, (3) dealer undertakings to make a market,
and (4) the nature of the security and of marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer). The liquidity of Rule 144A securities would be
monitored, and if as a result of changed conditions it is determined that a Rule
144A security is no longer liquid, the Series' holdings of illiquid securities
would be reviewed to determine what, if any, steps are required to assure that
the Series does not invest more than permitted in illiquid securities. Investing
in Rule 144A securities could have the effect of increasing the amount of the
Series' assets invested in illiquid securities if qualified institutional buyers
are unwilling to purchase such securities.
Warrants. Investment in warrants is pure speculation in that they have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. Warrants basically are options to purchase
equity securities at a specific price valid for a specific period of time. They
do not represent ownership of the securities but only the right to buy them.
Warrants differ from call options in that warrants are issued by the issuer of
the security which may be purchased on their exercise, whereas call options may
be written or issued by anyone. The prices of warrants do not necessarily move
parallel to the prices of the underlying securities, and a warrant ceases to
have value if it is not exercised prior to its expiration date.
Certain Risks of Foreign Investing
Political and Economic Risks. Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, the Series
(through its investments in ADRs) or an underlying fund in which the Series
invests could lose its entire investment in any such country to the extent it is
invested in such country.
An investment in non-U.S. companies is subject to the political and
economic risks associated with investments in emerging markets. Even though
opportunities for investment may exist in emerging markets, any change in the
leadership or policies of the governments of those countries or in the
leadership or policies of any other government which exercises a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities or ADRs purchased by a
Series or an underlying fund in which a Series invests. The claims of property
owners against those governments were never finally settled. There can be no
assurance that any property represented by ADRs or securities purchased by the
Series or an underlying fund will not also be expropriated, nationalized, or
otherwise confiscated. If such confiscation were to occur, the Series could lose
a substantial portion of its investments in such countries. The Series'
investments would similarly be adversely affected by exchange control regulation
in any of those countries.
Religious and Ethnic Instability. Certain countries in which the Series or
an underlying fund in which a Series may invest may have vocal minorities that
advocate radical religious or revolutionary philosophies or support ethnic
independence. Any disturbance on the part of such individuals could carry the
potential for wide-spread destruction or confiscation of property owned by
individuals and entities foreign to such country and could cause the loss of the
Series' investment in those countries.
Foreign Investment Restrictions. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Series. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investments by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. A Series could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
Non-Uniform Corporate Disclosure Standards and Governmental Regulation.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the securities or ADRs held by the Series or held
by underlying funds in which the Series invest will not be registered with the
SEC or regulators of any foreign country, nor will the issuers thereof be
subject to the SEC's reporting requirements. Thus, there will be less available
information concerning foreign issuers of these securities than is available
concerning U.S. issuers. There is substantially less publicly available
information about foreign companies than there are reports and ratings published
about U.S. companies and the U.S. Government. In addition, where public
information is available, it may be less reliable than such information
regarding U.S. issuers.
Currency Fluctuations. Because a Series, under normal circumstances, may
indirectly invest a significant portion of its total assets in the securities of
foreign issuers which are denominated in foreign currencies, the strength or
weakness of the U.S. dollar against such foreign currencies will account for
part of the Series' investment performance. A decline in the value of any
particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of the underlying fund's holdings of securities denominated in such
currency and, therefore, will cause an overall decline in the Series' net asset
value.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.
Adverse Market Characteristics. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of an
underlying fund in which a Series is invested are uninvested and no return is
earned thereon. The inability of an underlying fund in which a Series is
invested to make intended security purchases due to settlement problems could
cause it to miss attractive opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to an
underlying fund due to subsequent declines in value of the portfolio security
or, if an underlying fund in which a Series is invested has entered into a
contract to sell the security, could result in possible liability to the
purchaser. The Investment Adviser or Subadviser will consider such difficulties
when determining the allocation of the Series' assets.
Non-U.S. Withholding Taxes. Investment income and gains from foreign
issuers may be subject to non-U.S. withholding and other taxes, thereby reducing
the Series' investment income and gains.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may at times limit or preclude investment in
certain of such countries and may increase the costs and expenses of doing so.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may invest.
In addition, the repatriation of both investment income and capital from several
foreign countries is restricted and controlled under certain regulations,
including in some cases the need for certain government consents. These
restrictions may in the future make it undesirable to invest in these countries.
Market Characteristics. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and securities traded on such markets may be less
liquid and more volatile than securities of comparable U.S. companies. Equity
securities may trade at price/earnings multiples higher than comparable United
States securities and such levels may not be sustainable. Fixed commissions on
foreign stock exchanges are generally higher than negotiated commissions on
United States exchanges. There is generally less government supervision and
regulation of foreign stock exchanges, brokers and listed companies than in the
United States. Moreover, settlement practices for transactions in foreign
markets may differ from those in United States markets, and may include delays
beyond periods customary in the United States.
Information and Supervision. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies.
Costs. Investors should understand that the expense ratio of an underlying
fund that invests in foreign securities can be expected to be higher than
investment companies investing in domestic securities since the cost of
maintaining the custody of foreign securities and the rate of advisory fees paid
by the Series to invest in such underlying fund are higher.
INVESTMENT POLICY LIMITATIONS
The Series operate within certain investment limitations which cannot be
changed without the approval of the holders of a majority of the outstanding
shares of the respective Series. Pursuant thereto, none of the Series will:
1. Purchase a security if, as a result, with respect to 75% of the value of
its total assets, more than 5% of the value of its total assets would be
invested in the securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities).
2. Purchase more than 10% of the outstanding voting securities of any one
issuer.
3. Underwrite securities of other issuers.
4. Borrow money or pledge, mortgage or hypothecate its assets, except that a
Series may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets
in connection therewith, but only if immediately after each borrowing there
is asset coverage of 300%, and (ii) enter into transactions in options,
futures, options on futures, and other derivative instruments as described
in the Fund's registration statement. The deposit of assets in escrow in
connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis,
collateral arrangements with respect to initial or variation margin
deposits for futures contracts and commitments entered into under swap
agreements or other derivative instruments, will not be deemed to be
pledges of a Series' assets.
5. Make loans to other persons, except by entry into repurchase agreements or
by the purchase, upon original issuance or otherwise, of a portion of an
issue of publicly distributed bonds, notes, debentures or other securities.
6. Concentrate investments in particular industries or make an investment in
any one industry if, when added to its other investments, total investments
in the same industry then held by the Series would exceed 25% of the value
of its assets.
7. Purchase or sell interests in real estate except as are represented by
securities of companies, including real estate trusts whose assets consist
substantially of interests in real estate, including obligations secured by
real estate or interests therein and which therefore may represent indirect
interest in real estate.
8. Own, buy, sell or otherwise deal in commodities or commodities contracts;
provided, however, that the Series may enter into forward currency
contracts and other forward commitments, swap agreements, and transactions
in futures, options and options on futures.
9. Issue senior securities, except as permitted under the 1940 Act. The
following notes should be read in connection with the above-described
fundamental policies. The notes are not fundamental policies.
For purposes of investment restrictions 4 and 9, to the extent a Series
covers its commitment under a reverse repurchase agreement (or economically
similar transaction) by the maintenance of a segregated account consisting of
liquid assets, such an agreement will not be considered a "senior security" by
the Series and therefore will not be subject to the 300% asset coverage
requirement otherwise applicable to borrowings by the Series.
For purposes of investment restriction 5, the Series will consider the
acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
For purposes of investment restriction 6, U.S., state or local governments,
or related agencies or instrumentalities, are not considered an industry.
Industries are determined by reference to the classifications of industries set
forth in the Series' semiannual and annual reports. This investment restriction
does not apply to investments by the Series in issues in the investment company
industry.
With respect to investment restriction 8, the Fund does not interpret this
restriction as prohibiting transactions in currency contracts, hybrid
instruments, options, financial futures contracts or options on financial
futures contracts or from investing in securities or other instruments backed by
physical commodities.
OFFICERS AND DIRECTORS
The directors and officers of the Fund and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the address
of each officer and director is 700 SW Harrison Street, Topeka, Kansas
66636-0001.
<TABLE>
<S> <C>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member Representative,
Security Management Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors. Prior to 1997,
2222 SW 29th Street President, Neon Tube Light Company, Inc.
Topeka, Kansas 66611
PENNY A. LUMPKIN,** Director Vice President, Palmer News Companies, Inc. (Wholesalers,
3616 Canterbury Town Road Retailers and Developers) and Bellaire Shopping Center
Topeka, Kansas 66610 (Leasing and Shopping Center Management); Secretary-
Treasurer, Palmer News, Inc. (Wholesale Distributors).
MARK L. MORRIS, JR.,** Director Retired Former General Partner, Mark Morris Associates
5500 SW 7th Street (Veterinary Research and Education).
Topeka, Kansas 66606
JAMES R. SCHMANK,* Vice President and Director President and Managing Member Representative, Security
Management Company, LLC; Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
RICHARD K. RYAN, Vice President President and Director, Security Distributors, Inc.; Senior
Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
AMY J. LEE, Secretary Secretary, Security Management Company, LLC; Vice
President, Associate General Counsel and Assistant
Secretary, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
BRENDA M. HARWOOD, Treasurer Assistant Vice President and Treasurer, Security Management
Company, LLC; Assistant Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Secretary, Security Management Company, LLC;
Assistant Vice President and Assistant Counsel, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company.
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
*These directors are deemed to be "interested persons" of the Fund under the 1940 Act.
**These directors serve on the Fund's audit committee, the purpose of which is to meet with the independent auditors, to
review the work of the auditors, and to oversee the handling by Security
Management Company, LLC of the accounting functions for the Fund.
- -----------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
REMUNERATION OF DIRECTORS AND OTHERS
The Fund pays each of its directors, except those directors who are
"interested persons" of the Fund, a fee of $250 per meeting, plus reasonable
travel costs, for each meeting of the board attended. [DIRECTOR COMPENSATION
TABLE TO BE PROVIDED.]
The Fund does not pay any fees to, or reimburse expenses of, its Directors
who are considered "interested persons" of the Fund.
It is expected that the Fund's officers and directors (as a group) will
beneficially own variable contracts entitling them to give voting instructions
with respect to less than 1% of the outstanding shares of the Fund.
SALE AND REDEMPTION OF SHARES
Shares of the Fund are sold and redeemed at their net asset value next
determined after receipt of a purchase or redemption order. No sales or
redemption charge is made. The value of shares redeemed may be more or less than
the shareholder's cost, depending upon the market value of the portfolio
securities at the time of redemption. Payment for shares redeemed will be made
as soon as practicable after receipt, but in no event later than seven days
after tender, except that the Fund may suspend the right of redemption during
any period when trading on the New York Stock Exchange is restricted or such
Exchange is closed for other than weekends or holidays, or any emergency is
deemed to exist by the SEC.
INVESTMENT MANAGEMENT
Private Consulting Group, Inc., 4650 SW Macadam Avenue, Portland, Oregon
97201, serves as investment adviser to the Fund.
The Investment Adviser is an affiliate of Interwest Financial Advisers,
Inc. and is a subsidiary of Interwest Financial Group. The Investment Adviser is
a corporation organized under the laws of the State of Oregon. The Investment
Adviser serves as investment adviser to the Fund under an Investment Advisory
Contract dated [______, 1998], which was approved by the board of directors of
the Fund at a regular meeting held on ____________, 1998. The contract may be
terminated without penalty at any time by either party on 60 days' written
notice and is automatically terminated in the event of its assignment.
Pursuant to the Investment Advisory Contract, the Investment Adviser
furnishes investment advisory, statistical and research facilities, supervises
and arranges for the purchase and sale of securities on behalf of the Fund, and
provides for the compilation and maintenance of records pertaining to the
investment advisory function. For such services, the Investment Adviser is
entitled to receive compensation on an annual basis equal to 0.75% of each
Series' average daily net assets, computed on a daily basis and payable monthly.
The Fund will pay all its expenses not assumed by the Investment Advisor
including directors' fees; fees and expenses of custodian; taxes and
governmental fees; interest charges; any membership dues; brokerage commissions;
reports, proxy statements, and notices to stockholders; costs of stockholder and
other meetings; and legal, auditing and accounting expenses. The Fund will also
pay all expenses in connection with the Fund's registration under the 1940 Act
and the registration of its capital stock under the Securities Act of 1933, as
amended.
Mench Financial, Inc., 30 West Third Street, Fourth Floor, Cincinnati,
Ohio, 45202 acts as portfolio manager and subadviser for PCG Aggressive Growth.
The Subadviser receives compensation on an annual basis equal to ____% of the
0.75% of PCG Aggressive Growth's average daily net assets, computed on a daily
basis and payable monthly, which is paid to the Investment Advisor.
Administrator, Transfer Agent and Dividend Disbursing Agent
Pursuant to an Administrative Services and Transfer Agency Agreement, dated
[insert date], as amended, Security Management Company, LLC ("SMC" or the
"Administrator") acts as the administrative agent, transfer agent and dividend
disbursing agent for each Series of the Fund. As such, SMC performs
administrative functions, fund accounting, transfer agency, dividend disbursing
services, bookkeeping, accounting and pricing functions for the Fund. For
providing these services SMC receives, from each Series of the Fund an annual
maintenance fee of $8.00 per account, an annual accounting fee of the greater of
$15,000 or 0.03% of the average daily net asset value of the Series and an
annual administration fee of 0.045% of the daily net asset value of the Series.
SMC is a limited liability company ultimately controlled by SBL.
Distribution
Shares of the Fund will be offered to certain SBL variable annuity and
variable life insurance separate accounts. Shares of the Fund will be sold to
SBL for allocation to such separate accounts which are established for the
purpose of funding variable annuity contracts and variable life insurance
policies issued by SBL.
Services Plan
Each Series of the Fund has adopted a Services Plan (the "Plan") which
provides that each Series will make payments in an amount not to exceed on an
annual basis 0.50% of the average daily net asset value of the shares of the
Series attributable to Shares held by certain qualified retirement plans or by
variable insurance contracts funded by the Fund to the extent that a registered
investment adviser, registered broker-dealer, bank, trust company or other
person or entity ("Authorized Firms") provide the services contemplated by the
Plan. The Authorized Firms will provide certain service activities to the
investors, and the Fund will enter into agreements ("Services Agreements") with
Authorized Firms.
The Directors of the Fund, including a majority of the Directors who are
not interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or the related Services Agreements, voted
to adopt the Plan and Services Agreements at a meeting on _______, 1998. The
Plan and Services Agreements will remain in effect for a period of one year and
will continue in effect thereafter only if such continuance is specifically
approved annually by a vote of the Directors in the manner described above. All
material amendments of the Plan must also be approved by the Directors in the
manner described above. The Plan may be terminated at any time by a majority of
the Directors as described above or by vote of a majority of the outstanding
shares of the affected Series. The Services Agreements may be terminated at any
time, without payment of any penalty, by vote of a majority of the Directors as
described above or by a vote of the majority of the outstanding shares of the
affected Series on not more than 60 days' written notice to any other party to
the Services Agreements. The Services Agreements shall terminate automatically
if assigned. The Directors have determined that, in their judgment, there is a
reasonable likelihood that the Plan will benefit the Fund and the investors. In
the Directors' quarterly review of the Plan and Services Agreements, they will
consider their continued appropriateness and the level of compensation provided
therein.
The intent of the Plan and Services Agreements is to procure quality
services on behalf of investors in the Fund; in adopting the Plan and Services
Agreements, the Directors considered the fact that such services may have the
effect of enhancing distribution of shares of the Fund and growth of the Fund.
In light of this, the Fund intends to observe the procedural requirements of
Rule 12b-1 under the 1940 Act on considering the continued appropriateness of
the Plan and Services Agreements.
PORTFOLIO TURNOVER
[Anticipated portfolio turnover information to be provided.]
Portfolio turnover is defined as the lesser of purchases or sales of
portfolio securities divided by the average market value of portfolio securities
owned during the year, determined monthly.
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus for the Fund, the net asset value per share
of each Series is determined as of the close of regular trading hours on the New
York Stock Exchange (normally 3:00 p.m. Central time) on each day that the
Exchange is open for trading (other than a day on which no shares of a Series
are tendered for redemption and no order to purchase shares of a Series is
received). The New York Stock Exchange is open for trading Monday through Friday
except when closed in observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, July
Fourth, Labor Day, Thanksgiving Day and Christmas. The determination is made by
dividing the value of the portfolio securities of each Series, plus any cash or
other assets (including dividends accrued but not collected), less all
liabilities (including accrued expenses but excluding capital and surplus), by
the number of shares of each Series outstanding. In determining asset value,
securities listed or traded on a recognized securities exchange are valued on
the basis of the last sale price. If there are no sales on a particular day,
then the securities shall be valued at the last bid price. All other securities
for which market quotations are available are valued on the basis of the last
current bid price. If there is no bid price, or if the bid price is deemed to be
unsatisfactory by the board of directors or the Fund's Administrator, then the
securities shall be valued in good faith by such method as the board of
directors determines will reflect their fair market value. Circumstances under
which the board of directors or the Fund's Administrator may consider the bid
price include instances in which the spread between the bid and the asked prices
is substantial, trades have been infrequent or the size of the trades which have
occurred are not representative of the Fund's holdings.
As stated in the Prospectus, the Fund's short-term debt securities may be
valued by the amortized cost method. As a result of using this method, during
periods of declining interest rates, the yield on shares of these Series
(computed by dividing the annualized income of the Fund by the net asset value
computed as described above) may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Fund for instruments with
remaining maturities of 60 days or less resulted in a lower aggregate portfolio
value on a particular day, a prospective investor would be able to obtain a
somewhat higher yield than would result from investment in a fund utilizing
solely market values and existing investors in these Series would receive less
investment income. The converse would apply in a period of rising interest
rates. To the extent that, in the opinion of the board of directors, the
amortized cost value of a portfolio instrument or instruments does not represent
fair value thereof as determined in good faith, the board of directors will take
appropriate action which would include a revaluation of all or an appropriate
portion of the portfolio based upon current market factors.
For purposes of determining the net asset value per share of the Fund, all
assets and liabilities initially expressed in foreign currencies will be
converted into United States dollars at the mean between the bid and offer
prices of such currencies against United States dollars quoted by any major U.S.
bank.
PORTFOLIO TRANSACTIONS
Transactions in portfolio securities shall be effected in such manner as
deemed to be in the best interests of the Fund and the respective Series. In
reaching a judgment relative to the qualifications of a broker-dealer ("broker")
to obtain the best execution of a particular transaction, all relevant factors
and circumstances will be taken into account by the Investment Adviser or
Subadviser, including the overall reasonableness of commissions paid to the
broker, the firm's general execution and operational capabilities and its
reliability and financial condition. The execution of portfolio transactions may
be directed to brokers who furnish investment information or research services
to the Investment Adviser or Subadviser. Such information and research services
include advice as to the value of securities, the advisability of investing in,
purchasing, or selling securities, the availability of securities or purchasers
or sellers of securities, and furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts. Such investment information and research services may
be furnished by brokers in many ways, including: (1) on-line data base systems,
the equipment for which is provided by the broker, that enable registrant to
have real-time access to market information, including quotations; (2) economic
research services, such as publications, chart services and advice from
economists concerning macroeconomic information; and (3) analytical investment
information concerning particular corporations. If a transaction is directed to
a broker supplying such information or services, the commission paid for such
transaction may be in excess of the commission another broker would have charged
for effecting that transaction, provided that the Investment Adviser or
Subadviser shall have determined in good faith that the commission is reasonable
in relation to the value of the investment information or research services
provided, viewed in terms of either that particular transaction or the overall
responsibilities of the Investment Adviser or Subadviser with respect to all
accounts as to which it exercises investment discretion. The Investment Adviser
or Subadviser may use all, none or some of such information and services in
providing investment advisory services to its clients, including the Fund.
In addition, brokerage transactions may be placed with brokers who sell
variable contracts offered by SBL and who may or may not also provide investment
information and research services. The Investment Adviser or Subadviser may,
consistent with the NASD Conduct Rules, consider sales of variable contracts in
the selection of a broker. The Fund may also buy securities from, or sell
securities to, dealers acting as principals or market makers.
Securities held by the Series may also be held by other investment advisory
clients of the Investment Adviser or Subadviser, including other investment
companies. When selecting securities for purchase or sale for a Series, the
Investment Adviser or Subadviser may at the same time be purchasing or selling
the same securities for one or more of such other accounts. Subject to the
Investment Adviser's and Subadviser's obligation to seek best execution, such
purchases or sales may be executed simultaneously or "bunched." It is the policy
of the Investment Adviser and Subadviser not to favor one account over the
other. Any purchase or sale orders executed simultaneously are allocated at the
average price and as nearly as practicable on a pro rata basis (transaction
costs will also generally be shared on a pro rata basis) in proportion to the
amounts desired to be purchased or sold by each account. In those instances
where it is not practical to allocate purchase or sale orders on a pro rata
basis, then the allocation will be made on a rotating or other equitable basis.
While it is conceivable that in certain instances this procedure could adversely
affect the price or number of shares involved in a Series' transaction, it is
believed that the procedure generally contributes to better overall execution of
the Series' portfolio transactions. With respect to the allocation of initial
public offerings ("IPOs"), the Investment Adviser or Subadviser may determine
not to purchase such offerings for certain of its clients (including investment
company clients) due to the limited number of shares typically available to the
Investment Adviser or Subadviser in an IPO.
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS
The following summarizes certain federal income tax considerations
generally affecting the Series. No attempt is made to present a detailed
explanation of the tax treatment of the Series or their shareholders. The
discussion is based upon present provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the regulations promulgated thereunder, and
judicial and administrative ruling authorities, all of which are subject to
change, which change may be retroactive.
Each Series intends to qualify annually and to elect to be treated as a
regulated investment company under the Code.
To qualify as a regulated investment company, each Series must, among other
things: (i) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities, or currencies ("Qualifying Income Test"); (ii) diversify
its holdings so that, at the end of each quarter of the taxable year, (a) at
least 50% of the market value of the Series' assets is represented by cash, cash
items, U.S. Government securities, the securities of other regulated investment
companies, and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Series' total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Series controls (as that term is
defined in the relevant provisions of the Code) and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses; and (iii) distribute at least 90% of the sum of its investment
company taxable income (which includes, among other items, dividends, interest,
and net short-term capital gains in excess of any net long-term capital losses)
and its net tax-exempt interest each taxable year. The Treasury Department is
authorized to promulgate regulations under which foreign currency gains would
constitute qualifying income for purposes of the Qualifying Income Test only if
such gains are directly related to investing in securities (or options and
futures with respect to securities). To date, no such regulations have been
issued.
A Series qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Series intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and any net capital
gains.
Generally, regulated investment companies, like the Series, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Series intends
to make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Series in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Series
during January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. The
excise tax provisions described above do not apply to a regulated investment
company, like a Series, all of whose shareholders at all times during the
calendar year are segregated asset accounts of life insurance companies where
the shares are held in connection with variable contracts. (For this purpose,
any shares of a Series attributable to an investment in the Series not exceeding
$250,000 made in connection with the organization of the Series shall not be
taken into account.) Accordingly, if this condition regarding the ownership of
shares of a Series is met, the excise tax will be inapplicable to that Series.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Series were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Series
would not qualify for the favorable federal income tax treatment afforded
regulated investment companies, or, even if it did so qualify, it might become
liable for federal taxes on undistributed income. In addition, the ability of a
Series to obtain timely and accurate information relating to its investments is
a significant factor in complying with the requirements applicable to regulated
investment companies, in making tax-related computations, and in complying with
the Code Section 817(h) diversification requirements. Thus, if a Series were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, its tax computations might be subject
to revisions (which could result in the imposition of taxes, interest and
penalties), or it might be unable to satisfy the Code Section 817(h)
diversification requirements.
Code Section 817(h) Diversification. To comply with regulations under
Section 817(h) of the Code, each Series will be required to diversify its
investments so that on the last day of each quarter of a calendar year, no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by any
four investments. Generally, securities of a single issuer are treated as one
investment and obligations of each U.S. Government agency and instrumentality
are treated for purposes of Section 817(h) as issued by separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contractowner's control of the
investments of a separate account may cause the contractowner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contractowner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contractowner's gross income. These future
rules and regulations proscribing investment control may adversely affect the
ability of certain Series of the Fund to operate as described herein. There is,
however, no certainty as to what standards, if any, Treasury will ultimately
adopt. In the event that unfavorable rules or regulations are adopted, there can
be no assurance that the Series will be able to operate as currently described
in the Prospectus, or that a Series will not have to change its investment
objective or objectives, investment policies, or investment restrictions.
Passive Foreign Investment Companies. Some of the Series may invest in
stocks of foreign companies that are classified under the Code as passive
foreign investment companies ("PFICs"). In general, a foreign company is
classified as a PFIC if at least one half of its assets constitutes
investment-type assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received with respect to
PFIC stock is treated as having been realized ratably over a period during which
the Series held the PFIC stock. The Series itself will be subject to tax on the
portion, if any, of the excess distribution that is allocated to the Series'
holding period in prior taxable years (an interest factor will be added to the
tax, as if the tax had actually been payable in such prior taxable years) even
though the Series distributes the corresponding income to shareholders. Excess
distributions include any gain from the sale of PFIC stock as well as certain
distributions from a PFIC. All excess distributions are taxable as ordinary
income.
A Series may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Series
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. Alternatively, a Series may elect to mark-to-market its PFIC stock at the
end of each taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they were realized
and reported as ordinary income. Any mark-to-market losses and any loss from an
actual disposition of PFIC shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Series
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
Options, Futures and Forward Contracts and Swap Agreements. Certain
options, futures contracts, and forward contracts in which a Series may invest
may be "Section 1256 contracts." Gains or losses on Section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses; however, foreign currency gains or losses arising from certain Section
1256 contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Series at the end of each taxable year (and at certain other
times as prescribed pursuant to the Code) are "marked to market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Series may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Series. In addition, losses
realized by a Series on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures, forward
contracts, swap agreements and other financial contracts to a Series are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by a Series which is taxed as ordinary income when distributed to
shareholders.
A Series may make one or more of the elections available under the Code
which are applicable to straddles. If a Series makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Because only a few regulations regarding the treatment of swap agreements,
and related caps, floors and collars, have been implemented, the tax
consequences of such transactions are not entirely clear. The Series intend to
account for such transactions in a manner deemed by them to be appropriate, but
the Internal Revenue Service might not necessarily accept such treatment. If it
did not, the status of a Series as a regulated investment company, and the
Series' ability to satisfy the Code Section 817(h) diversification requirements,
might be affected.
The requirements applicable to a Series' qualification as a regulated
investment company may limit the extent to which a Series will be able to engage
in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
Market Discount. If a Series purchases a debt security at a price lower
than the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Series in
each taxable year in which the Series owns an interest in such debt security and
receives a principal payment on it. In particular, the Series will be required
to allocate that principal payment first to the portion of the market discount
on the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a Series at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Series, at
a constant yield to maturity which takes into account the semi-annual
compounding of interest. Gain realized on the disposition of a market discount
obligation must be recognized as ordinary interest income (not capital gain) to
the extent of the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Series may
be treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by a Series, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies.
Some debt securities may be purchased by the Series at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
Constructive Sales. Recently enacted rules may affect the timing and
character of gain if a Series engages in transactions that reduce or eliminate
its risk of loss with respect to appreciated financial positions. If the Series
enters into certain transactions in property while holding substantially
identical property, the Series would be treated as if it had sold and
immediately repurchased the property and would be taxed on any gain (but not
loss) from the constructive sale. The character of gain from a constructive sale
would depend upon the Series' holding period in the property. Loss from a
constructive sale would be recognized when the property was subsequently
disposed of, and its character would depend on the Series' holding period and
the application of various loss deferral provisions of the Code.
Foreign Taxation. Income received by a Series from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes. The payment of such taxes will reduce the amount of dividends and
distributions paid to shareholders.
Foreign Currency Transactions. Under the Code, gains or losses attributable
to fluctuations in exchange rates which occur between the time a Series accrues
income or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time that Series actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Series' investment company taxable
income to be distributed to its shareholders as ordinary income.
Distributions. Distributions of any investment company taxable income by a
Series are taxable to the shareholders as ordinary income. Net capital gains
designated by a Series as capital gain dividends will be treated, to the extent
distributed, as long-term capital gains in the hands of the shareholders,
regardless of the length of time the shareholders may have held the shares, and
will generally be taxable at a maximum rate of 20% or 28%, depending upon the
fund's holding period for the assets whose sale produces the gain. Any
distributions that are not from a Series' investment company taxable income or
net capital gains may be characterized as a return of capital to shareholders
or, in some cases, as capital gain. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by a Series in October,
November or December of that year to shareholders of record on a date in such a
month and paid by the Series during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which they
are declared, rather than the calendar year in which they are received.
Other Taxes. The foregoing discussion is general in nature and is not
intended to provide an exhaustive presentation of the tax consequences of
investing in a Series. Distributions may also be subject to additional state,
local and foreign taxes, depending on each shareholder's particular situation.
Depending upon the nature and extent of a Series' contacts with a state or local
jurisdiction, the Series may be subject to the tax laws of such jurisdiction if
it is regarded under applicable law as doing business in, or as having income
derived from, the jurisdiction. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Series.
CAPITAL STOCK AND VOTING
The Fund has authorized the issuance of an indefinite number of shares of
capital stock of no par value. Its shares are currently issued in four Series:
PCG Growth Series, PCG Aggressive Growth Series, SIM Growth Series, SIM
Conservative Growth Series. The shares of each Series represent pro rata
beneficial interest in that Series' assets and in the earnings and profits or
losses derived from the investment of such assets. Upon issuance and sale, such
shares will be fully paid and nonassessable. They are fully transferable and
redeemable. These shares have no preemptive rights, but the stockholders of each
Series are entitled to receive dividends as declared for that Series by the
board of directors of the Fund.
Within each respective Series, each share has equal voting rights with each
other share and there are no preferences as to conversion, exchange, retirement
or liquidation. On other matters, all shares, (irrespective of Series) are
entitled to one vote each. Pursuant to the rules and regulations of the SEC, in
certain instances, a vote of the outstanding shares of the combined Series may
not modify the rights of holders of a particular Series without the approval of
a majority of the shares of that Series.
CUSTODIAN
UMB Bank, N.A. has been approved by the Fund's Board of Directors to serve
as custodian for the Fund's assets.
The firm of Ernst & Young, LLP, has been approved by the Fund's
stockholders to serve as the Fund's independent auditors, and as such, the firm
will perform the annual audit of the Fund's financial statements.
COUNSEL
Legal matters for the Fund are handled by Dechert Price & Rhoads, 1775 Eye
Street, N.W., Washington, D.C. 20006.
PERFORMANCE INFORMATION
The Fund may, from time to time, include the average annual total return
and the total return of the Series in advertisements or reports to shareholders
or prospective investors.
Quotations of average annual total return for a Series will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Series over certain periods that will include periods of 1, 5
and 10 years (up to the life of the Series), calculated pursuant to the
following formula:
P(1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures assume that all dividends and distributions are reinvested when
paid.
Quotations of total return for any Series will also be based on a
hypothetical investment in the Series for a certain period, and will assume that
all dividends and distributions are reinvested when paid. The total return is
calculated by subtracting the value of the investment at the beginning of the
period from the ending value and dividing the remainder by the beginning value.
Performance information for a Series may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average ("DJIA"), or other unmanaged indices so that investors may
compare a Series' results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(ii) other groups of mutual funds tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall performance
or other criteria; and (iii) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment in the Series. Unmanaged
indices may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Such mutual fund rating services include the following: Lipper Analytical
Services; Morningstar, Inc.; Investment Company Data; Schabacker Investment
Management; Wiesenberger Investment Companies Service; Computer Directions
Advisory (CDA); and Johnson's Charts.
Quotations of average annual total return or total return for the Fund will
not take into account charges and deductions against the Separate Accounts to
which the Fund shares are sold or charges and deductions against the Contracts
issued by SBL. Performance information for any Series reflects only the
performance of a hypothetical investment in the Series during the particular
time period on which the calculations are based. Performance information should
be considered in light of the Series' investment objectives and policies,
characteristics and quality of the portfolios and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future.
FINANCIAL STATEMENTS
There are no financial statements for the Fund at this time as it did not
begin operations until ____________.
<PAGE>
APPENDIX
DESCRIPTION OF SHORT-TERM INSTRUMENTS
U.S. Government Securities. Federal agency securities are debt obligations
which principally result from lending programs of the U.S. Government. Housing
and agriculture have traditionally been the principal beneficiaries of federal
credit programs, and agencies involved in providing credit to agriculture and
housing account for the bulk of the outstanding agency securities.
Some U.S. Government securities, such as treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury, others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
U.S. Treasury bills are issued with maturities of any period up to one
year. Three-month bills are currently offered by the Treasury on a 13-week cycle
and are auctioned each week by the Treasury. Bills are issued in bearer form
only and are sold only on a discount basis, and the difference between the
purchase price and the maturity value (or the resale price if they are sold
before maturity) constitutes the interest income for the investor.
Certificates of Deposit. A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate.
Commercial Paper. Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from a few days to nine
months. Commercial paper is also sold on a discount basis.
Bankers' Acceptances. A banker's acceptance generally arises from a
short-term credit arrangement designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred to
by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of 10 years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated "A" by Standard & Poor's Ratings Services ("S&P")
has the highest rating and is regarded as having the greatest capacity for
timely payment. Commercial paper rated A-1 by S&P has the following
characteristics. Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated A-1, A-2 or A-3.
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Standard & Poor's Ratings Services
AAA - Bonds rated AAA have the highest rating assigned by S&P to debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid. D - Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
<PAGE>
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<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Included in Part A:
Included in Part B:
(b) Exhibits
(1) Form of Articles of Incorporation filed April 29,
1998
(2) Form of By-Laws
(3) Not Applicable
(4) Not Applicable
(5) (i) Form of Advisory Agreement between
Advisor's Fund and Private Consulting
Group, Inc*
(ii) Form of Subadvisory Agreement between Private
Consulting Group, Inc. and Mench Financial,
Inc.*
(6) Not Applicable
(7) Not Applicable
(8) Form of Custody Agreement between UMB Bank, N.A. and
Security Management Company Family of Funds
(9) (i) Form of Administrative Services and Transfer
Agency Agreement between Advisor's Fund and
Security Management Company, LLC
(ii) Form of Services Agreement
(10) (i) Opinion of Counsel*
(ii) Consent of Counsel*
(11) Consent of Independent Auditors*
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Calculation of Performance Data*
(17) Financial Data Schedule*
(18) Not Applicable
- ----------
* To be filed by amendment.
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
No person is controlled by or under common control with the
Registrant.
Item 26. Number of Holders of Securities
There is no shareholder of record as of the date of this filing.
Item 27. Indemnification
Reference is made to Article Eleventh of the Registrant's Articles of
Incorporation (Exhibit 1)which is incorporated by reference herein.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant by the Registrant pursuant to
the Fund's Articles of Incorporation, its By-Laws or otherwise, the
Registrant is aware that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed
in the Act and, therefore, is unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by directors, officers
or controlling persons of the Registrant in connection with the
successful defense of any act, suit or proceeding) is asserted by such
directors, officers or controlling persons in connection with shares
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issues.
Item 28. Business and Other Connections of Investment Adviser
Information as to the directors and officers of the Investment Advisor
and Subadvisor, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in
by the directors and officers of the Investment Advisor and the
Subadvisor in the last two years, is included in their applications
for registration as investment advisers on Form ADV filed under the
Investment Advisers Act of 1940, as amended, and is incorporated
herein by reference thereto (Private Consulting Group, Inc.: File No.
801-53674; Mench Financial, Inc.: File No. 801-48232).
Item 29. Principal Underwriter
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
Item 30. Location of Accounts and Records
The account books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of
1940 and the Rules thereunder will be maintained at the offices of
Security Management Company, LLC whose principal business address is
700 SW Harrison Street, Topeka, Kansas 66636-0001.
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) Not Applicable
(b) Registrant undertakes to furnish each person to whom a prospectus
is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(c) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a person
serving as Director if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of
Registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Topeka in the State of Kansas on the
11th day of May, 1998.
ADVISOR'S FUND
By: /s/ John D. Cleland
John D. Cleland
President
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signatures Title Date
/s/ Donald A. Chubb, Jr. Director May 11, 1998
Donald A. Chubb, Jr.
/s/ John D. Cleland President and Director May 11, 1998
John D. Cleland
/s/ Penny A. Lumpkin Director May 11, 1998
Penny A. Lumpkin
/s/ Mark L. Morris, Jr. Director May 11, 1998
Mark L. Morris, Jr.
/s/ James R. Schmank Director May 11, 1998
James R. Schmank
/s/ Brenda M. Harwood Treasurer (Principal June 26, 1998
Brenda M. Harwood Financial and Accounting
Officer)
<PAGE>
Advisor's Fund
Index to Exhibits
Filed With
Registration Statement
Exhibit 1 Form of Articles of Incorporation dated April 29, 1998
Exhibit 2 Form of Bylaws
Exhibit 8 Form of Custody Agreement between UMB Bank, N.A. and
Security Management Company Family of Funds
Exhibit 9 Form of Administrative Service and Transfer Agency Agreement
between Advisor's Fund and Security Management Company, LLC
ARTICLES OF INCORPORATION
OF
ADVISOR'S FUND
FIRST.
The name of the corporation (hereinafter called the Corporation) is
ADVISOR'S FUND.
SECOND
The purposes for which the Corporation is formed are as follows:
(1) To engage in the business of an incorporated open-end investment
company of the management type investing and reinvesting its assets in
accordance with the provisions of these Articles of Incorporation. The general
nature of its business shall be to buy, hold, sell, exchange, pledge and
otherwise deal in notes, stock, bonds, options or other securities and financial
instruments of whatsoever nature; to do any and all acts and things necessary or
incidental thereto to the extent permitted business corporations under the laws
of the State of Kansas as from time to time amended; to borrow money or
otherwise obtain credit and to secure the same by mortgaging, pledging or
otherwise subjecting as security the assets of the Corporation; and to sell,
hold, transfer, purchase and reissue (all without any vote or consent of
stockholders of the Corporation) the shares of its own capital stock.
(2) To engage in any lawful act or activity for which corporations may
be organized under the Kansas General Corporation Code as it may be amended from
time to time.
THIRD
The address of its registered office in the State of Kansas is 700 SW
Harrison Street, Topeka, Shawnee County, Kansas, 66636; and the name of its
resident agent at such address is Advisor's Fund.
FOURTH
(1) The Corporation shall have authority to issue 50 million shares of
common stock, consisting of four series designated as follows, with the number
of authorized shares as indicated: (i) PCG Growth Series, 12,500,000 shares;
(ii) PCG Aggressive Growth Series, 12,500,000; (iii) SIM Growth Series,
12,500,000 and (iv) SIM Conservative Growth Series, 12,500,000. All shares of
the common stock are to be without par value or stated capital. The board of
directors of the Corporation is expressly authorized to cause additional shares
of capital stock of the Corporation to be issued in one or more additional
series or classes as may be established from time to time by setting or changing
in one or more respects the designations, preferences, conversion or other
rights, voting powers, qualifications, dividend or other limitations or
restrictions of such shares of stock and to increase or decrease the number of
shares so authorized to be issued in any such series or class.
(2) The board of directors of the Corporation is expressly authorized
to classify and reclassify any unissued shares of capital stock into one or more
additional or other classes or series as may be established from time to time by
setting or changing in any one or more respects the designation, preferences,
conversion or other rights, voting powers, qualifications, dividend or other
limitations, or restrictions of such shares of stock.
(3) The board of directors may authorize the issuance and sale of stock
in such amounts and on such terms and conditions, for such purposes and for such
amount or kind of consideration as the board of directors shall determine,
subject to any limits required by then applicable law. All shares shall be
issued on a fully paid and non-assessable basis.
(4) The Corporation may issue and sell fractions of shares having pro
rata all the rights of full shares, including, without limitation, the right to
vote and receive dividends; and wherever the words "share" or "shares" are used
in these articles or in the bylaws, they shall be deemed to include fractions of
shares where the context does not clearly indicate that only full shares are
intended.
(5) At all meetings of stockholders each stockholder of the Corporation
of any class or series shall be entitled to one vote on each matter submitted to
a vote at such meeting for each share of stock standing in his or her name on
the books of the Corporation on the date, fixed in accordance with the Bylaws,
for determination of stockholders entitled to vote at such meeting. No
stockholder of the Corporation shall be entitled to exercise any right of
cumulative voting.
(6) No shares need be offered to existing shareholders before being
offered to others and no shareholder shall have any right to purchase or
subscribe for any shares of the capital stock of the Corporation of any class or
series which may be issued or sold other than such right, if any, as the Board
of Directors, in its discretion, may determine. In connection with the
acquisition of all or substantially all of the assets of another entity, the
board of directors may issue or cause to be issued shares of the Corporation and
accept in payment thereof, in lieu of cash such assets of such entity as the
board determines is appropriate. No shares shall be sold by the Corporation
during any period when determination of the net asset value is suspended.
(7) From and after the close of business on the day when the shares are
properly tendered for repurchase the owner shall, with respect of said shares,
cease to be a stockholder of the Corporation and shall have only the right to
receive the repurchase price therefor. Repurchase of shares is conditional upon
the Corporation having funds or property legally available therefor.
(8) The Corporation, pursuant to a resolution by the Board of Directors
and without the vote or consent of the stockholders of the Corporation, shall
have the right to redeem at net asset value all shares of capital stock of the
Corporation in any stockholder account in which there has been (a) a failure to
provide the Corporation with a tax identification number; or (b) failure to
maintain ownership of a specified minimum number or value of shares of any class
or series of stock of the Corporation, such redemption to be effected at such
price, at such time and subject to such conditions as may be required or
permitted by applicable law.
(9) Payment for redeemed stock shall be made in cash unless, in the
opinion of the board of directors, which shall be conclusive, conditions exist
which make it advisable for the Corporation to make payment wholly or partially
in securities or other property or assets of the class or series of the shares
being redeemed.
(10) The net asset value of each share of the Corporation outstanding
shall be determined in accordance with the Corporation's current prospectus.
(11) The board of directors may suspend the right of stockholders of
any or all classes or series of shares to require the Corporation to redeem
shares held by them for such periods and to the extent permitted by, or in
accordance with, the Investment Company Act of 1940. The board of directors may
in the absence of a ruling by a responsible regulatory official, terminate such
suspension at such time as the board of directors, in its discretion, shall deem
reasonable, such determination to be conclusive.
(12) Shares of any class or series which have been redeemed shall
constitute authorized but unissued shares subject to classification and
reclassification as provided in these Articles.
(13) The board of directors may suspend the determination of net asset
value for all or any part of any period during which the New York Stock Exchange
is normally closed, or during which trading on the New York Stock Exchange or in
the markets normally utilized by the Corporation is restricted by government
order, or during which an emergency exists such as would make disposal by the
Corporation of securities owned by the Corporation unreasonable or
impracticable. The determination of whether trading on the New York Stock
Exchange or in the markets normally utilized by the Corporation is restricted or
whether such an emergency, as herein provided, exists, shall be by applicable
rules and regulations of the Securities and Exchange Commission or other
governmental authority. The suspension shall become effective at such time as
the board of directors shall specify in their declaration or resolution, but not
later than the close of business on the next succeeding business day following
the declaration or resolution. After such suspension becomes effective, there
shall be no determination of net asset value until the board of directors shall
declare the suspension terminated. The suspension shall terminate in any event
on the first day on which the New York Stock Exchange is open, the restricted
trading on the New York Stock Exchange or in the markets utilized by the
Corporation has ended or the emergency shall have expired in accordance with the
official ruling of the Securities and Exchange Commission or other governmental
authority or, in the absence of such ruling, upon the determination of the board
of directors.
(14) The board of directors may delegate any of its powers and duties
under this article with respect to appraisal of assets and liabilities and
determination of net asset value or with respect to suspension of the
determination of net asset value to an officer or agent of the Corporation.
FIFTH
(1) The name and mailing address of the incorporator is as follows:
Security Benefit Group, Inc.
700 SW Harrison
Topeka, Kansas 66636
(2) The power of the incorporator to act on behalf of the Corporation
shall terminate upon the filing of these Articles of Incorporation with the
Secretary of State. The names and mailing addresses of the persons who are to
serve as directors until their successors are elected and qualified are:
John D. Cleland, 700 SW Harrison St., Topeka, Kansas 66636
Donald A. Chubb, Jr., 700 SW Harrison St., Topeka, Kansas 66636
Penny A. Lumpkin, 700 SW Harrison St., Topeka, Kansas 66636
Mark L. Morris, Jr., 700 SW Harrison St., Topeka, Kansas 66636
James R. Schmank, 700 SW Harrison St., Topeka, Kansas 66636
SIXTH
The number of Directors of the Corporation shall be as provided in the
Bylaws. Unless otherwise provided by the Bylaws of the Corporation, the
Directors of the Corporation need not be stockholders therein.
SEVENTH
(1) Except as may be otherwise specifically provided by (i) statute,
(ii) the Articles of Incorporation of the Corporation as from time to time
amended or (iii) Bylaw provisions adopted from time to time by the stockholders
or directors of the Corporation, all powers of management, direction and control
of the Corporation shall be, and hereby are, vested in the board of directors.
(2) The board of directors, subject to the provisions of this article
and applicable law, may in its discretion enter into any contract with any
person, firm, partnership or corporation, irrespective of whether or not one or
more of the directors or officers of this corporation may also be an officer,
partner, director, shareholder or member of such other person, firm, partnership
or corporation, and such contract shall not be invalidated or rendered voidable
by reason of any such relationship. No person holding such relationship shall be
liable because of such relationship for any loss or expense to the Corporation
under or by reason of such contract, or accountable for any profit realized
directly or indirectly therefrom, provided that such contract when executed was
reasonable and fair, consistent with the provisions of these articles of
incorporation and approved by a majority of the board of directors of this
Corporation who are not so related, or by the vote of a majority of the
outstanding shares of this Corporation.
(3) Any contract entered into pursuant to the terms of this article
shall be consistent with and subject to the requirements of the Investment
Company Act of 1940, including any amendment thereto, or other applicable act of
Congress hereafter enacted, with respect to its duration, termination,
authorization, approval, assignment amendment or renewal.
EIGHTH
(1) The board of directors may from time to time declare and pay
dividends with the amount, source and payment thereof to be within their
discretion and calculated on the of generally accepted accounting principles.
(2) The board of directors has the power, in its discretion, to
distribute for any year as ordinary dividends and as capital gains
distributions, respectively, amounts sufficient to enable the Corporation as a
regulated investment company to avoid any liability for federal income tax in
respect to that year. In the case of a dividend payable in shares of stock or
cash at the election of a shareholder, the board of directors may prescribe
whether a shareholder failing to express his or her election before a given time
shall be deemed to have elected to take cash rather than shares, or to take
shares rather than cash, or to take shares with cash adjustment of fractions.
NINTH
The board of directors shall have power to make, and from time to time
alter, amend and repeal the Bylaws of the Corporation; provided, however, that
the paramount power to make, alter, amend and repeal the Bylaws, or any
provision thereof, or to adopt new Bylaws, shall always be vested in the
stockholders, which power may be exercised by the affirmative vote of the
holders of a majority of the outstanding shares of stock of the Corporation
entitled to vote, at any annual or special meeting of the stockholders;
provided, further, that thereafter the directors shall have the power to
suspend, repeal, amend or otherwise alter the Bylaws or any portion thereof so
enacted by the stockholders, unless the stockholders in enacting such Bylaws or
portion thereof shall otherwise provide.
TENTH
The Corporation reserves the right to alter, amend or repeal any provision
contained in these Articles of Incorporation in the manner now or hereafter
prescribed by the statutes of Kansas, and all rights and powers conferred herein
are granted subject to this reservation, provided, however, that any amendment
or repeal of the Eleventh Article of these Articles of Incorporation shall not
adversely affect any right or protection existing hereunder immediately prior to
such amendment or repeal. The Corporation reserves the right and privilege to
amend its Articles of Incorporation from time to time so as to authorize other
or additional series or classes of shares of stock, to increase or decrease the
number of shares of stock of any series or class now or hereafter authorized and
to vary the preferences, qualifications, limitations, restrictions and the
special or relative rights or other characteristics in respect of the shares of
each series or class, in the manner and upon such minimum vote of the
stockholders entitled to vote thereon as may at the time be prescribed or be
permitted by the laws of Kansas, or such larger vote as may then be required by
the Articles of Incorporation of the Corporation.
ELEVENTH
(1) No director of the Corporation shall be liable to the Corporation
or its stockholders for monetary damages for breach of his or her fiduciary duty
as a director, provided that nothing contained in this Article shall eliminate
or limit the liability of a director (a) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under the provisions of K.S.A. 17-6424 and amendments thereto, or (d)
for any transaction from which the director derived an improper personal
benefit. If the General Corporation Code of the State of Kansas is amended after
the filing of these Articles of Incorporation to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the General Corporation Code of the State of Kansas,
as so amended.
(2) Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
(3) Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them or between this Corporation
and its stockholders or any class of them, any court of competent jurisdiction
within the state of Kansas, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver of receivers appointed for this Corporation under the provisions of
K.S.A. 17-6901, and amendments thereto, or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of K.S.A. 17-6808, and amendments thereto, may order a meeting of
the creditors or class of creditors, or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the court directs. If a majority in number representing 3/4 in value
of the creditors or class of creditors, or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement and the reorganization, if sanctioned by the court to
which the application has been made, shall be binding on all creditors or class
or creditors, or on all the stockholders or class of stockholders, of this
Corporation, as the case may be, and also on this Corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name on behalf of the
Incorporator, Security Benefit Group, Inc., at Topeka, Kansas, on this ______
day of _______________, 19____.
------------------------------------
Roger K. Viola
Sr. Vice President, General Counsel
& Secretary
Security Benefit Group, Inc.
<PAGE>
ATTEST:
- ------------------------------------------
Amy J. Lee, Assistant Secretary
Security Benefit Group, Inc.
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
The foregoing instrument was acknowledged before me this ______ day of
_____________________, 19____, by Roger K. Viola, Sr. Vice President, General
Counsel and Secretary and Amy J. Lee, Assistant Secretary, each of Security
Benefit Group, Inc., a Kansas Corporation, on behalf of said Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial
seal at Topeka, Kansas, on this ______ day of _______________, 19____.
------------------------------------------------------
Notary Public
My Appointment Expires: _________________________
BYLAWS
OF
ADVISOR'S FUND
Offices
1. Registered Office and Registered Agent. The location of the registered
office and the name of the registered agent of the Corporation in the State
of Kansas shall be as stated in the Articles of Incorporation or as shall
be determined from time the time by the Board of Directors and on file in
the appropriate public offices of the State of Kansas pursuant to
applicable provisions of law.
2. Corporate Offices. The Corporation may have such other corporate offices
and places of business anywhere within or without the State of Kansas as
the Board of Directors may from time to time designate or the business of
the Corporation may require.
3. Corporate Records. The books and records of the Corporation may be kept at
any one or more offices of the Corporation within or without the State of
Kansas, except as otherwise required by applicable law.
4. Stockholders' Right of Inspection. A stockholder of record, upon written
demand to inspect the records of the Corporation pursuant to any statutory
or other legal right, shall be privileged to inspect such records only
during the usual and customary hours of business and in such manner as will
not unduly interfere with the regular conduct of the business of the
Corporation.
Stockholders' Meetings
5. Place of Meetings. Meetings of the stockholders may be held at any place
within or without the State of Kansas, as shall be determined from time to
time by the Board of Directors. Meetings of the stockholders for any
purpose other than the election of Directors may be held at such place as
shall be specified in the notice thereof.
6. Annual Meeting. No annual meeting of stockholders is required to be held
for the purpose of electing Directors or any other reason, except when
specifically and expressly required under state or federal law. When an
annual meeting is held for the purpose of electing Directors, such
Directors shall hold office until the next annual meeting at which
Directors are to be elected and until their successors are elected and
qualified, or until their earlier resignation or removal.
7. Special Meetings. Special meetings of the stockholders for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the
President, or a Vice President, by the Board of Directors or by the holders
of not less than 10% of all outstanding shares of stock entitled to vote at
any annual meeting, provided that (a) such request shall state the purpose
of such meeting and the matters to be acted on, and (b) the stockholders
requesting such meeting shall have paid to the Corporation the reasonably
estimated cost of preparing and mailing the notice thereof, which the
Secretary shall determine and specify to such stockholders. A special
meting shall be called by any officer directed to do so by the Board of
Directors.
The "call" and the "notice" of any such meeting shall be deemed to be
synonymous.
8. Notice of Meetings. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise in respect of any change, conversion or exchange of stock or for
the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days and
not less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders
shall apply to any adjournment of the meeting; provided, however, that the
Board of Directors may fix a new record date for the adjourned meeting.
Written or printed notice of each meeting of the stockholders, whether
annual or special, stating the place, date and time thereof and in case of
a special meeting, the purpose or purposes thereof shall be delivered or
mailed to each stockholder entitled to vote thereat, not less than ten (10)
days nor more than sixty (60) days prior to the meeting unless as to a
particular matter, other or further notice is required by law, in which
case such other or further notice shall be given. The holders of a majority
of shares entitled to vote at the meeting and present in person or by
proxy, whether or not sufficient to constitute a quorum, or any officer
present and entitled to preside or act as Secretary of such meeting, may
adjourn the meeting without determining the date of the new meeting. Any
business that might have been transacted at the meeting originally called
may be transacted at any such adjourned meeting at which a quorum is
present. Any notice of a stockholders' meeting sent by mail shall be deemed
to be delivered when deposited in the United States mail with postage
prepaid thereon, addressed to the stockholder at his or her address as it
appears on the books of the Corporation.
9. Registered Stockholders - Exceptions - Stock Ownership Presumed. The
Corporation shall be entitled to treat the holders of the shares of stock
of the Corporation, as recorded on the stock record or transfer books of
the Corporation, as the holders of record and as the holders and owners in
fact thereof and, accordingly, the Corporation shall not be required to
recognize any equitable or other claim to or interest in any such shares on
the part of any other person or other claim to or interest in any such
shares on the part of any other person, firm, partnership, corporation or
association, whether or not the Corporation shall have express or other
notice thereof, except as is otherwise expressly required by law, and the
term "stockholder" as used in these Bylaws means one who is a holder of
record of shares of the Corporation; provided, however, that if permitted
by law, (a) shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the Bylaws of such
corporation may prescribe, or, in the absence of such provision, as the
Board of Directors of such corporation may determine; (b) shares held by a
person in a fiduciary capacity may be voted by such person; and, (c) a
stockholder whose shares are pledged shall be entitled to vote such shares,
unless in the transfer of the shares by the pledgor on the books of the
Corporation, (s)he shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee or his/her proxy may represent said
stock and vote thereon.
10. Consent of Stockholders in Lieu of Meeting. To the extent, if any, and in
the manner permitted by statute and unless otherwise provided in the
Articles of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the Corporation, or any action which may
be taken at any annual or special meeting of such stockholders, may be
taken by written consent without a meeting.
11. Waiver of Notice. Whenever any notice is required to be given under the
provisions of these Bylaws, the Articles of Incorporation of the
Corporation, or of any law, a waiver thereof, if not expressly prohibited
by law, in writing signed by the person or persons entitled to notice
shall, whether before or after the time stated therein, be deemed the
equivalent to the giving of such notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when a
person attends a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened.
12. Quorum. Except as otherwise may be provided by law, by the Articles of
Incorporation of the Corporation or by these Bylaws, the holders of
one-third of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall be required for and shall
constitute a quorum at all meetings of the stockholders for the transaction
of any business. Every decision of a majority in amount of shares of such
quorum shall be valid as a corporate act, subject to the following
exceptions: (a) Directors shall be elected by a plurality of the votes of
the stockholders present in person or represented by proxy at the meeting
and entitled to vote on the election of directors; and (b) specific
instances in which a larger vote is required by law or by the Articles of
Incorporation or by these Bylaws.
If a quorum be not present at any meeting, the stockholders entitled to
vote thereat, present in person or by proxy, shall have power to adjourn
the meeting from time to time without notice other than announcement at the
meeting, until the requisite amount of voting stock shall be present. If
the adjournment is for more than thirty (30) days, or if after adjournment
a new record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. At any subsequent session of the meeting at which a
quorum is present in person or by proxy any business may be transacted
which could have been transacted at the initial session of the meeting if a
quorum had been present.
13. Proxies. At any meeting of the stockholders, every stockholder having the
right to vote shall be entitled to vote in person or by proxy executed by
an instrument in writing subscribed by such a stockholder and bearing a
date not more than three (3) years prior to said meeting unless said
instrument provides that it shall be valid for a longer period.
14. Voting. Each stockholder shall have one vote for each share of stock having
voting power registered in his/her name on the books of the Corporation and
except where the transfer books of the Corporation shall have been closed
or a date shall have been fixed as a record date for the determination of
its stockholders entitled to vote, no share of stock shall be voted at any
election for directors which shall have been transferred on the books of
the Corporation within twenty (20) days next preceding such election of
Directors. There shall be no cumulative voting in the election of
Directors. Voting shall be ballot for the election of Directors and on such
matters as may be required by law, provided that voting by ballot on any
matter may be waived by the unanimous consent of those stockholders
entitled to vote present at the meeting. A stockholder holding stock in a
fiduciary capacity shall be entitled to vote the shares so held, and a
stockholder whose stock is pledged shall be entitled to vote unless, in the
transfer by the pledgor on the books of the Corporation, (s)he shall have
expressly empowered the pledgee to vote thereon, in which case only the
pledgee or his/her proxy may represent said stock and vote thereon.
15. Stockholders' Lists. A complete list of the stockholders entitled to vote
at every election of Directors, arranged in alphabetical order, with the
address of and the number of voting shares held by each stockholder, shall
be prepared by the officer having charge of the stock books of the
Corporation and for at least ten (10) days prior to the date of the
election shall be open at the place where the election is to be held,
during the usual hours for business, to the examination of any stockholder
and shall be produced and kept open at the place of the election during the
whole time thereof the inspection of any stockholder present. The original
or duplicate stock ledger shall be the only evidence as to who are
stockholders entitled to examine such lists, or the books of the
Corporation, or to vote in person or by proxy, at such election. Failure to
comply with the foregoing shall not affect the validity or any action taken
at any such meeting.
16. Conduct of Meeting. The Chairman of the Board, or if no Chairman has been
elected, the President, shall preside as chairman at all meetings of the
stockholders. The Chairman shall conduct each such meeting in a
businesslike and fair manner, but shall not be obligated to follow any
technical, formal or parliamentary rules or principles of procedure. Except
as provided by law, the Corporation's Articles of Incorporation or these
Bylaws, the Chairman of the meeting shall have the power and duty to
determine whether a nomination, or any business proposed to be brought
before the meeting was made in accordance with any procedures followed by
the Corporation, and, if any proposed nomination or business is not in
accordance with such procedures, to declare that such defective nomination
or proposal shall be disregarded. The Chairman's rulings on procedural
matters shall be conclusive and binding on all stockholders. Without
limiting the generality of the foregoing, the Chairman shall have all the
powers usually vested in the Chairman of a meeting of stockholders.
Board of Directors
17. Offices. The Directors may have one or more offices at such place or places
within or without the State of Kansas as the Board of Directors may from
time to time determine.
18. Management. The management of all affairs, property and business of the
corporation shall be vested in a Board of Directors, consisting of a
minimum of three (3) and a maximum of nine (9) directors. Unless required
by the Articles of Incorporation, Directors need not be stockholders. Each
person who shall serve on the Board of Directors and who shall be
recommended and nominated for election or reelection as a director shall be
a person who is in good standing in his/her community and who shall not, at
the time of election or reelection, have attained his/her 70th birthday. In
addition to the power and authorities by these Bylaws and the Articles of
Incorporation expressly conferred upon it, the Board of Directors may
exercise all such powers of the Corporation, and do all such lawful acts
and things as are not by statute or by the Articles of Incorporation or by
these Bylaws directed or required to be exercised or done by the
stockholders.
19. Vacancies and Newly Created Directorships. Vacancies and newly created
directorships resulting from any increase in the authorized number of
Directors may be filled by a majority of the Directors then in office,
though less than a quorum, or by a sole remaining Director, unless it is
otherwise provided in the Articles of Incorporation or these Bylaws, and
the Directors so chosen shall hold office until the next annual election of
Directors and until their successors are duly elected and qualified, or
until their earlier resignation or removal. If there are no Directors in
office, then an election of Directors may be held in the manner provided by
statute.
20. Consent to Serve. Every Director of the Corporation, upon his/her election,
shall qualify by accepting the office of the Director, and his/her
attendance at, or his/her written approval of the minutes of, any meeting
of the Board subsequent to his/her election shall constitute his/her
acceptance of such office; or (s)he may execute such acceptance by a
separate writing, which shall be placed in the minute book.
21. Regular Meetings. Regular meetings of the Board of Directors may be held
without notice at such times and places either within or without the State
of Kansas as shall from time to time be fixed by resolution adopted by the
full Board of Directors. Any business may be transacted at a regular
meeting.
22. Special Meetings. Special meetings of the Board of Directors may be called
at any time by the Chairman of the Board, the President, the Vice President
or the Secretary, or by any two (2) or more of the Directors. The place may
be within or without the State of Kansas as designated in the notice.
23. Notice of Special Meetings. Written or printed notice of each special
meeting of the Board, stating the place, day and hour of the meeting and
the purpose or purposes thereof, shall be mailed to each Director addressed
to him/her at his/her residence or usual place of business at least three
(3) days before the day on which the meeting is to be held, or shall be
sent to him/her by telegram, or delivered to him/her personally, at least
two (2) days before the day on which the meeting is to be held. If mailed,
such notice shall be deemed to be delivered when it is deposited in the
United States mail with postage thereon addressed to the Director at
his/her residence or usual place of business. If given by telegraph, such
notice shall be deemed to be delivered when it is delivered to the
telegraph company. The notice may be given by any officer having authority
to call the meeting. "Notice" and "call" with respect to such meetings
shall be deemed to be synonymous. Any meeting of the Board of Directors
shall be a legal meeting without any notice thereof having been given if
all Directors shall be present without objection.
24. Meetings by Conference Telephone or Similar Communications Equipment.
Unless otherwise restricted by the Articles of Incorporation, these Bylaws,
or applicable law members of the Board of Directors of the Corporation, or
any committee designated by the board, may participate in a meeting of the
board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant hereto
shall constitute presence in person at such meeting.
25. Quorum. Unless otherwise required by law, the Articles of Incorporation or
these Bylaws, a majority of the total number of Directors shall be
necessary at all meetings to constitute a quorum for the transaction of
business, and except as may be otherwise provided by law, the Articles of
Incorporation or these Bylaws, the act of a majority of the Directors
present at any meeting at which there is a quorum shall be the act of the
Board of Directors.
If at least two (2) Directors or one-third (1/3) of the whole Board of
Directors, whichever is greater, is present at any meeting at which a
quorum is not present, a majority of the Directors present at such meeting
shall have power successively to adjourn the meeting from time to time to a
subsequent date, without notice to any Directors other than announcement at
the meeting. At such adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the original
meeting which was adjourned.
26. Standing or Temporary Committees. The Board of Directors may, by resolution
or resolutions passed by a majority of the whole Board, designate one (1)
or more committees, each committee to consist of one (1) or more Directors
of the Corporation. The Board may designate one (1) or more Directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not
(s)he or they constitute a quorum, may unanimously appoint another member
of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member. Any such committee, to the extent provided
in the resolution of the Board of Directors or in these Bylaws, shall have
and may exercise all of the powers and authority of the Board of Directors
in the management of the business and affairs of the Corporation, including
the power or authority to declare a dividend or to authorize the issuance
of stock; but no such committee shall have the power or authority of the
Board of Directors with respect to amending the Articles of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or
amending the Bylaws of the Corporation.
Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of
Directors. All committees so appointed shall keep regular minutes of the
transactions at their meetings and shall cause them to be recorded in books
kept for that purpose in the office of the Corporation and shall report the
same to the Board of Directors at its next meeting. The Secretary or an
Assistant Secretary of the Corporation may act as Secretary of the
committee if the committee so requests.
27. Compensation. Unless otherwise restricted by the Articles of Incorporation,
the Board of Directors may, by resolution, fix the compensation to be paid
Directors for serving as Directors of the Corporation and may, by
resolution, fix a sum which shall be allowed and paid for attendance at
each meeting of the Board of Directors and may provide for reimbursement of
expenses incurred by Directors in attending each meeting; provided that
nothing herein contained shall be construed to preclude any Director from
serving the Corporation in any other capacity and receiving his/her regular
compensation therefor. Members of special or standing committees may be
allowed similar compensation for attending committee meetings. Nothing
herein contained shall be construed to preclude any Director or committee
member from serving the Corporation in any other capacity and receiving
compensation therefor.
28. Resignations. Any Director may resign at any time upon written notice to
the Corporation. Such resignation shall take effect at the time specified
therein or shall take effect upon receipt thereof by the Corporation if no
time is specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
29. Removal. Any Director may be removed, with or without cause, by the holders
of a majority of the shares then entitled to vote at an election of
Directors.
30. Indemnification and Liability of Directors, Officers Employees or Agents.
Each person who is or was a Director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise (including the heirs, executors,
administrators and estate of such person) shall be indemnified by the
Corporation and be entitled to advancement of expenses as of right to the
full extent permitted or authorized by the laws of the State of Kansas, as
now in effect and as hereafter amended, regarding any liability, judgment,
fine, amount paid in settlement, cost and expense (including attorneys'
fees) asserted or threatened against and incurred by such person in his/her
capacity as or arising out of his/her status as a Director, officer,
employee or agent of the Corporation or, if serving at the request of the
Corporation, as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. The
indemnification and advancement of expenses provided by this Bylaw
provision shall not be exclusive of any other rights to which those
indemnified may be entitled under the Articles of Incorporation, under any
other Bylaw or under any agreement, vote of stockholders or disinterested
directors or otherwise, and shall not limit in any way any right which the
Corporation may have to make different or further indemnification with
respect to the same or different persons or classes of persons. The
Corporation shall have the power to purchase and maintain insurance on
behalf of persons entitled to indemnification hereunder against any
liability asserted against such person and incurred by such person in any
capacity discussed herein, or arising out of such person's status as such,
whether or not the Corporation would have the power to indemnify such
person against such liability.
To the fullest extent permitted by the Kansas General Corporation Code and
the Investment Company Act of 1940, no Director or officer of the
Corporation shall be liable to the Corporation or to its stockholders for
monetary damages. Without limiting the foregoing, no person shall be liable
to the Corporation for any loss, damage, liability or expense suffered by
it on account of any action taken or omitted to be taken by him/her as a
Director or officer of the Corporation or of any other corporation which
(s)he serves as a Director or officer at the request of the Corporation, if
such person (a) exercised the same degree of care and skill as a prudent
person would have exercised under the circumstances in the conduct of
his/her own affairs, or (b) took or omitted to take such action in reliance
upon advice of counsel for the Corporation, or for such other corporation,
or upon statement made or information furnished by Directors, officers,
employees or agents of the Corporation, or of such other corporation, which
(s)he had no reasonable grounds to disbelieve.
In the event any provision of this section 30 shall be in violation of the
Investment Company Act of 1940, as amended, or of the rules and regulations
promulgated thereunder, such provisions shall be void to the extent of such
violations.
31. Action Without a Meeting. Unless otherwise restricted by law, the Articles
of Incorporation or these Bylaws, any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if written consent thereto is signed by all
members of the Board of Directors or of such committee, as the case may be,
and such written consent is filed with the minutes of proceedings of the
Board or committee.
32. Term of Office. Except as may otherwise be provided by law, the Articles of
Incorporation or these Bylaws, each Director shall hold office until the
next annual election and until a successor shall be duly elected and
qualified, or until his/her written resignation shall have been filed with
the Secretary of the Corporation.
33. Waiver. Any notice provided or required to be given to the Directors may be
waived in writing by any of them. Attendance of a Director at any meeting
shall constitute a waiver of notice of such meeting except where (s)he
attends for the express purpose of objecting to the transaction of any
business thereat because the meeting is not lawfully called or convened.
Officers
34. Officers -- Who Shall Constitute. (a) The officers of the Corporation shall
be a President, a Secretary, a Treasurer, and any Chairman of the Board,
Vice Presidents, Assistant Secretaries, or Assistant Treasurers elected by
the Board. The Board shall elect a President, a Secretary and a Treasurer
at its first meeting. The Board then, or from time to time, may elect one
or more of the other prescribed officers as it may deem advisable, but need
not elect any officers other than a President, a Secretary and a Treasurer.
The Board may, if it desires, elect or appoint additional officers and may
further identify or describe any one or more of the officers of the
Corporation. In the discretion of the Board of Directors, the office of
Chairman of the Board of Directors may remain unfilled. The Chairman of the
Board of Directors, if any, shall at all times be, and other officers may
be, members of the Board of Directors. Except for the Chairman of the
Board, officers of the Corporation need not be members of the Board of
Directors. Any two (2) or more offices may be held by the same person.
(b) Term of Office. Each officer of the Corporation shall hold his/her
office at the pleasure of the Board of Directors or for such other period
as the Board may specify at the time of his/her election or appointment, or
until his/her death, resignation or removal by a majority of the Board,
whichever first occurs. In any event, each officer of the Corporation who
is not reelected or reappointed at the annual election of officers by the
Board next succeeding his/her election or appointment shall be deemed to
have been removed by the Board, unless the Board provides otherwise at the
time of his/her election or appointment.
(c) Other Agents. The Board from time to time may also appoint such other
agents for the Corporation as it shall deem necessary or advisable, each of
whom shall serve at the pleasure of the Board or for such period as the
Board may specify, and shall exercise such powers, have such titles and
perform such duties as shall be determined from time to time by the Board
or by an officer empowered by the Board to make such determinations.
35. Chairman of the Board. If a Chairman of the Board be elected, (s)he shall
preside at all meetings of the stockholders and Directors at which (s)he
may be present and shall have such other duties, powers and authority as
any be prescribed elsewhere in these Bylaws. The Board of Directors may
delegate such other authority and assign such additional duties to the
Chairman of the Board, other than those conferred by law exclusively upon
the President, as it may from time to time determine, and, to the extent
permissible by law, the Board may designate the Chairman of the Board as
the Chief Executive Officer of the Corporation with all of the powers
otherwise conferred upon the President of the Corporation under paragraph
36 of these Bylaws, or it may, from time to time, divide the
responsibilities, duties and authority for the general control and
management of the Corporation's business and affairs between the Chairman
of the Board and the President.
36. The President. Unless the Board otherwise provides, the President shall be
the Chief Executive Officer of the Corporation with such general executive
powers and duties of supervision and management as are usually vested in
the office of the Chief Executive Officer of a corporation, and (s)he shall
carry into effect all directions and resolutions of the Board. The
President, in the absence of the Chairman of the Board or if there be no
Chairman of the Board, shall preside at all meetings of the stockholders
and Directors.
The President may execute all bonds, notes, debentures, mortgages and other
instruments for and in the name of the Corporation and may execute all
other instruments for and in the name of the Corporation.
Unless the Board otherwise provides, the President, or any person
designated in writing by him/her, shall have full power and authority on
behalf of this Corporation (a) to attend and vote or take action at any
meeting of the holders of securities of corporations in which this
Corporation may hold securities, and at such meetings shall possess and may
exercise any and all rights and powers incident to being a holder of such
securities, and (b) to execute and deliver waivers of notice and proxies
for and in the name of the Corporation with respect to any securities held
by this Corporation.
(S)he shall, unless the Board otherwise provides, be ex officio a member of
all standing committees.
(S)he shall have such other or further duties and authority as may be
prescribed elsewhere in these Bylaws or from time to time by the Board of
Directors.
If a Chairman of the Board be elected or appointed and designated as the
Chief Executive Officer of the Corporation, as provided in paragraph 35 of
these Bylaws, the President shall perform such duties as may be
specifically delegated to him/her by the Board of Directors or are
conferred by law exclusively upon him/her, and in the absence, disability,
or inability or refusal to act of the Chairman of the Board, the President
shall perform the duties and exercise the powers of the Chairman of the
Board.
37. Vice President. In the absence of the President or in the event of his/her
disability or inability or refusal to act, any Vice President may perform
the duties and exercise the powers of the President until the Board
otherwise provides. Vice Presidents shall perform such other duties as the
Board may from time to time prescribe.
38. Secretary and Assistant Secretaries. The Secretary shall attend all
sessions of the Board and all meetings of the stockholders, shall prepare
minutes of all proceedings at such meetings and shall preserve them in a
minute book of the Corporation kept for that purpose. (S)he shall perform
similar duties for the executive and other standing committees when
requested by the Board or any such committee.
It shall be the principal responsibility of the Secretary to give, or cause
to be given, notice of all meetings of the stockholders and of the Board of
Directors, but this shall not lessen the authority of others to give such
notice as is authorized elsewhere in these Bylaws.
The Secretary shall see that all books, records, lists and information, or
duplicates, required to be maintained in Kansas, or elsewhere, are so
maintained.
The Secretary shall have the general duties, responsibilities and
authorities of a Secretary of a Corporation and shall perform such other
duties and have such other responsibility and authority as may be
prescribed elsewhere in these Bylaws or from time to time by the Board of
Directors or the Chief Executive Officer of the Corporation, under whose
direct supervision (s)he shall be.
In the absence of the Secretary or in the event of his/her disability, or
inability or refusal to act, any Assistant Secretary may perform the duties
and exercise the powers of the Secretary until the Board otherwise
provides. Assistant Secretaries shall perform such other duties as the
Board of Directors may from time to time prescribe.
39. Treasurer and Assistant Treasurers. The Treasurer shall be the principal
financial and accounting officer of the Corporation. The Treasurer shall
have responsibility for the safekeeping of the funds and securities of the
Corporation, shall keep or cause to be kept full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
keep, or cause to be kept, all other books of account and accounting
records of the Corporation. (S)he shall deposit or cause to be deposited
all moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors or by any officer of the Corporation to whom such authority has
been granted by the Board.
(S)he shall disburse, or permit to be disbursed, the funds of the
Corporation as may be ordered, or authorized generally, by the Board, and
shall render to the Chief Executive Officer of the Corporation and the
Directors whenever they may require it, an account of all his/her
transactions as Treasurer and of those under his/her jurisdiction, and of
the financial condition of the Corporation.
(S)he shall perform such other duties and shall have such other
responsibility and authority as may be prescribed elsewhere in these Bylaws
or from time to time by the Board of Directors.
(S)he shall have the general duties, powers and responsibility of a
Treasurer of a corporation and shall, unless otherwise provided by the
Board, be the Chief Financial and Accounting Officer of the Corporation.
If required by the Board, (s)he shall give the Corporation a bond in a sum
and with one or more sureties satisfactory to the Board, for the faithful
performance of the duties of his/her office and for the restoration to the
Corporation, in the case of his/her death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other
property of whatever kind in his/her possession or under his/her control
which belong to the Corporation.
In the absence of the Treasurer or in the event of his/her disability, or
inability of refusal to act, any Assistant Treasurer may perform the duties
and exercise the powers of the Treasurer until the Board otherwise
provides. Assistant Treasurers shall perform such other duties and have
such other authority as the Board of Directors may from time to time
prescribe.
40. Duties of Officers May be Delegated. If any officer of the Corporation be
absent or unable to act, or for any other reason that the Board may deem
sufficient, the Board may delegate, for the time being, some or all of the
functions, duties, powers and responsibilities of any officer to any other
officer, or to any other agent or employee of the Corporation or other
responsible person, provided a majority of the whole Board concurs.
41. Removal. Any officer or agent elected or appointed by the Board of
Directors, and any employee, may be removed or discharged by the Board
whenever in its judgment the best interests of the Corporation would be
served thereby, but such removal or discharge shall be without prejudice to
the contract rights, if any, of the person so removed or discharged.
Stock
42. Certificates for Shares of Stock. Certificates for shares of stock shall be
issued in numerical order, and each stockholder shall be entitled to a
certificate signed by, or in the name of the Corporation by, the Chairman
of the Board or the President or a Vice President, and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary,
certifying the number of shares owned by him/her. To the extent permitted
by statute, any of or all of the signatures on such certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such
certificate is issued, such certificate may nevertheless be issued by the
Corporation with the same effect as if such officer, transfer agent or
registrar who signed such certificate, or whose facsimile signature shall
have been used thereon, had not ceased to be such officer, transfer agent
or registrar of the Corporation. Subject to applicable law, the Board of
Directors may authorize the issuance of some or all of the shares of any or
all classes or series without certificates and may establish such
conditions as it may determine in connection with the issuance of
certificates.
43. Transfers of Stock. Transfers of stock shall be made only upon the transfer
books of the Corporation, kept at the office of the Corporation or of the
transfer agent designated to transfer the class of stock, and before a new
certificate is issued the old certificate shall be surrendered for
cancellation. Until and unless the Board appoints some other person, firm
or corporation as its transfer agent (and upon the revocation of any such
appointment, thereafter, until a new appointment is similarly made) the
Secretary of the Corporation shall be the transfer agent of the Corporation
without the necessity of any formal action of the Board, and the Secretary,
or any person designated by him/her, shall perform all of the duties
thereof.
44. Lost Certificates. The Board of Directors may direct that a new certificate
or certificates be issued in place of any certificate or certificates
theretofore issued by the Corporation, alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of the fact by the person
claiming the certificate or certificates to be lost, stolen or destroyed.
When authorizing such issue of a replacement certificate or certificates,
the Secretary may, as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or
certificates, or his/her legal representative, to give the Corporation and
its transfer agents and registrars, if any, a bond in such sum as it may
direct to indemnify it against any claim that may be made against it with
respect to the certificate or certificates alleged to have been lost,
stolen or destroyed, or with respect to the issuance of such new
certificate or certificates.
45. Regulations. The Board of Directors shall have power and authority to make
all such rules and regulations as it may deem expedient concerning the
issue, transfer, conversion and registration of certificates for shares of
stock of the Corporation, not inconsistent with the laws of the State of
Kansas, the Articles of Incorporation of the Corporation and these Bylaws.
Dividends and Finance
46. Dividends. Dividends upon the outstanding shares of stock of the
Corporation, subject to the provisions of the Articles of Incorporation and
of any applicable law and of these Bylaws, may be declared by the Board of
Directors at any meeting. Subject to such provisions, dividends may be paid
in cash, in property, or in shares of stock of the Corporation.
47. Creation of Reserves. The Directors may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any
proper purpose or may abolish any such reserve in the manner in which it
was created.
48. Depositories. The moneys of the Corporation shall be deposited in the name
of the Corporation in such bank or banks or other depositories as the Board
of Directors shall designate, and shall be drawn out only by check signed
by persons designated by resolution adopted by the Board of Directors,
except that the Board of Directors may delegate said powers in the manner
hereinafter provided in this Bylaw 48. The Board of Directors may by
resolution authorize an officer or officers of the Corporation to designate
any bank or banks or other depositories in which moneys of the Corporation
may be deposited, and to designate the persons who may sign checks drawn on
any particular account or accounts of the Corporation, whether created by
direct designation of the Board of Directors or by authorized officer or
officers as aforesaid.
49. Fiscal Year. The Board of Directors shall have power to fix and from time
to time change the fiscal year of the Corporation. In the absence of action
by the Board of Directors, the fiscal year of the Corporation shall end
each year on the date which the Corporation treated as the close of its
first fiscal year, until such time, if any, as the fiscal year shall be
changed by the Board of Directors.
50. Fixing of Capital, Transfers of Surplus. Except as may be specifically
otherwise provided in the Articles of Incorporation, the Board of Directors
is expressly empowered to exercise all authority conferred upon it or the
Corporation by any law or statute, and in conformity therewith, relative
to:
the determination of what part of the consideration received for shares of
the Corporation shall be capital;
increasing or reducing capital;
transferring surplus to capital or capital to surplus;
all similar or related matters;
provided that any concurrent action or consent by or of the Corporation and
its stockholders required to be taken or given pursuant to law shall be
duly taken or given in connection therewith.
51. Loans to Officers and Directors Prohibited. The Corporation shall not loan
money to any officer or director of the Corporation.
52. Books, Accounts and Records. The books, accounts and records of the
Corporation, except as may be otherwise required by applicable law of the
State of Kansas, may be kept outside the State of Kansas, at such place or
places as the Board of Directors may from time to time determine. The Board
of Directors shall determine whether, to what extent and the conditions
upon which the book, accounts and records of the Corporation, or any of
them, shall be open to the inspection of the stockholders, and no
stockholder shall have any right to inspect any book, account or record of
the Corporation, except as conferred by law or by resolution of the
stockholders or Directors.
Miscellaneous
53. Waiver of Notice. Whenever any notice is required to be given under the
provisions of the statutes of Kansas, or of the Articles of Incorporation
or of these Bylaws, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, Directors or members of a committee of directors need be
specified in any written waiver of notice unless so required by the
Articles of Incorporation of these Bylaws.
54. Contracts. The Board of Directors may authorize any officer or officers, or
agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
55. Amendments. These Bylaws may be altered, amended or repealed, or new Bylaws
may be adopted, in any of the following ways: (i) by the holders of a
majority of the outstanding shares of stock of the Corporation entitled to
vote, or (ii) by a majority of the full Board of Directors and any change
so made by the stockholders may thereafter be further changed by a majority
of the directors; provided, however, that the power of the Board of
Directors to alter, amend or repeal the Bylaws, or to adopt new Bylaws, may
be denied as to any Bylaws or portion thereof as the stockholders shall so
expressly provide.
<PAGE>
CUSTODY AGREEMENT
DATED JANUARY 1, 1995
BETWEEN
UMB BANK, N.A.
AND
SECURITY MANAGEMENT COMPANY
FAMILY OF FUNDS
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. APPOINTMENT OF CUSTODIAN 1
2. DEFINITIONS 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. DELIVERY OF CORPORATE DOCUMENTS 2
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN 3
(a) Safekeeping 3
(b) Manner of Holding Securities 4
(c) Free Delivery of Assets 6
(d) Exchange of Securities 6
(e) Purchases of Assets 6
(f) Sales of Assets 7
(g) Options 8
(h) Futures Contracts 8
(i) Segregated Accounts 9
(j) Depository Receipts 9
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 10
(l) Interest Bearing Deposits 10
(m) Foreign Exchange Transactions Other than as Principal 11
(n) Pledges or Loans of Securities 11
(o) Stock Dividends, Rights, Etc. 12
(p) Routine Dealings 12
(q) Collections 12
(r) Bank Accounts 13
(s) Dividends, Distributions and Redemptions 13
(t) Proceeds from Shares Sold 13
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 14
(v) Books and Records 14
(w) Opinion of Fund's Independent Certified Public Accountants 14
(x) Reports by Independent Certified Public Accountants 14
(y) Bills and Other Disbursements 15
5. SUBCUSTODIANS 15
(a) Domestic Subcustodians 15
(b) Foreign Subcustodians 15
(c) Interim Subcustodians 16
(d) Special Subcustodians 17
(e) Termination of a Subcustodian 17
(f) Certification Regarding Foreign Subcustodians 17
6. STANDARD OF CARE 17
(a) General Standard of Care 17
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Armed Conflict, Sovereign Risk, Etc. 18
(c) Liability for Past Records 18
(d) Advice of Counsel 18
(e) Advice of the Fund and Others 19
(f) Instructions Appearing to be Genuine 19
(g) Exceptions from Liability 19
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS 20
(a) Domestic Subcustodians 20
(b) Liability for Acts and Omissions of Foreign Subcustodians 20
(c) Securities Systems, Interim Subcustodians, Special
Subcustodians, Securities Depositories and Clearing Agencies 20
(d) Defaults or Insolvencies of Brokers, Banks, Etc. 20
(e) Reimbursement of Expenses 20
8. INDEMNIFICATION 21
(a) Indemnification by Fund 21
(b) Indemnification by Custodian 21
9. ADVANCES 21
10. LIENS 22
11. COMPENSATION 22
12. POWERS OF ATTORNEY 22
13. TERMINATION AND ASSIGNMENT 23
14. ADDITIONAL FUNDS 23
15. NOTICES 23
16. MISCELLANEOUS 24
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this 1st day of January, 1995, between UMB Bank, n.a.,
a national banking association with its principal place of business located at
Kansas City, Missouri (hereinafter "Custodian"), and each of the Funds which
have executed the signature page hereof together with such additional Funds
which shall be made parties to this Agreement by the execution of a separate
signature page hereto (individually, a "Fund" and collectively, the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended; and
WHEREAS, each Fund desires to appoint Custodian as its custodian for the custody
of Assets (as hereinafter defined) owned by such Fund which Assets are to be
held in such accounts as such Fund may establish from time to time; and
WHEREAS, Custodian is willing to accept such appointment on the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto, intending to be legally bound, mutually covenant and agree as
follows:
1. APPOINTMENT OF CUSTODIAN.
Each Fund hereby constitutes and appoints the Custodian as custodian of
Assets belonging to each such Fund which have been or may be from time to
time deposited with the Custodian. Custodian accepts such appointment as a
custodian and agrees to perform the duties and responsibilities of
Custodian as set forth herein on the conditions set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or
nonnegotiable paper commonly known as Securities and other instruments
or obligations.
(b) "Assets" shall mean Securities, monies and other property held by the
Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex, a
written (including, without limitation, facsimile transmission)
request, direction, instruction or certification signed or initialed
by or on behalf of a Fund by an Authorized Person; (ii) a telephonic
or other oral communication from a person the Custodian reasonably
believes to be an Authorized Person; or (iii) a communication effected
directly between an electro-mechanical or electronic device or system
(including, without limitation, computers) on behalf of a Fund.
Instructions in the form of oral communications shall be confirmed by
the appropriate Fund by tested telex or in writing in the manner set
forth in clause (i) above, but the lack of such confirmation shall in
no way affect any action taken by the Custodian in reliance upon such
oral Instructions prior to the Custodian's receipt of such
confirmation. Each Fund authorizes the Custodian to record any and all
telephonic or other oral Instructions communicated to the Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any
Assistant Treasurer of a Fund or any other person designated by the
Treasurer of such Fund in writing, which countersignature or
confirmation shall be included on the same instrument containing the
Instructions or on a separate instrument relating thereto.
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission or
telex number agreed upon from time to time by the Custodian and each
Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall be
continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution does
not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been
taken.
Each Fund has furnished the Custodian with copies, properly certified or
authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund as
in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
Each Fund shall promptly furnish the Custodian with copies of any updates,
amendments or supplements to the foregoing documents.
In addition, each Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or
Trustees and all amendments or supplements thereto, properly certified or
authenticated, designating certain officers or employees of each such Fund
who will have continuing authority to certify to the Custodian: (a) the
names, titles, signatures and scope of authority of all persons authorized
to give Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of each Fund, and (b) the names, titles
and signatures of those persons authorized to countersign or confirm
Special Instructions on behalf of each Fund (in both cases collectively,
the "Authorized Persons" and individually, an "Authorized Person"). Such
Resolutions and certificates may be accepted and relied upon by the
Custodian as conclusive evidence of the facts set forth therein and shall
be considered to be in full force and effect until delivery to the
Custodian of a similar Resolution or certificate to the contrary. Upon
delivery of a certificate which deletes or does not include the name(s) of
a person previously authorized to give Instructions or to countersign or
confirm Special Instructions, such persons shall no longer be considered an
Authorized Person authorized to give Instructions or to countersign or
confirm Special Instructions. Unless the certificate specifically requires
that the approval of anyone else will first have been obtained, the
Custodian will be under no obligation to inquire into the right of the
person giving such Instructions or Special Instructions to do so.
Notwithstanding any of the foregoing, no Instructions or Special
Instructions received by the Custodian from a Fund will be deemed to
authorize or permit any director, trustee, officer, employee, or agent of
such Fund to withdraw any of the Assets of such Fund upon the mere receipt
of such authorization, Special Instructions or Instructions from such
director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to Sections
5(b), (c), or (d) of this Agreement, the Custodian shall have and perform
the powers and duties hereinafter set forth in this Section 4. For purposes
of this Section 4 all references to powers and duties of the "Custodian"
shall also refer to any Domestic Subcustodian appointed pursuant to Section
5(a).
(a) SAFEKEEPING.
The Custodian will keep safely the Assets of each Fund which are
delivered to it from time to time. The Custodian shall not be
responsible for any property of a Fund held or received by such Fund
and not delivered to the Custodian.
(b) MANNER OF HOLDING SECURITIES.
(1) The Custodian shall at all times hold Securities of each Fund
either: (i) by physical possession of the share certificates or
other instruments representing such Securities in registered or
bearer form; or (ii) in book-entry form by a Securities System
(as hereinafter defined) in accordance with the provisions of
sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the
same in the name of the appropriate Fund or its nominee, or in
the name of the Custodian or its nominee, for whose actions such
Fund and Custodian, respectively, shall be fully responsible.
Upon the receipt of Instructions, the Custodian shall hold such
Securities in street certificate form, so called, with or without
any indication of fiduciary capacity. However, unless it receives
Instructions to the contrary, the Custodian will register all
such portfolio Securities in the name of the Custodian's
authorized nominee. All such Securities shall be held in an
account of the Custodian containing only assets of the
appropriate Fund or only assets held by the Custodian as a
fiduciary, provided that the records of the Custodian shall
indicate at all times the Fund or other customer for which such
Securities are held in such accounts and the respective interests
therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by a Fund in, and each Fund hereby approves use of: (a) The
Depository Trust Company; (b) The Participants Trust Company; and
(c) any book-entry system as provided in (i) Subpart 0 of
Treasury Circular No. 300, 31 CFR 306.115, (ii) Subpart B of
Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2, or
(iii) the book-entry regulations of federal agencies
substantially in the form of 31 CFR 306.115. Upon the receipt of
Special Instructions, the Custodian may deposit and/or maintain
domestic Securities owned by a Fund in any other domestic
clearing agency registered with the Securities and Exchange
Commission ("SEC") under Section 17A of the Securities Exchange
Act of 1934 (or as may otherwise be authorized by the SEC to
serve in the capacity of depository or clearing agent for the
Securities or other assets of investment companies) which acts as
a Securities depository. Each of the foregoing shall be referred
to in this Agreement as a "Securities System", and all such
Securities Systems shall be listed on the attached Appendix A.
Use of a Securities System shall be in accordance with applicable
Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(i) The Custodian may deposit the Securities directly or through
one or more agents or Subcustodians which are also qualified
to act as custodians for investment companies.
(ii) The Custodian shall deposit and/or maintain the Securities
in a Securities System, provided that such Securities are
represented in an account ("Account") of the Custodian in
the Securities System that includes only assets held by the
Custodian as a fiduciary, custodian or otherwise for
customers.
(iii)The books and records of the Custodian shall at all times
identify those Securities belonging to any one or more Funds
which are maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for the
account of a Fund only upon (a) receipt of advice from the
Securities System that such Securities have been transferred
to the Account of the Custodian in accordance with the rules
of the Securities System, and (b) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of such Fund. The Custodian shall
transfer Securities sold for the account of a Fund only upon
(a) receipt of advice from the Securities System that
payment for such Securities has been transferred to the
Account of the Custodian in accordance with the rules of the
Securities System, and (b) the making of an entry on the
records of the Custodian to reflect such transfer and
payment for the account of such Fund. Copies of all advices
from the Securities System relating to transfers of
Securities for the account of a Fund shall be maintained for
such Fund by the Custodian. The Custodian shall deliver to a
Fund on the next succeeding business day daily transaction
reports which shall include each day's transactions in the
Securities System for the account of such Fund. Such
transaction reports shall be delivered to such Fund or any
agent designated by such Fund pursuant to Instructions, by
computer or in such other manner as such Fund and Custodian
may agree.
(v) The Custodian shall, if requested by a Fund pursuant to
Instructions, provide such Fund with reports obtained by the
Custodian or any Subcustodian with respect to a Securities
System's accounting system, internal accounting control and
procedures for safeguarding Securities deposited in the
Securities System.
(vi) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any Securities System on behalf of a
Fund as promptly as practicable and shall take all actions
reasonably practicable to safeguard the Securities of such
Fund maintained with such Securities System.
(c) FREE DELIVERY OF ASSETS.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of Special
Instructions, will undertake to make free delivery of Assets, provided
such Assets are on hand and available, in connection with a Fund's
transactions and to transfer such Assets to such broker, dealer,
Subcustodian, bank, agent, Securities System or otherwise as specified
in such Special Instructions.
(d) EXCHANGE OF SECURITIES.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Fund for other Securities or cash paid in
connection with any reorganization, recapitalization, merger,
consolidation, or conversion of convertible Securities, and will
deposit any such Securities in accordance with the terms of any
reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange
Securities held by it in temporary form for Securities in definitive
form, to surrender Securities for transfer into a name or nominee name
as permitted in Section 4(b)(2), to effect an exchange of shares in a
stock split or when the par value of the stock is changed, to sell any
fractional shares, and, upon receiving payment therefor, to surrender
bonds or other Securities held by it at maturity or call.
(e) PURCHASE OF ASSETS.
(1) SECURITIES PURCHASES. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay
for such Securities out of monies held for a Fund's account for
which the purchase was made, but only insofar as monies are
available therein for such purpose, and receive the portfolio
Securities so purchased. Unless the Custodian has received
Special Instructions to the contrary, such payment will be made
only upon receipt of Securities by the Custodian, a clearing
corporation of a national Securities exchange of which the
Custodian is a member, or a Securities System in accordance with
the provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, upon receipt of Instructions: (i) in connection with a
repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the
Securities System that the Securities underlying such repurchase
agreement have been transferred by book-entry into the Account
maintained with such Securities System by the Custodian, provided
that the Custodian's instructions to the Securities System
require that the Securities System may make payment of such funds
to the other party to the repurchase agreement only upon transfer
by book-entry of the Securities underlying the repurchase
agreement into such Account; (ii) in the case of Interest Bearing
Deposits, currency deposits, and other deposits, foreign exchange
transactions, futures contracts or options, pursuant to Sections
4(g), 4(h), 4(1), and 4(m) hereof, the Custodian may make payment
therefor before receipt of an advice of transaction; and (iii) in
the case of Securities as to which payment for the Security and
receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the instrument
representing the Security expected to take place in different
locations or through separate parties, such as commercial paper
which is indexed to foreign currency exchange rates, derivatives
and similar Securities, the Custodian may make payment for such
Securities prior to delivery thereof in accordance with such
generally accepted trade practice or the terms of the instrument
representing such Security.
(2) OTHER ASSETS PURCHASED. Upon receipt of Instructions and except
as otherwise provided herein, the Custodian shall pay for and
receive other Assets for the account of a Fund as provided in
Instructions.
(f) SALES OF ASSETS.
(1) SECURITIES SOLD. In accordance with Instructions, the Custodian
will, with respect to a sale, deliver or cause to be delivered
the Securities thus designated as sold to the broker or other
person specified in the Instructions relating to such sale.
Unless the Custodian has received Special Instructions to the
contrary, such delivery shall be made only upon receipt of
payment therefor in the form of: (a) cash, certified check, bank
cashier's check, bank credit, or bank wire transfer; (b) credit
to the account of the Custodian with a clearing corporation of a
national Securities exchange of which the Custodian is a member;
or (c) credit to the Account of the Custodian with a Securities
System, in accordance with the provisions of Section 4(b)(3)
hereof. Notwithstanding the foregoing, Securities held in
physical form may be delivered and paid for in accordance with
"street delivery custom" to a broker or its clearing agent,
against delivery to the Custodian of a receipt for such
Securities, provided that the Custodian shall have taken
reasonable steps to ensure prompt collection of the payment for,
or return of, such Securities by the broker or its clearing
agent, and provided further that the Custodian shall not be
responsible for the selection of or the failure or inability to
perform of such broker or its clearing agent or for any related
loss arising from delivery or custody of such Securities prior to
receiving payment therefor.
(2) OTHER ASSETS SOLD. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment
for and deliver other Assets for the account of a Fund as
provided in Instructions.
(g) OPTIONS.
(1) Upon receipt of Instructions relating to the purchase of an
option or sale of a covered call option, the Custodian shall: (a)
receive and retain confirmations or other documents, if any,
evidencing the purchase or writing of the option by a Fund; (b)
if the transaction involves the sale of a covered call option,
deposit and maintain in a segregated account the Securities
(either physically or by book-entry in a Securities System)
subject to the covered call option written on behalf of such
Fund; and (c) pay, release and/or transfer such Securities, cash
or other Assets in accordance with any notices or other
communications evidencing the expiration, termination or exercise
of such options which are furnished to the Custodian by the
Options Clearing Corporation (the "OCC"), the securities or
options exchanges on which such options were traded, or such
other organization as may be responsible for handling such option
transactions.
(2) Upon receipt of Instructions relating to the sale of a naked
option (including stock index and commodity options), the
Custodian, the appropriate Fund and the broker-dealer shall enter
into an agreement to comply with the rules of the OCC or of any
registered national securities exchange or similar
organizations(s). Pursuant to that agreement and such Fund's
Instructions, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the writing
of the option; (b) deposit and maintain in a segregated account,
Securities (either physically or by book-entry in a Securities
System), cash and/or other Assets; and (c) pay, release and/or
transfer such Securities, cash or other Assets in accordance with
any such agreement and with any notices or other communications
evidencing the expiration, termination or exercise of such option
which are furnished to the Custodian by the OCC, the securities
or options exchanges on which such options were traded, or such
other organization as may be responsible for handling such option
transactions. The appropriate Fund and the broker-dealer shall be
responsible for determining the quality and quantity of assets
held in any segregated account established in compliance with
applicable margin maintenance requirements and the performance of
other terms of any option contract.
(h) FUTURES CONTRACTS.
Upon receipt of Instructions, the Custodian shall enter into a futures
margin procedural agreement among the appropriate Fund, the Custodian
and the designated futures commission merchant (a "Procedural
Agreement"). Under the Procedural Agreement the Custodian shall: (a)
receive and retain confirmations, if any, evidencing the purchase or
sale of a futures contract or an option on a futures contract by such
Fund; (b) deposit and maintain in a segregated account cash,
Securities and/or other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure such Fund's performance
of its obligations under any futures contracts purchased or sold, or
any options on futures contracts written by such Fund, in accordance
with the provisions of any Procedural Agreement designed to comply
with the provisions of the Commodity Futures Trading Commission and/or
any commodity exchange or contract market (such as the Chicago Board
of Trade), or any similar organization(s), regarding such margin
deposits; and (c) release Assets from and/or transfer Assets into such
margin accounts only in accordance with any such Procedural
Agreements. The appropriate Fund and such futures commission merchant
shall be responsible for determining the type and amount of Assets
held in the segregated account or paid to the broker-dealer in
compliance with applicable margin maintenance requirements and the
performance of any futures contract or option on a futures contract in
accordance with its terms.
(i) SEGREGATED ACCOUNTS.
Upon receipt of Instructions, the Custodian shall establish and
maintain on its books a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred
Assets of such Fund, including Securities maintained by the Custodian
in a Securities System pursuant to Paragraph (b)(3) of this Section 4,
said account or accounts to be maintained (i) for the purposes set
forth in Sections 4(g), 4(h) and 4(n) and (ii) for the purpose of
compliance by such Fund with the procedures required by the SEC
Investment Company Act Release Number 10666 or any subsequent release
or releases relating to the maintenance of segregated accounts by
registered investment companies, or (iii) for such other purposes as
may be set forth, from time to time, in Special Instructions. The
Custodian shall not be responsible for the determination of the type
or amount of Assets to be held in any segregated account referred to
in this paragraph, or for compliance by the Fund with required
procedures noted in (ii) above.
(j) DEPOSITORY RECEIPTS.
Upon receipt of Instructions, the Custodian shall surrender or cause
to be surrendered Securities to the depositary used for such
Securities by an issuer of American Depositary Receipts or
International Depositary Receipts (hereinafter referred to,
collectively, as "ADRs"), against a written receipt therefor
adequately describing such Securities and written evidence
satisfactory to the organization surrendering the same that the
depositary has acknowledged receipt of instructions to issue ADRs with
respect to such Securities in the name of the Custodian or a nominee
of the Custodian, for delivery in accordance with such instructions.
Upon receipt of Instructions, the Custodian shall surrender or cause
to be surrendered ADRs to the issuer thereof, against a written
receipt therefor adequately describing the ADRs surrendered and
written evidence satisfactory to the organization surrendering the
same that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the Securities
underlying such ADRs in accordance with such instructions.
(k) CORPORATE ACTIONS, PUT BONDS, CALLED BONDS, ETC.
Upon receipt of Instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar Securities to the issuer or
trustee thereof (or to the agent of such issuer or trustee) for the
purpose of exercise or sale, provided that the new Securities, cash or
other Assets, if any, acquired as a result of such actions are to be
delivered to the Custodian; and (b) deposit Securities upon
invitations for tenders thereof, provided that the consideration for
such Securities is to be paid or delivered to the Custodian, or the
tendered Securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the contrary, the
Custodian shall take all necessary action, unless otherwise directed
to the contrary in Instructions, to comply with the terms of all
mandatory or compulsory exchanges, calls, tenders, redemptions, or
similar rights of security ownership, and shall notify the appropriate
Fund of such action in writing by facsimile transmission or in such
other manner as such Fund and Custodian may agree in writing.
The Fund agrees that if it gives an Instruction for the performance of
an act on the last permissible date of a period established by any
optional offer or on the last permissible date for the performance of
such act, the Fund shall hold the Bank harmless from any adverse
consequences in connection with acting upon or failing to act upon
such Instructions.
(l) INTEREST BEARING DEPOSITS.
Upon receipt of Instructions directing the Custodian to purchase
interest bearing fixed term and call deposits (hereinafter referred
to, collectively, as "Interest Bearing Deposits") for the account of a
Fund, the Custodian shall purchase such Interest Bearing Deposits in
the name of such Fund with such banks or trust companies, including
the Custodian, any Subcustodian or any subsidiary or affiliate of the
Custodian (hereinafter referred to as "Banking Institutions"), and in
such amounts as such Fund may direct pursuant to Instructions. Such
Interest Bearing Deposits may be denominated in U.S. dollars or other
currencies, as such Fund may determine and direct pursuant to
Instructions. The responsibilities of the Custodian to a Fund for
Interest Bearing Deposits issued by the Custodian shall be that of a
U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those issued by the Custodian, (a) the Custodian
shall be responsible for the collection of income and the transmission
of cash to and from such accounts; and (b) the Custodian shall have no
duty with respect to the selection of the Banking Institution or for
the failure of such Banking Institution to pay upon demand.
(m) FOREIGN EXCHANGE TRANSACTIONS OTHER THAN AS PRINCIPAL.
(1) Upon receipt of Instructions, the Custodian shall settle foreign
exchange contracts or options to purchase and sell foreign
currencies for spot and future delivery on behalf of and for the
account of a Fund with such currency brokers or Banking
Institutions as such Fund may determine and direct pursuant to
Instructions. Each Fund accepts full responsibility for its use
of third party foreign exchange brokers and for execution of said
foreign exchange contracts and understands that the Fund shall be
responsible for any and all costs and interest charges which may
be incurred as a result of the failure or delay of its third
party broker to deliver foreign exchange. The Custodian shall
have no responsibility with respect to the selection of the
currency brokers or Banking Institutions with which a Fund deals
or, so long as the Custodian acts in accordance with
Instructions, for the failure of such brokers or Banking
Institutions to comply with the terms of any contract or option.
(2) Notwithstanding anything to the contrary contained herein, upon
receipt of Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in
the form of U.S. Dollars or foreign currency prior to receipt of
confirmation of such foreign exchange contract or confirmation
that the countervalue currency completing such contract has been
delivered or received.
(n) PLEDGES OR LOANS OF SECURITIES.
(1) Upon receipt of Instructions from a Fund, the Custodian will
release or cause to be released Securities held in custody to the
pledgees designated in such Instructions by way of pledge or
hypothecation to secure loans incurred by such Fund with various
lenders including but not limited to UMB Bank, n.a.; provided,
however, that the Securities shall be released only upon payment
to the Custodian of the monies borrowed, except that in cases
where additional collateral is required to secure existing
borrowings, further Securities may be released or delivered, or
caused to be released or delivered for that purpose upon receipt
of Instructions. Upon receipt of Instructions, the Custodian will
pay, but only from funds available for such purpose, any such
loan upon re-delivery to it of the Securities pledged or
hypothecated therefor and upon surrender of the note or notes
evidencing such loan. In lieu of delivering collateral to a
pledgee, the Custodian, on the receipt of Instructions, shall
transfer the pledged Securities to a segregated account for the
benefit of the pledgee.
(2) Upon receipt of Special Instructions, and execution of a separate
Securities Lending Agreement, the Custodian will release
Securities held in custody to the borrower designated in such
Instructions and may, except as otherwise provided below, deliver
such Securities prior to the receipt of collateral, if any, for
such borrowing, provided that, in case of loans of Securities
held by a Securities System that are secured by cash collateral,
the Custodian's instructions to the Securities System shall
require that the Securities System deliver the Securities of the
appropriate Fund to the borrower thereof only upon receipt of the
collateral for such borrowing. The Custodian shall have no
responsibility or liability for any loss arising from the
delivery of Securities prior to the receipt of collateral. Upon
receipt of Instructions and the loaned Securities, the Custodian
will release the collateral to the borrower.
(o) STOCK DIVIDENDS, RIGHTS, ETC.
The Custodian shall receive and collect all stock dividends, rights,
and other items of like nature and, upon receipt of Instructions, take
action with respect to the same as directed in such Instructions.
(p) ROUTINE DEALINGS.
The Custodian will, in general, attend to all routine and mechanical
matters in accordance with industry standards in connection with the
sale, exchange, substitution, purchase, transfer, or other dealings
with Securities or other property of each Fund except as may be
otherwise provided in this Agreement or directed from time to time by
Instructions from any particular Fund. The Custodian may also make
payments to itself or others from the Assets for disbursements and
out-of-pocket expenses incidental to handling Securities or other
similar items relating to its duties under this Agreement, provided
that all such payments shall be accounted for to the appropriate Fund.
(q) COLLECTIONS.
The Custodian shall (a) collect amounts due and payable to each Fund
with respect to portfolio Securities and other Assets; (b) promptly
credit to the account of each Fund all income and other payments
relating to portfolio Securities and other Assets held by the
Custodian hereunder upon Custodian's receipt of such income or
payments or as otherwise agreed in writing by the Custodian and any
particular Fund; (c) promptly endorse and deliver any instruments
required to effect such collection; and (d) promptly execute ownership
and other certificates and affidavits for all federal, state, local
and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio Securities and other Assets, or in
connection with the transfer of such Securities or other Assets;
provided, however, that with respect to portfolio Securities
registered in so-called street name, or physical Securities with
variable interest rates, the Custodian shall use its best efforts to
collect amounts due and payable to any such Fund. The Custodian shall
notify a Fund in writing by facsimile transmission or in such other
manner as such Fund and Custodian may agree in writing if any amount
payable with respect to portfolio Securities or other Assets is not
received by the Custodian when due. The Custodian shall not be
responsible for the collection of amounts due and payable with respect
to portfolio Securities or other Assets that are in default.
(r) BANK ACCOUNTS.
Upon Instructions, the Custodian shall open and operate a bank account
or accounts on the books of the Custodian; provided that such bank
account(s) shall be in the name of the Custodian or a nominee thereof,
for the account of one or more Funds, and shall be subject only to
draft or order of the Custodian. The responsibilities of the Custodian
to any one or more such Funds for deposits accepted on the Custodian's
books shall be that of a U.S. bank for a similar deposit.
(s) DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS.
To enable each Fund to pay dividends or other distributions to
shareholders of each such Fund and to make payment to shareholders who
have requested repurchase or redemption of their shares of each such
Fund (collectively, the "Shares"), the Custodian shall release cash or
Securities insofar as available. In the case of cash, the Custodian
shall, upon the receipt of Instructions, transfer such funds by check
or wire transfer to any account at any bank or trust company
designated by each such Fund in such Instructions. In the case of
Securities, the Custodian shall, upon the receipt of Special
Instructions, make such transfer to any entity or account designated
by each such Fund in such Special Instructions.
(t) PROCEEDS FROM SHARES SOLD.
The Custodian shall receive funds representing cash payments received
for shares issued or sold from time to time by each Fund, and shall
credit such funds to the account of the appropriate Fund. The
Custodian shall notify the appropriate Fund of Custodian's receipt of
cash in payment for shares issued by such Fund by facsimile
transmission or in such other manner as such Fund and the Custodian
shall agree. Upon receipt of Instructions, the Custodian shall: (a)
deliver all federal funds received by the Custodian in payment for
shares as may be set forth in such Instructions and at a time agreed
upon between the Custodian and such Fund; and (b) make federal funds
available to a Fund as of specified times agreed upon from time to
time by such Fund and the Custodian, in the amount of checks received
in payment for shares which are deposited to the accounts of such
Fund.
(u) PROXIES AND NOTICES; COMPLIANCE WITH THE SHAREHOLDERS COMMUNICATION
ACT OF 1985.
The Custodian shall deliver or cause to be delivered to the
appropriate Fund all forms of proxies, all notices of meetings, and
any other notices or announcements affecting or relating to Securities
owned by such Fund that are received by the Custodian, any
Subcustodian, or any nominee of either of them, and, upon receipt of
Instructions, the Custodian shall execute and deliver, or cause such
Subcustodian or nominee to execute and deliver, such proxies or other
authorizations as may be required. Except as directed pursuant to
Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such Securities, or execute any proxy to vote
thereon, or give any consent or take any other action with respect
thereto.
The Custodian will not release the identity of any Fund to an issuer
which requests such information pursuant to the Shareholder
Communications Act of 1985 for the specific purpose of direct
communications between such issuer and any such Fund unless a
particular Fund directs the Custodian otherwise in writing.
(v) BOOKS AND RECORDS.
The Custodian shall maintain such records relating to its activities
under this Agreement as are required to be maintained by Rule 31a-1
under the Investment Company Act of 1940 ("the 1940 Act") and to
preserve them for the periods prescribed in Rule 31a-2 under the 1940
Act. These records shall be open for inspection by duly authorized
officers, employees or agents (including independent public
accountants) of the appropriate Fund during normal business hours of
the Custodian.
The Custodian shall provide accountings relating to its activities
under this Agreement as shall be agreed upon by each Fund and the
Custodian.
(w) OPINION OF FUND'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
The Custodian shall take all reasonable action as each Fund may
request to obtain from year to year favorable opinions from each such
Fund's independent certified public accountants with respect to the
Custodian's activities hereunder and in connection with the
preparation of each such Fund's periodic reports to the SEC and with
respect to any other requirements of the SEC.
(x) REPORTS BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
At the request of a Fund, the Custodian shall deliver to such Fund a
written report prepared by the Custodian's independent certified
public accountants with respect to the services provided by the
Custodian under this Agreement, including, without limitation, the
Custodian's accounting system, internal accounting control and
procedures for safeguarding cash, Securities and other Assets,
including cash, Securities and other Assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report
shall be of sufficient scope and in sufficient detail as may
reasonably be required by such Fund and as may reasonably be obtained
by the Custodian.
(y) BILLS AND OTHER DISBURSEMENTS.
Upon receipt of Instructions, the Custodian shall pay, or cause to be
paid, all bills, statements, or other obligations of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians,
Foreign Subcustodians, Special Subcustodians, or Interim Subcustodians (as
each are hereinafter defined) to act on behalf of any one or more Funds. A
Domestic Subcustodian, in accordance with the provisions of this Agreement,
may also appoint a Foreign Subcustodian, Special Subcustodian, or Interim
Subcustodian to act on behalf of any one or more Funds. For purposes of
this Agreement, all Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians and Interim Subcustodians shall be referred to collectively
as "Subcustodians".
(a) DOMESTIC SUBCUSTODIANS.
The Custodian may, at any time and from time to time, appoint any bank
as defined in Section 2(a)(5) of the 1940 Act or any trust company or
other entity, any of which meet the requirements of a custodian under
Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act for the Custodian on behalf of any one or more
Funds as a subcustodian for purposes of holding Assets of such Fund(s)
and performing other functions of the Custodian within the United
States (a "Domestic Subcustodian"). Each Fund shall approve in writing
the appointment of the proposed Domestic Subcustodian; and the
Custodian's appointment of any such Domestic Subcustodian shall not be
effective without such prior written approval of the Fund(s). Each
such duly approved Domestic Subcustodian shall be listed on Appendix A
attached hereto, as it may be amended, from time to time.
(b) FOREIGN SUBCUSTODIANS.
The Custodian may at any time appoint, or cause a Domestic
Subcustodian to appoint, any bank, trust company or other entity
meeting the requirements of an "eligible foreign custodian" under
Section 17(f) of the 1940 Act and the rules and regulations thereunder
to act for the Custodian on behalf of any one or more Funds as a
subcustodian or sub-subcustodian (if appointed by a Domestic
Subcustodian) for purposes of holding Assets of the Fund(s) and
performing other functions of the Custodian in countries other than
the United States of America (hereinafter referred to as a "Foreign
Subcustodian" in the context of either a subcustodian or a
sub-subcustodian); provided that the Custodian shall have obtained
written confirmation from each Fund of the approval of the Board of
Directors or other governing body of each such Fund (which approval
may be withheld in the sole discretion of such Board of Directors or
other governing body or entity) with respect to (i) the identity of
any proposed Foreign Subcustodian (including branch designation), (ii)
the country or countries in which, and the securities depositories or
clearing agencies (hereinafter "Securities Depositories and Clearing
Agencies"), if any, through which, the Custodian or any proposed
Foreign Subcustodian is authorized to hold Securities and other Assets
of each such Fund, and (iii) the form and terms of the subcustodian
agreement to be entered into with such proposed Foreign Subcustodian.
Each such duly approved Foreign Subcustodian and the countries where
and the Securities Depositories and Clearing Agencies through which
they may hold Securities and other Assets of the Fund(s) shall be
listed on Appendix A attached hereto, as it may be amended, from time
to time. Each Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be held
in a country in which no Foreign Subcustodian is authorized to act, in
order that there shall be sufficient time for the Custodian, or any
Domestic Subcustodian, to effect the appropriate arrangements with a
proposed Foreign Subcustodian, including obtaining approval as
provided in this Section 5(b). In connection with the appointment of
any Foreign Subcustodian, the Custodian shall, or shall cause the
Domestic Subcustodian to, enter into a subcustodian agreement with the
Foreign Subcustodian in form and substance approved by each such Fund.
The Custodian shall not consent to the amendment of, and shall cause
any Domestic Subcustodian not to consent to the amendment of, any
agreement entered into with a Foreign Subcustodian, which materially
affects any Fund's rights under such agreement, except upon prior
written approval of such Fund pursuant to Special Instructions.
(c) INTERIM SUBCUSTODIANS.
Notwithstanding the foregoing, in the event that a Fund shall invest
in an Asset to be held in a country in which no Foreign Subcustodian
is authorized to act, the Custodian shall notify such Fund in writing
by facsimile transmission or in such other manner as such Fund and the
Custodian shall agree in writing of the unavailability of an approved
Foreign Subcustodian in such country; and upon the receipt of Special
Instructions from such Fund, the Custodian shall, or shall cause its
Domestic Subcustodian to, appoint or approve an entity (referred to
herein as an "Interim Subcustodian") designated in such Special
Instructions to hold such Security or other Asset.
(d) SPECIAL SUBCUSTODIANS.
Upon receipt of Special Instructions, the Custodian shall on behalf of
a Fund, appoint one or more banks, trust companies or other entities
designated in such Special Instructions to act for the Custodian on
behalf of such Fund as a subcustodian for purposes of: (i) effecting
third-party repurchase transactions with banks, brokers, dealers or
other entities through the use of a common custodian or subcustodian;
(ii) providing depository and clearing agency services with respect to
certain variable rate demand note Securities, (iii) providing
depository and clearing agency services with respect to dollar
denominated Securities, and (iv) effecting any other transactions
designated by such Fund in such Special Instructions. Each such
designated subcustodian (hereinafter referred to as a "Special
Subcustodian") shall be listed on Appendix A attached hereto, as it
may be amended from time to time. In connection with the appointment
of any Special Subcustodian, the Custodian shall enter into a
subcustodian agreement with the Special Subcustodian in form and
substance approved by the appropriate Fund in Special Instructions.
The Custodian shall not amend any subcustodian agreement entered into
with a Special Subcustodian, or waive any rights under such agreement,
except upon prior approval pursuant to Special Instructions.
(e) TERMINATION OF A SUBCUSTODIAN.
The Custodian may, at any time in its discretion upon notification to
the appropriate Fund(s), terminate any Subcustodian of such Fund(s) in
accordance with the termination provisions under the applicable
subcustodian agreement, and upon the receipt of Special Instructions,
the Custodian will terminate any Subcustodian in accordance with the
termination provisions under the applicable subcustodian agreement.
(f) CERTIFICATION REGARDING FOREIGN SUBCUSTODIANS.
Upon request of a Fund, the Custodian shall deliver to such Fund a
certificate stating: (i) the identity of each Foreign Subcustodian
then acting on behalf of the Custodian; (ii) the countries in which
and the Securities Depositories and Clearing Agencies through which
each such Foreign Subcustodian is then holding cash, Securities and
other Assets of such Fund; and (iii) such other information as may be
requested by such Fund, and as the Custodian shall be reasonably able
to obtain, to evidence compliance with rules and regulations under the
1940 Act.
6. STANDARD OF CARE.
(a) GENERAL STANDARD OF CARE.
The Custodian shall be liable to a Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by such Fund
resulting from the gross negligence or willful misfeasance of the
Custodian; provided, however, in no event shall the Custodian be
liable for special, indirect or consequential damages arising under or
in connection with this Agreement.
(b) ACTIONS PROHIBITED BY APPLICABLE LAW, EVENTS BEYOND CUSTODIAN'S
CONTROL, SOVEREIGN RISK, ETC.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder if the Custodian or any Subcustodian or Securities
System, or any subcustodian, Securities System, Securities Depository
or Clearing Agency utilized by the Custodian or any such Subcustodian,
or any nominee of the Custodian or any Subcustodian (individually, a
"Person") is prevented, forbidden or delayed from performing, or omits
to perform, any act or thing which this Agreement provides shall be
performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United
States of America, or any state thereof, or of any foreign country, or
political subdivision thereof or of any court of competent
jurisdiction (and neither the Custodian nor any other Person shall be
obligated to take any action contrary thereto); or (ii) any event
beyond the control of the Custodian or other Person such as armed
conflict, riots, strikes, lockouts, labor disputes, equipment or
transmission failures, natural disasters, or failure of the mails,
transportation, communications or power supply; or (iii) any
"Sovereign Risk." A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental
authority, de facto or de jure; or enactment, promulgation, imposition
or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges
affecting a Fund's Assets; or acts of armed conflict, terrorism,
insurrection or revolution; or any other act or event beyond the
Custodian's or such other Person's control.
(c) LIABILITY FOR PAST RECORDS.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a
Fund, insofar as such loss, damage or expense arises from the
performance of the Custodian or any Domestic Subcustodian in reliance
upon records that were maintained for such Fund by entities other than
the Custodian or any Domestic Subcustodian prior to the Custodian's
employment hereunder.
(d) ADVICE OF COUNSEL.
The Custodian and all Domestic Subcustodians shall be entitled to
receive and act upon advice of counsel of its own choosing on all
matters. The Custodian and all Domestic Subcustodians shall be without
liability for any actions taken or omitted in good faith pursuant to
the advice of counsel.
(e) ADVICE OF THE FUND AND OTHERS.
The Custodian and any Domestic Subcustodian may rely upon the advice
of any Fund and upon statements of such Fund's accountants and other
persons believed by it in good faith to be expert in matters upon
which they are consulted, and neither the Custodian nor any Domestic
Subcustodian shall be liable for any actions taken or omitted, in good
faith, pursuant to such advice or statements.
(f) INSTRUCTIONS APPEARING TO BE GENUINE.
The Custodian and all Domestic Subcustodians shall be fully protected
and indemnified in acting as a custodian hereunder upon any
Resolutions of the Board of Directors or Trustees, Instructions,
Special Instructions, advice, notice, request, consent, certificate,
instrument or paper appearing to it to be genuine and to have been
properly executed and shall, unless otherwise specifically provided
herein, be entitled to receive as conclusive proof of any fact or
matter required to be ascertained from any Fund hereunder a
certificate signed by any officer of such Fund authorized to
countersign or confirm Special Instructions.
(g) EXCEPTIONS FROM LIABILITY.
Without limiting the generality of any other provisions hereof,
neither the Custodian nor any Domestic Subcustodian shall be under any
duty or obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or for
any Fund, the legality of the purchase thereof or evidence of
ownership required to be received by any such Fund, or the
propriety of the decision to purchase or amount paid therefor;
(ii) the legality of the sale of any Securities by or for any Fund, or
the propriety of the amount for which the same were sold; or
(iii)any other expenditures, encumbrances of Securities, borrowings or
similar actions with respect to any Fund's Assets; and may, until
notified to the contrary, presume that all Instructions or
Special Instructions received by it are not in conflict with or
in any way contrary to any provisions of any such Fund's
Declaration of Trust, Partnership Agreement, Articles of
Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of any such Fund,
or any such Fund's currently effective Registration Statement on
file with the SEC.
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) DOMESTIC SUBCUSTODIANS
The Custodian shall be liable for the acts or omissions of any
Domestic Subcustodian to the same extent as if such actions or
omissions were performed by the Custodian itself.
(b) LIABILITY FOR ACTS AND OMISSIONS OF FOREIGN SUBCUSTODIANS.
The Custodian shall be liable to a Fund for any loss or damage to such
Fund caused by or resulting from the acts or omissions of any Foreign
Subcustodian to the extent that, under the terms set forth in the
subcustodian agreement between the Custodian or a Domestic
Subcustodian and such Foreign Subcustodian, the Foreign Subcustodian
has failed to perform in accordance with the standard of conduct
imposed under such subcustodian agreement and the Custodian or
Domestic Subcustodian recovers from the Foreign Subcustodian under the
applicable subcustodian agreement.
(c) SECURITIES SYSTEMS, INTERIM SUBCUSTODIANS, SPECIAL SUBCUSTODIANS,
SECURITIES DEPOSITORIES AND CLEARING AGENCIES.
The Custodian shall not be liable to any Fund for any loss, damage or
expense suffered or incurred by such Fund resulting from or occasioned
by the actions or omissions of a Securities System, Interim
Subcustodian, Special Subcustodian, or Securities Depository and
Clearing Agency unless such loss, damage or expense is caused by, or
results from, the gross negligence or willful misfeasance of the
Custodian.
(d) DEFAULTS OR INSOLVENCIES OF BROKERS, BANKS, ETC.
The Custodian shall not be liable for any loss, damage or expense
suffered or incurred by any Fund resulting from or occasioned by the
actions, omissions, neglects, defaults or insolvency of any broker,
bank, trust company or any other person with whom the Custodian may
deal (other than any of such entities acting as a Subcustodian,
Securities System or Securities Depository and Clearing Agency, for
whose actions the liability of the Custodian is set out elsewhere in
this Agreement) unless such loss, damage or expense is caused by, or
results from, the gross negligence or willful misfeasance of the
Custodian.
(e) REIMBURSEMENT OF EXPENSES.
Each Fund agrees to reimburse the Custodian for all out-of-pocket
expenses incurred by the Custodian in connection with this Agreement,
but excluding salaries and usual overhead expenses.
8. INDEMNIFICATION.
(a) INDEMNIFICATION BY FUND.
Subject to the limitations set forth in this Agreement, each Fund
agrees to indemnify and hold harmless the Custodian and its nominees
from all losses, damages and expenses (including attorneys' fees)
suffered or incurred by the Custodian or its nominee caused by or
arising from actions taken by the Custodian, its employees or agents
in the performance of its duties and obligations under this Agreement,
including, but not limited to, any indemnification obligations
undertaken by the Custodian under any relevant subcustodian agreement;
provided, however, that such indemnity shall not apply to the extent
the Custodian is liable under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with respect to
Securities, which action involves the payment of money or which may,
in the opinion of the Custodian, result in the Custodian or its
nominee assigned to such Fund being liable for the payment of money or
incurring liability of some other form, such Fund, as a prerequisite
to requiring the Custodian to take such action, shall provide
indemnity to the Custodian in an amount and form satisfactory to it.
(b) INDEMNIFICATION BY CUSTODIAN.
Subject to the limitations set forth in this Agreement and in addition
to the obligations provided in Sections 6 and 7, the Custodian agrees
to indemnify and hold harmless each Fund from all losses, damages and
expenses suffered or incurred by each such Fund caused by the gross
negligence or willful misfeasance of the Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing
Agency acting either directly or indirectly under agreement with the
Custodian (each of which for purposes of this Section 9 shall be referred
to as "Custodian"), makes any payment or transfer of funds on behalf of any
Fund as to which there would be, at the close of business on the date of
such payment or transfer, insufficient funds held by the Custodian on
behalf of any such Fund, the Custodian may, in its discretion without
further Instructions, provide an advance ("Advance") to any such Fund in an
amount sufficient to allow the completion of the transaction by reason of
which such payment or transfer of funds is to be made. In addition, in the
event the Custodian is directed by Instructions to make any payment or
transfer of funds on behalf of any Fund as to which it is subsequently
determined that such Fund has overdrawn its cash account with the Custodian
as of the close of business on the date of such payment or transfer, said
overdraft shall constitute an Advance. Any Advance shall be payable by the
Fund on behalf of which the Advance was made on demand by Custodian, unless
otherwise agreed by such Fund and the Custodian, and shall accrue interest
from the date of the Advance to the date of payment by such Fund to the
Custodian at a rate agreed upon in writing from time to time by the
Custodian and such Fund. It is understood that any transaction in respect
of which the Custodian shall have made an Advance, including but not
limited to a foreign exchange contract or transaction in respect of which
the Custodian is not acting as a principal, is for the account of and at
the risk of the Fund on behalf of which the Advance was made, and not, by
reason of such Advance, deemed to be a transaction undertaken by the
Custodian for its own account and risk. The Custodian and each of the Funds
which are parties to this Agreement acknowledge that the purpose of
Advances is to finance temporarily the purchase or sale of Securities for
prompt delivery in accordance with the settlement terms of such
transactions or to meet emergency expenses not reasonably foreseeable by a
Fund. The Custodian shall promptly notify the appropriate Fund of any
Advance. Such notification shall be sent by facsimile transmission or in
such other manner as such Fund and the Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to secure
payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any
purpose or in the event that the Bank or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities
in connection with the performance of its duties hereunder, except such as
may arise from its or its nominee's negligent action, negligent failure to
act or willful misconduct, any Property at any time held for the Custody
Account shall be security therefor and the Fund hereby grants a security
interest therein to the Bank. The Fund shall promptly reimburse the Bank
for any such advance of cash or securities or any such taxes, charges,
expenses, assessments, claims or liabilities upon request for payment, but
should the Fund fail to so reimburse the Bank, the Bank shall be entitled
to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund
with the Bank including, without limitation, the Custody Account, in
connection with any such advance and any interest on such advance as the
Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as is agreed to in
writing by the Custodian and each such Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to each such
Fund and paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian such proxies, powers
of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return
receipt requested) to the other not less than 90 days prior to the date
upon which such termination shall take effect. Upon termination of this
Agreement, the appropriate Fund shall pay to the Custodian such fees as may
be due the Custodian hereunder as well as its reimbursable disbursements,
costs and expenses paid or incurred. Upon termination of this Agreement,
the Custodian shall deliver, at the terminating party's expense, all Assets
held by it hereunder to the appropriate Fund or as otherwise designated by
such Fund by Special Instructions. Upon such delivery, the Custodian shall
have no further obligations or liabilities under this Agreement except as
to the final resolution of matters relating to activity occurring prior to
the effective date of termination.
This Agreement may not be assigned by the Custodian or any Fund without the
respective consent of the other, duly authorized by a resolution by its
Board of Directors or Trustees.
14. ADDITIONAL FUNDS.
An additional Fund or Funds may become a party to this Agreement after the
date hereof by an instrument in writing to such effect signed by such Fund
or Funds and the Custodian. If this Agreement is terminated as to one or
more of the Funds (but less than all of the Funds) or if an additional Fund
or Funds shall become a party to this Agreement, there shall be delivered
to each party an Appendix B or an amended Appendix B, signed by each of the
additional Funds (if any) and each of the remaining Funds as well as the
Custodian, deleting or adding such Fund or Funds, as the case may be. The
termination of this Agreement as to less than all of the Funds shall not
affect the obligations of the Custodian and the remaining Funds hereunder
as set forth on the signature page hereto and in Appendix B as revised from
time to time.
15. NOTICES.
As to each Fund, notices, requests, instructions and other writings
delivered to THE SECURITY BENEFIT GROUP OF COMPANIES, 700 HARRISON, TOPEKA,
KS 66636-0001, postage prepaid, or to such other address as any particular
Fund may have designated to the Custodian in writing, shall be deemed to
have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration Department of the Custodian at its office at 928
Grand Avenue, Kansas City, Missouri, or mailed postage prepaid, to the
Custodian's Securities Administration Department, Post Office Box 226,
Kansas City, Missouri 64141, or to such other addresses as the Custodian
may have designated to each Fund in writing, shall be deemed to have been
properly delivered or given to the Custodian hereunder; provided, however,
that procedures for the delivery of Instructions and Special Instructions
shall be governed by Section 2(c) hereof..
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the
respective successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived,
in any manner except in writing, properly executed by both parties
hereto; provided, however, Appendix A may be amended from time to
time as Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians, and Securities Depositories and Clearing Agencies
are approved or terminated according to the terms of this
Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution
hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following
sections of the Agreement:
TERM SECTION
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2
Authorized Person 3
Banking Institution 4(l)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(l)
Liability 10
OCC 4(g)(2)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2
Special Subcustodian 5(c)
Subcustodian 5
1940 Act 4(v)
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court
of competent jurisdiction, the remaining portion or portions shall
be considered severable and shall not be affected, and the rights
and obligations of the parties shall be construed and enforced as
if this Agreement did not contain the particular part, term or
provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof,
and accordingly supersedes, as of the effective date of this
Agreement, any custodian agreement heretofore in effect between the
Fund and the Custodian.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Custody Agreement to be
executed by their respective duly authorized officers.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Equity Fund
Equity Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Series
Limited Maturity Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Fund
U. S. Government Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S and J
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: UMB BANK, N.A.
R. WILLIAM BLOOM By: DAVID SWAN
Title: Senior Vice President
Date: 1/11/95
<PAGE>
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
Security Ultra Fund Limited Maturity Bond Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Equity Fund Security Income Fund
Equity Series U. S. Government Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Growth and Income Fund SBL Fund
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Income Fund
Corporate Bond Series UMB BANK, N.A.
By: JOHN D. CLELAND By: DAVID SWAN
Title: President Title: Senior Vice President
Date: 1/11/95
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
High Yield Series
By: JAMES R. SCHMANCK
Title: Vice President & Treasurer
SBL Fund
Series B
Series E
Series P
By: JAMES R. SCHMANK
Title: Vice President & Treasurer
UMB BANK, N.A.
By: RALPH SANTOR
Title: Vice President
Date: August 15, 1996
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are hereby made
parties to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agree to be bound by all the terms and conditions contained
in said Agreement:
List of Funds
Security Income Fund, High Yield Series
SBL Fund, Series P
ATTEST: Security Income Fund
High Yield Series
AMY J. LEE
By: JOHN D. CLELAND
Title: President
ATTEST: SBL Fund
Series P
AMY J. LEE
By: JOHN D. CLELAND
Title: President
ATTEST: UMB BANK, N.A.
R.WM. BLOOM By: DAVID SWAN
Title: Senior Vice President
Date: April 29, 1996
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Fund") is hereby made a
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund
Social Awareness Series
ATTEST: Security Equity Fund
Social Awareness Series
CHRIS SWICKARD
By: JAMES R. SCHMANK
Title: Vice President and Treasurer
ATTEST: UMB BANK, N.A.
WILLIAM BLOEMKER By: RALPH SANTORO
Title: Vice President
Date: August 15, 1996
<PAGE>
UMB Financial Corporation
CUSTODY FEE SCHEDULE
Security Management Group of Mutual Funds
NET ASSET VALUE CHARGES
A fee to be computed as of month-end and payable on the last day of each
month of the portfolios' fiscal year, at the annual rate of:
0.275 basis points on the combined net assets of all portfolios, subject to
a $100.00 per month minimum per portfolio.
PORTFOLIO TRANSACTION CHARGES
DTC Book-Entry Transactions* $5.00
PTC Book-Entry Transactions* 11.50
Federal Book-Entry Transactions* 7.50
Physical Transactions* 18.00
Third Party (Bank Book-Entry) Transactions 15.00
Principal and Interest Paydowns 3.00
Options/Futures 25.00
Corporate Actions/Calls/Reorgs 30.00
*A TRANSACTION INCLUDES BUYS, SELLS, MATURITIES, AND FREE SECURITY MOVEMENTS.
OUT OF POCKET EXPENSES
Including, but not limited to, security transfer fees, certificate fees,
shipping/courier fees or charges, FDIC insurance premiums, and remote
system access charges.
UMB Bank, N.A. agrees that the foregoing fees and charges will be in effect for
a period of three years beginning December 1, 1996, unless otherwise agreed by
the parties.
IN WITNESS WHEREOF, the parties hereto have executed this amendment to the
Custody Agreement dated January 1, 1995, this 26th day of November, 1996.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
Name: John D. Cleland
Title: President
ATTEST: Security Equity Fund
Equity Series
Social Awareness Series
AMY J. LEE By: JOHN D. CLELAND
Name: John D. Cleland
Title: President
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
Name: John D. Cleland
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
Limited Maturity Bond Series
U.S. Government Bond Series
High Yield Series
AMY J. LEE By: JOHN D. CLELAND
Name: John D. Cleland
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
Name: John D. Cleland
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
Name: John D. Cleland
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S, J and P
AMY J. LEE By: JOHN D. CLELAND
Name: John D. Cleland
Title: President
ATTEST: UMB Bank, N.A.
R. W. BLOOM By: PATRICIA A. PETERSON
Name: Patricia A. Peterson
Title: Senior Vice President
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Equity Fund
Value Series
By: AMY J. LEE
Title: Secretary
SBL Fund
Series V
By: AMY J. LEE
Title: Secretary
UMB BANK, N.A.
By: RALPH SANTORO
Title: Vice President
Date: April 23, 1997
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Fund") is hereby made
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
List of Funds:
Security Equity Fund, Value Series
SBL Fund, Series V
Security Equity Fund
ATTEST: Value Series
CHRIS SWICKARD By: AMY J. LEE
Title: Secretary
SBL Fund
ATTEST: Series V
CHRIS SWICKARD By: AMY J. LEE
Title: Secretary
ATTEST: UMB BANK, N.A.
CHRIS SWICKARD By: RALPH SANTORO
Title: Vice President
Date: February 14, 1997
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS and CLEARING AGENCIES
Euroclear
Security Equity Fund
Small Company Series
By: JAMES R. SCHMANK
Name: JAMES R. SCHMANK
Title: Vice President and Treasurer
Date: October 7, 1997
SBL Fund
Series X
By: JAMES R. SCHMANK
Name: JAMES R. SCHMANK
Title: Vice President and Treasurer
Date: October 7, 1997
UMB BANK, N.A.
By: RALPH R. SANTORO
Name: RALPH R. SANTORO
Title: Vice President
Date: September 26, 1997
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Funds") is hereby made
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agree to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund, Small Company Series
SBL Fund, Series X
Security Equity Fund
ATTEST: Small Company Series
AMY J. LEE By: JAMES R. SCHMANK
Title: Vice President and Treasurer
SBL Fund
ATTEST: Series X
AMY J. LEE By: JAMES R. SCHMANK
Title: Vice President and Treasurer
ATTEST: UMB BANK, N.A.
By: RALPH R. SANTORO
Title: Vice President
Date: September 26, 1997
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS and CLEARING AGENCIES
Euroclear
Advisor's Fund UMB BANK, N.A.
By: By:
-------------------------------- --------------------------------
Name: Name:
-------------------------------- --------------------------------
Title: Title:
-------------------------------- --------------------------------
Date: Date:
-------------------------------- --------------------------------
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Fund") is hereby made a
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Advisor's Fund, PCG Growth Series
Advisor's Fund, PCG Aggressive Growth Series
Advisor's Fund, SIM Growth Series
Advisor's Fund, SIM Conservative Growth Series
ATTEST: Advisor's Fund
By:
- --------------------------------- ---------------------------------
Title:
-------------------------------
ATTEST: UMB BANK, N.A.
By:
- --------------------------------- ---------------------------------
Title:
------------------------------
Date:
-------------------------------
ADVISOR'S FUND
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
This Agreement is made as of this ____ day of __________, 1998, by and between
the Advisor's Fund, a Kansas corporation ("Fund"), and Security Management
Company, LLC, a Kansas limited liability company ("SMC, LLC"), located in
Topeka, Kansas.
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Investment Company Act of 1940 (the "1940 Act") ;
and
WHEREAS, Security Management Company, LLC is willing to provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to PCG Aggressive Growth Series, PCG Growth Series, SIM Growth Series
and SIM Conservative Growth Series (the "Series") of the Fund under the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties agree as follows:
1. Employment of Security Management Company, LLC
SMC, LLC will provide the Series with general administrative, fund
accounting, transfer agency, and dividend disbursing services described
and set forth in Schedule A attached hereto and made a part of this
Agreement by reference. SMC, LLC agrees to maintain sufficient trained
personnel, equipment and supplies to perform such services in
conformity with the current prospectus of the Series and such other
reasonable standards of performance as the Fund may from time to time
specify, and otherwise in an accurate, timely and efficient manner.
2. Compensation
As consideration for the services described in Section A, the Fund
agrees to pay SMC, LLC a fee as described and set forth in Schedule B
attached hereto and made a part of this Agreement by reference, as it
may be amended from time to time, such fee to be calculated and accrued
daily and payable monthly.
3. Expenses
A. Expenses of SMC, LLC. SMC, LLC shall pay all of the expenses
incurred in providing the Series the services and facilities
described in this agreement, whether or not such expenses are
billed to SMC, LLC or the Fund, except as otherwise provided
herein.
B. Expenses of Series. Expenses to be incurred in the operation of
the Series shall be borne by the Series, except as provided by
Section 3.A. Expenses to be borne by the Series include, but are
not limited to, taxes; interest; brokerage fees and commissions,
if any; fees of directors who are not "interested persons" of the
Fund as that term is defined in the 1940 Act; Securities and
Exchange Commission ("SEC") fees and state Blue Sky qualification
fees; advisory and administration fees; charges of custodians,
transfer and dividend disbursing agents; insurance premiums;
outside auditing and legal expenses; costs of maintenance of
"corporate existence"; costs of preparation and transmission of
registration statements and other SEC filings; typesetting and
printing of prospectuses for regulatory purposes and for
distribution to shareholders of the Fund; costs of shareholders'
reports and corporate meetings; and any extraordinary expenses.
4. Insurance
The Fund and SMC, LLC agree to procure and maintain, separately or as
joint insureds with themselves, their directors, employees, agents and
others, and other investment companies for which SMC, LLC acts as
investment advisor and transfer agent, a policy or policies of
insurance against loss arising from breaches of trust, errors and
omissions, and a fidelity bond meeting the requirements of the 1940
Act, in the amounts and with such deductibles as may be agreed upon
from time to time, and to pay such portions of the premiums therefor as
amount of the coverage attributable to each party is to the aggregate
amount of the coverage for all parties or, with respect to the errors
and omissions coverage, on the basis of the respective insureds' net
assets or other reasonable basis.
5. Registration and Compliance
A. SMC, LLC represents that as of the date of this agreement it is
registered as a transfer agent with the Securities and Exchange
Commission ("SEC") pursuant to Subsection 17A of the Securities
Exchange Act of 1934 and the rules and regulations thereunder,
and agrees to maintain said registration and comply with all of
the requirements of said Act, rules and regulations so long as
this Agreement remains in force.
B. The Fund represents that it is a diversified management
investment company registered with the SEC in accordance with
the 1940 Act and the rules and regulations thereunder, and
authorized to sell its shares pursuant to the 1940 Act, the
Securities Act of 1933 and the rules and regulations thereunder.
6. Liability and Indemnification
SMC, LLC shall be liable for any actual losses, claims, damages or
expenses (including any reasonable counsel fees and expenses) resulting
from SMC, LLC's bad faith, willful misfeasance, reckless disregard of
its obligations and duties, negligence or failure to properly perform
any of its responsibilities or duties under this Agreement. SMC, LLC
shall not be liable and shall be indemnified and held harmless by the
Fund, for any claim, demand or action brought against it arising out
of, or in connection with:
A. Bad faith, willful misfeasance, reckless disregard of its duties
or negligence of the Board of Directors of the Fund, or SMC,
LLC's acting upon any instructions properly executed and
authorized by the Board of Directors of the Fund;
B. SMC, LLC acting in reliance upon advice given by independent
counsel retained by the Board of Directors of the Fund.
In the event that SMC, LLC requests the Fund to indemnify or hold it
harmless hereunder, SMC, LLC shall use its best efforts to inform the
Fund of the relevant facts concerning the matter in question. SMC, LLC
shall use reasonable care to identify and promptly notify the Fund
concerning any matter which presents, or appears likely to present, a
claim for indemnification against the Fund.
The Fund shall have the election of defending SMC, LLC against any
claim which may be the subject of indemnification hereunder. In the
event the Fund so elects, it will so notify SMC, LLC and thereupon the
Fund shall take over defenses of the claim, and if so requested by the
Fund, SMC, LLC shall incur no further legal or other claims related
thereto for which it would be entitled to indemnity hereunder provided,
however, that nothing herein contained shall prevent SMC, LLC from
retaining, at its own expense, counsel to defend any claim. Except with
the Fund's prior consent, SMC, LLC shall in no event confess any claim
or make any compromise in any matter in which the Fund will be asked to
indemnify or hold SMC, LLC harmless hereunder.
Punitive Damages. SMC, LLC shall not be liable to the Fund, or
any third party, for punitive, exemplary, indirect, special or
consequential damages (even if SMC, LLC has been advised of the
possibility of such damages) arising from its obligations and
the services provided under this agreement, including but not
limited to loss of profits, loss of use of the shareholder
accounting system, cost of capital and expenses of substitute
facilities, programs or services.
Force Majeure. Anything in this Agreement to the contrary
notwithstanding, SMC, LLC shall not be liable for delays or
errors occurring by reason of circumstances beyond its control,
including but not limited to acts of civil or military
authority, national emergencies, work stoppages, fire, flood,
catastrophe, earthquake, acts of God, insurrection, war, riot,
failure of communication or interruption.
7. Delegation of Duties
SMC, LLC may, at its discretion, delegate, assign or subcontract any of
the duties, responsibilities and services governed by this Agreement to
its affiliate, Security Benefit Group, Inc., whether or not by formal
written agreement, or to any third party, provided that such
arrangement with a third party has been approved by the Board of
Directors of the Fund. SMC, LLC shall, however, retain ultimate
responsibility to the Fund, and shall implement such reasonable
procedures as may be necessary, for assuring that any duties,
responsibilities or services so assigned, subcontracted or delegated
are performed in conformity with the terms and conditions of this
Agreement.
8. Amendment
This Agreement and the schedules forming a part hereof may be amended
at any time, without shareholder approval, by a writing signed by each
of the parties hereto. Any change in the Fund's registration statements
or other documents of compliance or in the forms relating to any plan,
program or service offered by its current prospectus which would
require a change in SMC, LLC's obligations hereunder shall be subject
to SMC, LLC's approval, which shall not be unreasonably withheld.
9. Termination
This Agreement may be terminated by either party without cause upon 120
days' written notice to the other, and at any time for cause in the
event that such cause remains unremedied for more than 30 days after
receipt by the other party of written specification of such cause.
In the event the Fund designates a successor to any of SMC, LLC's
obligations hereunder, SMC, LLC shall, at the expense and pursuant to
the direction of the Fund, transfer to such successor all relevant
books, records and other data of the Fund in the possession or under
the control of SMC, LLC.
10. Severability
If any clause or provision of this Agreement is determined to be
illegal, invalid or unenforceable under present or future laws
effective during the term hereof, then such clause or provision shall
be considered severed herefrom and the remainder of this Agreement
shall continue in full force and effect.
11. Term
This Agreement initially shall become effective upon its approval by a
majority vote of the Board of Directors of the Fund, including a
majority vote of the Directors who are not "interested persons" of the
Fund or SMC, LLC, as defined in the 1940 Act, and shall continue until
terminated pursuant to its provisions.
12. Applicable Law
This Agreement shall be subject to and construed in accordance with the
laws of the State of Kansas.
SECURITY MANAGEMENT COMPANY, LLC
--------------------------------
By: James R. Schmank, President
ATTEST:
- ---------------------------
Amy J. Lee, Secretary
ADVISOR'S FUND
--------------------------------
By: John D. Cleland, President
ATTEST:
- ---------------------------
Amy J. Lee, Secretary
<PAGE>
ADVISOR'S FUND
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
SCHEDULE A
Security Management Company, LLC agrees to provide the Series the following
Administrative facilities and services:
1. Fund and Portfolio Accounting
A. Maintenance of Fund General Ledger and Journal.
B. Preparing and recording disbursements for direct series expenses.
C. Preparing daily money transfers.
D. Reconciliation of all Series bank and custodian accounts.
E. Assisting Fund independent auditors as appropriate.
F. Prepare daily projection of available cash balances.
G. Record trading activity for purposes of determining net asset values
and daily dividend.
H. Prepare daily portfolio evaluation report to value portfolio
securities and determine daily accrued income.
I. Determine the daily net asset value per share.
J. Determine the daily, monthly, quarterly, semiannual or annual dividend
per share.
K. Prepare monthly, quarterly, semiannual and annual financial
statements.
L. Provide financial information for reports to the Securities and
Exchange Commission in compliance with the provisions of the 1940 Act
and the Securities Act of 1933, the Internal Revenue Service and other
regulatory agencies as required.
M. Provide financial, yield, net asset value, etc. information to NASD
and other survey and statistical agencies as instructed by the Fund.
N. Report to the Audit Committee of the Board of Directors, if
applicable.
2. Administrative
A. Provide registration and other administrative services necessary to
qualify the shares of the Series for sale in those jurisdictions
determined from time to time by the Fund's Board of Directors
(commonly known as "Blue Sky Registration").
B. Provide registration with and reports to the Securities and Exchange
Commission in compliance with the provisions of the 1940 Act and the
Securities Act of 1933.
C. Prepare and review Series prospectus and Statement of Additional
Information.
D. Prepare proxy statements and oversee proxy tabulation for annual
meetings.
E. Prepare Board materials and maintain minutes of Board meetings.
F. Draft, review and maintain contractual agreements between Fund and
Investment Advisor, Custodian, Distributor and Transfer Agent.
G. Oversee printing of proxy statements, financial reports to
shareholders, prospectuses and Statements of Additional Information.
H. Provide oversight regarding shareholder transactions, administrative
services, compliance with contractual agreements and the provisions of
the 1940 Act and the Securities Act of 1933.
<PAGE>
SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES
Security Management Company, LLC agrees to provide the Series the following
transfer agency and dividend disbursing services:
1. Maintenance of shareholder accounts, including processing of new accounts.
2. Posting address changes and other file maintenance for shareholder
accounts.
3. Posting all transactions to the shareholder file, including:
A. Direct purchases
B. Wire order purchases
C. Direct redemptions
D. Wire order redemptions
E. Draft redemptions
F. Direct exchanges
G. Transfers
H. Certificate issuances
I. Certificate deposits
4. Monitor fiduciary processing, insuring accuracy and deduction of fees.
5. Prepare daily reconciliations of shareholder processing to money movement
instructions.
6. Handle bad/returned check collections. Immediately liquidate shares
purchased and return to the shareholder the check and confirmation of the
transaction.
7. Issuing all checks and stopping and replacing lost checks.
8. Draft clearing services.
A. Maintenance of signature cards and appropriate corporate resolutions.
B. Comparison of the signature on the check to the signatures on the
signature card for the purpose of paying the face amount of the check
only.
C. Receiving checks presented for payment and liquidating shares after
verifying account balance.
D. Ordering checks in quantity specified by the Series for the
shareholder, if applicable.
9. Mailing confirmations, checks and/or certificates resulting from
transaction requests to shareholders.
10. Performing all of the Series' other mailings, including:
A. Dividend and capital gain distributions.
B. Semiannual and annual reports.
C. 1099/year-end shareholder reporting.
D. Systematic withdrawal plan payments.
E. Daily confirmations.
11. Answering all service related telephone inquiries from shareholders and
others, including:
A. General and policy inquiries (research and resolve problems).
B. Fund yield inquiries.
C. Taking shareholder processing requests and account maintenance changes
by telephone as described above.
D. Submit pending requests to correspondence.
E. Monitor on-line statistical performance of unit.
F. Develop reports on telephone activity.
12. Respond to written inquiries (research and resolve problems), including:
A. Initiate shareholder account reconciliation proceeding when
appropriate.
B. Notify shareholder of bad/returned investment checks.
C. Respond to financial institutions regarding verification of deposit.
D. Initiate proceedings regarding lost certificates.
E. Respond to complaints and log activities.
F. Correspondence control.
13. Maintaining and retrieving all required past history for shareholders and
provide research capabilities as follows:
A. Daily monitoring of all processing activity to verify back-up
documentation.
B. Provide exception reports.
C. Microfilming.
D. Storage, retrieval and archive.
14. Prepare materials for annual meetings.
A. Address and mail annual proxy and related material.
B. Prepare and submit to Fund and affidavit of mailing.
C. Furnish certified list of shareholders (hard copy or microfilm) and
inspectors of election.
15. Report and remit as necessary for state escheat requirements.
<PAGE>
ADVISOR'S FUND
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to the Series:
Annual Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Accounting Fee: Per Series, the greater of $ 15,000 per
year or 0.03% (based on average daily
net asset values).
Annual Administration Fee: Per Series, 0.045% (based on average
daily net asset values)
If this Agreement shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees set forth above.
