As filed with the U.S. Securities and Exchange Commission on September 30, 1998
Securities Act File No. 333-57911
Investment Company Act File No. 811-08843
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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. 1 X
Post-Effective Amendment No. __
and/or
Registration Statement Under The Investment Company Act of 1940 X
Amendment No. _1_
(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.
<PAGE>
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Advisor's Fund
700 SW Harrison Street, Topeka, Kansas 66636-0001
Prospectus
September 30, 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 issued by SBL ("Separate Accounts") (Holders of
contracts 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 September 30, 1998 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 the Advisor's Fund, 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 Adviser..........................................................4
Other Information...........................................................4
Fund Expenses...............................................................4
ADVISOR'S FUND.................................................................4
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES...............................5
PCG Growth..................................................................5
PCG Aggressive Growth.......................................................5
SIM Growth..................................................................5
SIM Conservative Growth.....................................................6
INVESTMENT METHODS AND RISK FACTORS............................................6
Investments.................................................................6
General..................................................................6
Equity Securities........................................................6
Debt Securities..........................................................6
Convertible Securities...................................................7
Warrants.................................................................7
U.S. Government Securities...............................................7
Asset-Backed Securities..................................................8
When-Issued and Forward Commitment Securities ...........................8
Illiquid and Restricted Securities.......................................8
American Depositary Receipts.............................................9
Zero Coupon Securities ..................................................9
Repurchase Agreements, Reverse Repurchase Agreements and Roll
Transactions ..........................................................9
Management Practices........................................................9
Borrowing................................................................9
Lending of Portfolio Securities ........................................10
Forward Currency Transactions ..........................................10
Options.................................................................10
Futures Contracts and Related Options ..................................11
Swaps, Caps, Floors and Collars ........................................11
Hybrid Instruments .....................................................11
Risk Factors...............................................................11
General.................................................................11
Equity Securities.......................................................12
Specific Risks Pertaining to PCG Aggressive Growth......................12
Investments in Shares of Mutual Funds...................................12
Additional Expenses Associated with Investments in Mutual Funds.........12
Other Expenses..........................................................13
Futures and Options Risk ...............................................13
Foreign Investment Risks ...............................................13
Emerging Markets........................................................13
Currency Risk ..........................................................13
Risks Associated with Investments in High-Yield Lower-Rated Debt
Securities............................................................14
Industry Concentration..................................................15
Year 2000 Concerns......................................................15
MANAGEMENT OF THE FUND........................................................15
PORTFOLIO MANAGEMENT..........................................................15
EXPENSES......................................................................16
SALE AND REDEMPTION OF SHARES.................................................16
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS...........................16
TAX CONSEQUENCES OF INVESTMENTS IN SHARES OF INVESTMENT COMPANIES.............17
FOREIGN TAXES.................................................................17
DETERMINATION OF NET ASSET VALUE..............................................17
TRADING PRACTICES AND BROKERAGE...............................................18
PERFORMANCE INFORMATION.......................................................18
GENERAL INFORMATION...........................................................18
Organization...............................................................18
Administrator, Transfer Agent and Dividend-Paying Agent....................19
Custodian..................................................................19
Inquiries..................................................................19
<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. Shares of the Fund also may be offered to qualified
pension and retirement plans outside of the separate account context.
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. As with any investment, the risk
exists that an investor will lose a part or all of the investment made. 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 0.97% 0.97% 0.97% 0.97%
Total Fund Operating
Expenses 1.72% 1.72% 1.72% 1.72%
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 $17 $17 $17 $17
3 Years $54 $54 $54 $54
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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
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 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."
CG 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 $500 million but less than $2 billion dollars. 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 that primarily invest in equity
securities 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. As with all investments,
there is a risk that an investor will lose money when investing in the Fund.
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.
Illiquid 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, Reverse Repurchase Agreements and Roll
Transactions -- 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. This may produce additional costs to the
Series. 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 or which assess redemption charges.
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 distribution fees under Rule 12b-1 of the 1940 Act
or service activities for 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 Concention -- 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 $200 million
in assets, as of August 31, 1998, 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 as Subadviser and portfolio
manager for PCG Aggressive Growth. The Subadviser is an Ohio 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 0.25% 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 which was founded in 1983. 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 in 1994, 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 between 80% and
100%. 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. 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.
dministrator, 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.
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<PAGE>
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ADVISOR'S FUND
Statement of Additional Information
September 30, 1998
(785) 431-3127
(800) 888-2461
- --------------------------------------------------------------------------------
<PAGE>
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
Portland, Oregon 97201 Kansas City, Place
Missouri 64106 1200 Main Street
FUND ADMINISTRATOR Kansas City,
Security Management Company, LLC Missouri 64105
700 SW Harrison
Topeka, Kansas 66636
<PAGE>
ADVISOR'S FUND
700 SW Harrison Street, Topeka, Kansas 66636-0001
Statement of
Additional Information
September 30, 1998
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with Advisor's Fund Prospectus dated September 30, 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..........................................24
SALE AND REDEMPTION OF SHARES.................................................25
INVESTMENT MANAGEMENT.........................................................25
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.......................................................31
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 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 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. On July 31,
1998, SBL converted from a mutual life insurance company to a stock life
insurance company ultimately controlled by Security Benefit Mutual Holding
Company, a Kansas mutual holding company. 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.
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 Ohio 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 0.25% 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.)
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.
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.
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.
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.
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.
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 for 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.
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 Fund is managed by the Board of Directors and the officers of the Fund
as appointed by the Board of Directors. Among their responsibilities, the
Directors review and approve fundamental operating, financial, and corporate
governance policies and evaluate the Investment Adviser's performance and
investment management fees. 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; Senior Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company.
RICHARD K. RYAN, Vice President 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.
- -----------------------------------------------------------------------------------------------------------------------------
*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.
- -----------------------------------------------------------------------------------------------------------------------------
</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 board of directors' meeting,
plus reasonable travel costs, for each meeting of the board attended. The
aggregate compensation paid or estimated to be paid by the Fund to each of the
Directors during its fiscal year ending April 30, 1999, is set forth below:
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -------------------------------- ------------------------------ ------------------------------ -------------------------------
AGGREGATE COMPENSATION PENSION OR RETIREMENT
FROM ADVISOR'S FUND BENEFITS ACCRUED AS PART OF ESTIMATED ANNUAL BENEFITS
NAME OF DIRECTOR OF THE FUND FUND EXPENSES UPON RETIREMENT
- -------------------------------- ------------------------------ ------------------------------ -------------------------------
Donald A. Chubb, Jr. $500 0 0
John D. Cleland 0 0 0
Penny A. Lumpkin $500 0 0
Mark L. Morris, Jr. $500 0 0
James R. Schmank 0 0 0
</TABLE>
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 October ___, 1998, which was approved by
the board of directors of the Fund at a regular meeting held on July 24, 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 0.25% 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 October ___, 1998, 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 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 policies issued by SBL. Shares of the Fund may also be sold to
qualified pension and retirement plans outside of the separate account context.
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 July
24, 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
Portfolio turnover for each of the Series is expected to be between 80 and
100%. 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.
INDEPENDENT AUDITORS
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.
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 will not
begin operations until October __, 1998.
<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>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) In reliance on Rule 14a-2 of the 1940 Act, no
financial statements are required to be submitted.
(b) Exhibits
(1) Form of Articles of Incorporation filed
April 29, 1998+
(a) Form of Amended Articles of
Incorporation
(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) Opinion of Counsel
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Not Applicable
(18) Not Applicable
- ----------
+ Previously filed.
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 are no shareholders 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
30th day of September, 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 September 30, 1998
Donald A. Chubb, Jr.
/s/ John D. Cleland President and Director September 30, 1998
John D. Cleland
/s/ Penny A. Lumpkin Director September 30, 1998
Penny A. Lumpkin
/s/ Mark L. Morris, Jr. Director September 30, 1998
Mark L. Morris, Jr.
/s/ James R. Schmank Director September 30, 1998
James R. Schmank
/s/ Brenda M. Harwood Treasurer (Principal September 30, 1998
Brenda M. Harwood Financial and
Accounting Officer)
<PAGE>
Advisor's Fund
Index to Exhibits
Filed With
Registration Statement
Exhibit b(1)(a) Form of Amended Articles of Incorporation
Exhibit 5(i) Form of Advisory Agreement between Advisor's Fund and
Private Consulting Group, Inc.
Exhibit 5(ii) Form of Subadvisory Agreement between Private Consulting
Group, Inc. and Mench Financial, Inc.
Exhibit 8 Form of Custody Agreement between UMB Bank, N.A. and
Security Management Company Family of Funds
Exhibit 9(ii) Form of Services Agreement
Exhibit 10 Opinion of Counsel
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
ADVISOR'S FUND
We, John D. Cleland, President, and Amy J. Lee, Secretary, of Advisor's Fund, a
corporation organized and existing under the laws of the State of Kansas, do
hereby certify that by unanimous written consent of the Board of Directors of
said corporation, dated the 9th day of September, 1998, the board adopted a
resolution setting forth the following amendment to the Articles of
Incorporation and declaring its advisability:
RESOLVED
The Board of Directors of Advisor's Fund recommends that the Articles of
Incorporation be amended by deleting the first paragraph of Article Fourth and
by inserting, in lieu thereof, the following new first paragraph of Article
Fourth:
FOURTH: The corporation shall have authority to issue an indefinite number of
shares of common stock 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.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of said
corporation this ____ day of September, 1998.
------------------------------------
John D. Cleland, President
------------------------------------
Amy J. Lee, Secretary
<PAGE>
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE )
BE IT REMEMBERED, that before me, ____________________, a Notary Public in and
for the aforesaid county and state, personally appeared John D. Cleland,
President and Amy J. Lee, Secretary, of Advisor's Fund who are known to me to be
the same persons who executed the foregoing certificate, and duly acknowledged
the execution of the same this ______ day of September, 1998.
------------------------------
Notary Public
My Commission Expires:
PLEASE SUBMIT THIS DOCUMENT IN DUPLICATE, WITH $20 FILING FEE TO:
Secretary of State
2nd Floor, State Capitol
Topeka, KS 66612-1594
(785) 296-4564
ADVISORY AGREEMENT
THIS AGREEMENT is made this ______ day of ___________________ 1998, by and
between THE ADVISOR'S FUND, a Kansas Corporation (the "Fund"), and PRIVATE
CONSULTING GROUP, INC., an Oregon corporation (the "Adviser"),
WITNESSETH:
WHEREAS, the Fund is engaged in business as a diversified, open-end, management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"); and
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Fund desires to retain the Adviser to furnish advisory services to
the series of the Fund listed in Exhibit A (the series so listed being referred
to herein as the "Series");
WHEREAS, the Adviser is a registered investment adviser under the Investment
Advisers Act of 1940 (the "Investment Advisers Act"), as amended, and engages in
the business of acting as an investment adviser;
WHEREAS, the Adviser is willing to provide research and advice to the Series
on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Appointment. The Fund hereby appoints Adviser to act as investment adviser
to the Series with respect to the investment of its assets and to supervise
and arrange the purchase of securities for the Series and the sale of
securities held in the portfolios of the Series, subject always to the
supervision of the Board of Directors of the Fund (or a duly appointed
committee thereof) during the period and upon and subject to the terms and
conditions herein set forth. The Adviser hereby accepts such appointment
and agrees to perform the services required by this Agreement for the
compensation herein provided.
2. Investment Advice. The Adviser shall have investment discretion with
respect to the Series and will have the authority to purchase and sell
securities and other investments for the Series as it, in its best
judgment, deems appropriate subject to the investment objective, policies
and restrictions in the Prospectus and Statement of Additional Information
of the Fund. The investment advice rendered hereunder is subject further to
any requirements imposed by the Fund's Articles of Incorporation and
Bylaws, the 1940 Act and the rules and regulations promulgated thereunder,
any other applicable provisions of law, and the terms of the registration
statements of the Fund under the federal securities laws, all as from time
to time amended. The Adviser shall give the Series the benefit of its best
judgment, efforts and facilities in rendering its services as Adviser.
3. Investment Analysis and Implementation. In carrying out its obligation
under paragraph 2 hereof, the Adviser shall: (a) determine which issuers
and securities shall be represented in the Series' portfolio and regularly
report thereon to the Fund's Board of Directors; (b) formulate and
implement continuing programs for the purchase and sale of the securities
of such issuers and regularly report thereon to the Fund's Board of
Directors; (c) continuously review the Series' security holdings and the
investment program and the investment policies of the Series; and (d) take,
on behalf of the Series, all actions which appear necessary to carry into
effect such purchase and sale programs, including the placement of orders
for the purchase and sale of securities for the Series.
4. Broker-Dealer Relationships. The Adviser is responsible for decisions to
buy and sell securities for the Series, broker/dealer selection, and
negotiation of brokerage commission rates. The Adviser's primary
consideration in effecting a security transaction will be execution at the
most favorable price. In selecting a broker/dealer to execute each
particular transaction, the Adviser will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker/dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker/dealer to the investment performance of the Series on a continuing
basis. Accordingly, the price to the Series in any transaction may be less
favorable than that available from another broker/dealer if the difference
is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies as the Board of Directors may
determine, the Adviser shall not be deemed to have acted unlawfully or to
have breached any duty created by this Agreement or otherwise solely by
reason of its having caused a Series to pay a broker for effecting a
portfolio investment transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction
if the Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with
respect to the Series and to its other clients as to which it exercises
investment discretion (as that term is defined under Section 3(a)(35) of
the Securities Exchange Act of 1934). The Adviser is further authorized to
place and/or to effect orders with such brokers and dealers who may provide
research or statistical material or other services to the Series or to the
Adviser. Such allocation shall be in such amounts and proportions as the
Adviser shall determine. On occasions when the Adviser deems the purchase
or sale of a security to be in the best interest of a Series as well as
other clients of the Adviser, the Adviser, to the extent permitted by
applicable law and regulations, may, but shall not be obligated to,
aggregate the securities to be purchased or sold to attempt to obtain a
more favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or
sold, as well the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be most equitable and
consistent with its fiduciary obligations to the Series and to its other
clients.
5. Principal Transactions and Code of Ethics. The Adviser and any affiliated
person of the Adviser will not purchase securities or other financial
instruments from or sell securities or other financial instruments to the
Series ("Principal Transactions"); provided however, the Adviser may enter
into a Principal Transaction with a Series if (i) the transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Investment Advisers Act and the rules and
regulations promulgated thereunder, and (ii) the transaction receives the
express written approval of the Fund.
The Adviser agrees to observe and comply with Rule 17j-1 under the 1940 Act
and its Code of Ethics, as the same may be amended from time to time. The
Adviser agrees to provide the Fund with a copy of such Code of Ethics.
6. Control by Board of Directors. Any investment program undertaken by the
Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Adviser on behalf of the Series pursuant thereto, shall
at all times be subject to any directives of the Board of Directors of the
Fund.
7. Compliance with Applicable Requirements. In carrying out its obligations
under this Agreement, the Adviser shall ensure that each Series complies
with:
(a) all applicable provisions of the 1940 Act;
(b) the provisions of the Registration Statement of the Fund, as amended,
under the Securities Act of 1933 and the 1940 Act;
(c) all applicable statutes and regulations necessary to qualify a Series
as a Regulated Investment Company under Subchapter M of the Internal
Revenue Code (or any successor or similar provision), and shall notify
the Board of Directors immediately upon having a reasonable basis for
believing that a Series has ceased to so qualify or that it might not
so qualify in the future;
(d) the diversification provisions of Section 817(h) of the Internal
Revenue Code and the regulations issued thereunder relating to the
diversification requirements for variable insurance contracts and any
prospective amendments or other modifications to Section 817 or
regulations thereunder. Adviser shall notify the Board of Directors
immediately upon having a reasonable basis for believing that a Series
has ceased to comply and will take all reasonable steps to adequately
diversify such Series so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
(e) the provisions of the Fund's Articles of Incorporation, as amended;
(f) the provisions of the Bylaws of the Fund, as amended; and
(g) any other applicable provisions of state and federal law.
8. Records. The Adviser hereby agrees to maintain all records relating to its
activities and obligations under this Agreement which are required to be
maintained by Rule 31a-1 under the 1940 Act and agrees to preserve such
records for the periods prescribed by Rule 31a-2 under the 1940 Act. The
Adviser further agrees that all such records are the property of the Fund
and agrees to surrender promptly to the Fund any such records upon the
Fund's request.
9. Expenses. The expenses connected with the Fund shall be borne by the
Adviser as follows:
(a) The Adviser shall maintain, at its expense and without cost to the
Fund, a trading function in order to carry out its obligations under
subparagraph (d) of paragraph 3 hereof to place orders for the
purchase and sale of portfolio securities for the Series.
(b) The Adviser shall pay any expenses associated with carrying out its
obligation under subparagraph (b) of paragraph 3 hereof to prepare
reports for the Fund's Board of Directors concerning issuers and
securities represented in the Series' portfolio and the expenses of
any travel by employees of the Adviser in connection with such reports
to the Fund's Board of Directors.
(c) The Adviser shall pay any expenses that it may incur in communicating
with the Board of Directors of the Fund in connection with its
obligations under this Agreement, including the expenses of telephone
calls, special mail services and telecopier charges.
(d) Other than as specifically set forth above, the Adviser shall not be
required to pay any expenses of the Fund, and in particular, but
without limiting the generality of the foregoing, the Adviser shall
not be required to pay office rental or general administrative
expenses; board of directors' fees, legal, auditing, and accounting
expenses, brokerage commissions, taxes and governmental fees,
membership dues, fees of custodian, transfer agent, registrar and
dividend disbursing agent, expenses of issue sale or redemption of
shares of the Fund, costs and expenses in connection with the
registration of such stock under the Securities Act of 1933 and
qualification of the Fund's stock under Blue Sky laws, expenses of
preparing and distributing reports, proxy statements, expenses of
printing prospectuses and such other nonrecurring expenses as may
arise from time to time.
10. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Fund as follows:
(a) the Adviser is registered as an investment adviser under the
Investment Advisers Act;
(b) the Adviser will immediately notify the Fund of the occurrence of any
event that would disqualify the Adviser from serving as an investment
adviser of an investment company pursuant to Section 9(a) of the 1940
Act;
(c) the Adviser will file a notice of exemption pursuant to Rule 4.14
under the Commodity Exchange Act with the Commodity Futures Trading
Commission and the National Futures Association prior to providing any
futures contract or commodity trading advice to the Fund;
(d) the Adviser is duly organized and validly existing under the laws of
the State of Oregon with the power to own and possess its assets and
carry on its business as it is now being conducted;
(e) the execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly
authorized by all necessary actions on the part of its shareholders,
and no action by or in respect of, or filing with, any governmental
body, agency or official is required on the part of the Adviser for
the execution, delivery and performance by the Adviser of this
Agreement, and the execution, delivery and performance by the Adviser
of this Agreement do not contravene or constitute a default under (i)
any provision of applicable law, rule or regulation, (ii) the
Adviser's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree, or other instrument binding upon the
Adviser;
(f) This Agreement is a valid and binding agreement of the Adviser;
(g) The Form ADV of the Adviser previously provided to the Fund is a true
and complete copy of the form filed with the Securities and Exchange
Commission and the information contained therein is accurate in all
material respects and does not omit to state any material fact
necessary in order to make the statement made, in light of the
circumstances under which they were made, not misleading;
11. Delegation of Duties. The Adviser may delegate, assign or subcontract any
of the duties, responsibilities and services governed by this agreement to
a third party, but only by a written agreement approved by the Board of
Directors of the Fund. The Adviser 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.
12. Compensation. The Fund shall pay to the Adviser, for the services rendered
hereunder, the fee set forth in Exhibit B attached hereto.
13. Non-Exclusivity. The services of the Adviser to the Fund are not to be
deemed to be exclusive, and the Adviser shall be free to render investment
advisory or other services to others and to engage in other activities, so
long as its services under this Agreement are not impaired thereby.
14. Term. This Agreement shall become effective upon the date first above
written, provided that this Agreement shall not take effect with respect to
a Series unless it has first been approved (i) by a vote of a majority of
those directors of the Fund who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (ii) by vote of a majority
of the Series outstanding voting securities. This Agreement shall continue
in effect for a period of two years from the date hereof, subject
thereafter to being continued in force and effect from year to year with
respect to each Series if specifically approved each year by either (i) the
Board of Directors of the Series, or (ii) by the affirmative vote of a
majority of the Series outstanding voting securities. In addition to the
foregoing, each renewal of this Agreement with respect to a Series must be
approved by the vote of a majority of the Fund's directors who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval.
Prior to voting on the renewal of this Agreement , the Board of Directors
of the Fund may request and evaluate, and the Adviser shall furnish, such
information as may reasonably be necessary to enable the Fund's Board of
Directors to evaluate the terms of this Agreement.
15. Termination. This Agreement may be terminated at any time, without the
payment of any penalty: (i) by vote of the Fund's Board of Directors or by
vote of a majority of the Series' outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), or by the Adviser on sixty (60) days'
written notice to the other party; (ii) upon twenty (20) days written
notice by the Fund due to breach by the Adviser of any representation or
warranty contained in paragraph 10 hereof, which shall not have been cured
during the notice period; (iii) by the Fund immediately upon written notice
to the Adviser if the Adviser becomes unable to discharge its duties and
obligations under this Agreement. This Agreement shall automatically
terminate in the event of its "assignment" as that term is defined in
Section 2(a)(4) of the 1940 Act.
16. Limitation of Liability of the Adviser. The duties of the Adviser shall be
confined to those expressly set forth herein, and no implied duties are
assumed by or may be asserted against the Adviser hereunder. In the absence
of willful misfeasance, bad faith or gross negligence on the part of the
Adviser or its officers, directors or employees, or breach of its duties
hereunder, the Adviser shall not be liable to the Fund or to any
shareholder of the Fund for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security, provided the
Adviser has acted in good faith; provided further that nothing herein shall
relieve the Adviser from any obligations under applicable law, including,
without limitation, the federal and state securities laws.
17. Indemnification. The Adviser shall indemnify the Fund, and its officers and
directors, for any liability and expenses, including attorney's fees, which
may be sustained as a result of the Adviser's willful misfeasance, bad
faith, gross negligence, breach of its duties hereunder or violation of
applicable law, including without limitation, the federal and state
securities laws.
18. Notices. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage-paid to the other party at such address as
such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the
Adviser for this purpose shall be 4650 SW Macadam, Portland, Oregon, 97201,
and the address of the Fund for this purpose shall be 700 Harrison Street,
Topeka, Kansas 66636-0001.
19. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Kansas. Any question of
interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940
Act shall be resolved by reference to such term or provision of the 1940
Act and to interpretations thereof, if any, by the U.S. courts or, in the
absence of any controlling decisions of any such court, by rules,
regulation or order of the Securities and Exchange Commission validly
issued pursuant to the 1940 Act. In addition, where the effect of a
requirement of the 1940 Act reflected in any provision of this Agreement is
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or general application, such provision shall
be deemed to incorporate the effect of such rule, regulation or order.
20. Captions. The captions herein are included for convenience of reference
only and shall be ignored in the construction or interpretation hereof.
21. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the
Agreement shall not be affected adversely and shall remain in full force
and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
ATTEST: THE ADVISOR'S FUND
____________________________________ By:________________________________
Title
ATTEST: PRIVATE CONSULTING GROUP, INC.
____________________________________ By:________________________________
Title:
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this ______ day of ___________________ 1998, by and
between PRIVATE CONSULTING GROUP, INC., an Oregon corporation (the "Adviser")
and MENCH FINANCIAL, INC., an Ohio corporation (the "Sub-Adviser").
WITNESSETH:
WHEREAS, the Adviser is a registered investment adviser under the Investment
Advisers Act of 1940 (the "Investment Advisers Act"), as amended, and engages in
the business of acting as an investment adviser;
WHEREAS, the Sub-Adviser is a registered investment adviser under the Investment
Advisers Act and engages in the business of acting as an investment adviser;
WHEREAS, the Adviser is the investment adviser for the Advisor's Fund (the
"Fund") and provides investment advisory services to the Fund on the terms and
conditions set forth in an investment advisory contract;
WHEREAS, the Fund is engaged in business as a diversified, open-end, management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"); and
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Adviser desires to retain the Sub-Adviser as the Adviser's agent to
furnish advisory services to the PCG Aggressive Growth Series of the Fund (the
"Series") on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Appointment. The Adviser hereby appoints Sub-Adviser to provide
sub-investment advisory services to the Series for the period and on the
terms set forth in this Agreement. Sub-Adviser accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
2. Investment Advice. The Sub-Adviser shall furnish the Series investment
research and advice consistent with the investment policies set forth in
the prospectus and statement of additional information of the Fund, subject
at all times to the policies and control of the Fund's Board of Directors
and the supervision of the Adviser. In addition, the Sub-Adviser may avail
itself of any investment research or advice provided by the Adviser. The
investment advice rendered hereunder is subject further to any requirements
imposed by the Fund's Articles of Incorporation and Bylaws, the 1940 Act
and the rules and regulations promulgated thereunder, any other applicable
provisions of law, and the terms of the registration statements of the Fund
under the federal securities laws, all as from time to time amended. The
Sub-Adviser shall give the Series the benefit of its best judgment, efforts
and facilities in rendering its services as Sub-Adviser.
3. Investment Analysis and Implementation. In carrying out its obligation
under paragraph 2 hereof, the Sub-Adviser shall:
(a) determine which issuers and securities shall be represented in the
Series' portfolio and regularly report thereon to the Fund's Board of
Directors and the Adviser;
(b) formulate and implement continuing programs for the purchase and sale
of the securities of such issuers and regularly report thereon to the
Fund's Board of Directors and the Adviser;
(c) continuously review the Series' security holdings and the investment
program and the investment policies of the Series; and
(d) take, on behalf of the Series, all actions which appear necessary to
carry into effect such purchase and sale programs, including the
placement of orders for the purchase and sale of securities for the
Series.
4. Broker-Dealer Relationships. Subject to its fiduciary duty to seek best
execution, the Sub-Adviser shall place orders for the purchase and sale of
securities for the Series with the broker/dealers specified by the Adviser.
5. Principal Transactions and Code of Ethics. The Sub-Adviser and any
affiliated person of the Sub-Adviser will not purchase securities or other
financial instruments from or sell securities or other financial
instruments to the Series ("Principal Transactions"); provided however, the
Sub-Adviser may enter into a Principal Transaction with the Series if (i)
the transaction is permissible under applicable laws and regulations,
including, without limitation, the 1940 Act and the Investment Advisers Act
and the rules and regulations promulgated thereunder, and (ii) the
transaction receives the express written approval of the Fund.
The Sub-Adviser agrees to observe and comply with Rule 17j-1 under the 1940
Act and its Code of Ethics, as the same may be amended from time to time. The
Sub-Adviser agrees to provide the Adviser and the Fund with a copy of such Code
of Ethics.
6. Control by Board of Directors. Any investment program undertaken by the
Sub-Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of the Series pursuant thereto,
shall at all times be subject to any directives of the Board of Directors
of the Fund.
7. Compliance with Applicable Requirements. In carrying out its obligations
under this Agreement, the Sub-Adviser shall ensure that the Series complies
with:
(a) all applicable provisions of the 1940 Act;
(b) the provisions of the Registration Statement of the Fund, as amended,
under the Securities Act of 1933 and the 1940 Act;
(c) all applicable statutes and regulations necessary to qualify the
Series as a Regulated Investment Company under Subchapter M of the
Internal Revenue Code (or any successor or similar provision), and
shall notify the Adviser and the Board of Directors immediately upon
having a reasonable basis for believing that the Series has ceased to
so qualify or that it might not so qualify in the future;
(d) the diversification provisions of Section 817(h) of the Internal
Revenue Code and the regulations issued thereunder relating to the
diversification requirements for variable insurance contracts and any
prospective amendments or other modifications to Section 817 or
regulations thereunder. Sub-Adviser shall notify the Adviser and the
Board of Directors immediately upon having a reasonable basis for
believing that the Series has ceased to comply and will take all
reasonable steps to adequately diversify the Series so as to achieve
compliance within the grace period afforded by Regulation 1.817-5.
(e) the provisions of the Fund's Articles of Incorporation, as amended;
(f) the provisions of the Bylaws of the Fund, as amended; and
(g) any other applicable provisions of state and federal law.
8. Records. The Sub-Adviser hereby agrees to maintain all records relating to
its activities and obligations under this Agreement which are required to
be maintained by Rule 31a-1 under the 1940 Act and agrees to preserve such
records for the periods prescribed by Rule 31a-2 under the 1940 Act. The
Sub-Adviser further agrees that all such records are the property of the
Fund and agrees to surrender promptly to the Fund any such records upon the
Fund's request.
9. Expenses. The expenses connected with the Fund shall be borne by the
Sub-Adviser as follows:
(a) The Sub-Adviser shall maintain, at its expense and without cost to the
Fund, a trading function in order to carry out its obligations under
subparagraph (d) of paragraph 3 hereof to place orders for the
purchase and sale of portfolio securities for the Series.
(b) The Sub-Adviser shall pay any expenses associated with carrying out
its obligation under subparagraph (b) of paragraph 3 hereof to prepare
reports for the Fund's Board of Directors concerning issuers and
securities represented in the Series' portfolio.
(c) Other than as specifically set forth above, the Sub-Adviser shall not
be required to pay any expenses of the Fund, and in particular, but
without limiting the generality of the foregoing, the Sub-Adviser
shall not be required to pay office rental or general administrative
expenses; board of directors' fees, legal, auditing, and accounting
expenses, brokerage commissions, taxes and governmental fees,
membership dues, fees of custodian, transfer agent, registrar and
dividend disbursing agent, expenses of issue sale or redemption of
shares of the Fund, costs and expenses in connection with the
registration of such stock under the Securities Act of 1933 and
qualification of the Fund's stock under Blue Sky laws, expenses of
preparing and distributing reports, proxy statements, expenses of
printing prospectuses and such other nonrecurring expenses as may
arise from time to time.
10. Representations and Warranties of Sub-Adviser. The Sub-Adviser represents
and warrants to the Adviser and the Fund as follows:
(a) the Sub-Adviser is registered as an investment adviser under the
Investment Advisers Act;
(b) the Sub-Adviser will immediately notify the Adviser and the Fund of
the occurrence of any event that would disqualify the Sub-Adviser from
serving as an investment adviser of an investment company pursuant to
Section 9(a) of the 1940 Act;
(c) the Sub-Adviser will file a notice of exemption pursuant to Rule 4.14
under the Commodity Exchange Act with the Commodity Futures Trading
Commission and the National Futures Association prior to providing any
futures contract or commodity trading advice to the Fund;
(d) the Sub-Adviser is duly organized and validly existing under the laws
of the State of Ohio with the power to own and possess its assets and
carry on its business as it is now being conducted;
(e) the execution, delivery and performance by the Sub-Adviser of this
Agreement are within the Sub-Adviser's powers and have been duly
authorized by all necessary actions on the part of its shareholders,
and no action by or in respect of, or filing with, any governmental
body, agency or official is required on the part of the Sub-Adviser
for the execution, delivery and performance by the Sub-Adviser of this
Agreement, and the execution, delivery and performance by the
Sub-Adviser of this Agreement do not contravene or constitute a
default under (i) any provision of applicable law, rule or regulation,
(ii) the Sub-Adviser's governing instruments, or (iii) any agreement,
judgment, injunction, order, decree, or other instrument binding upon
the Sub-Adviser;
(f) This Agreement is a valid and binding agreement of the Sub-Adviser;
(g) The Form ADV of the Sub-Adviser previously provided to the Adviser and
the Fund is a true and complete copy of the form filed with the
Securities and Exchange Commission and the information contained
therein is accurate in all material respects and does not omit to
state any material fact necessary in order to make the statement made,
in light of the circumstances under which they were made, not
misleading.
11. Compensation. For the services to be rendered and the facilities furnished
hereunder, the Adviser shall pay the Sub-Adviser an annual fee equal to .25
percent of the average daily closing value of the net assets of the Series,
computed on a daily basis and payable monthly. If this Agreement shall be
effective for only a portion of a year, then the Sub-Adviser's compensation
for said year shall be prorated for such portion. For purposes of this
Section 11, the value of the net assets of the Series shall be computed in
the same manner at the end of the business day as the value of such net
assets is computed in connection with the determination of the net asset
value of the Series' shares as described in the Fund's prospectus and
statement of additional information. Payment of the Sub-Adviser's
compensation for the preceding month shall be made within 30 days of the
month-end.
12. Non-Exclusivity. The services of the Sub-Adviser to the Adviser are not to
be deemed to be exclusive, and the Sub-Adviser shall be free to render
investment advisory or other services to others and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby.
13. Term. This Agreement shall become effective upon the date first above
written, provided that this Agreement shall not take ---- effect with
respect to the Series unless it has first been approved (i) by a vote of a
majority of those directors of the Fund who are not parties to this
Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by vote
of a majority of the Series outstanding voting securities. This Agreement
shall continue in effect for a period of two years from the date hereof,
subject thereafter to being continued in force and effect from year to year
if specifically approved each year by either (i) the Board of Directors of
the Series, or (ii) by the affirmative vote of a majority of the Series
outstanding voting securities. In addition to the foregoing, each renewal
of this Agreement must be approved by the vote of a majority of the Fund's
directors who are not parties to this Agreement or interested persons of
any such party, cast in person at a meeting called for the purpose of
voting on such approval. Prior to voting on the renewal of this Agreement ,
the Board of Directors of the Fund may request and evaluate, and the
Sub-Adviser shall furnish, such information as may reasonably be necessary
to enable the Fund's Board of Directors to evaluate the terms of this
Agreement.
14. Termination. This Agreement may be terminated at any time, without the
payment of any penalty: (i) by vote of the Fund's Board of Directors or by
vote of a majority of the Series' outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), or by the Adviser or Sub-Adviser on
sixty (60) days' written notice to the other party; (ii) upon twenty (20)
days written notice by the Adviser due to breach by the Sub-Adviser of any
representation or warranty contained in paragraph 10 hereof, which shall
not have been cured during the notice period; (iii) by the Adviser
immediately upon written notice to the Sub-Adviser if the Sub-Adviser
becomes unable to discharge its duties and obligations under this
Agreement. This Agreement shall automatically terminate in the event of its
"assignment" as that term is defined in Section 2(a)(4) of the 1940 Act.
15. Limitation of Liability of the Sub-Adviser. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser
or its officers, directors or employees, or breach of its duties hereunder,
the Sub-Adviser shall not be liable to the Adviser, the Fund or to any
shareholder of the Fund for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security, provided the
Sub-Adviser has acted in good faith; provided further that nothing herein
shall relieve the Sub-Adviser from any obligations under applicable law,
including, without limitation, the federal and state securities laws.
16. Indemnification. The Sub-Adviser shall indemnify the Adviser and the Fund,
and their respective officers and directors, for any liability and
expenses, including attorney's fees, which may be sustained as a result of
the Sub-Adviser's willful misfeasance, bad faith, gross negligence, breach
of its duties hereunder or violation of applicable law, including without
limitation, the federal and state securities laws.
17. Notices. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage-paid to the other party at such address as
such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the
Adviser for this purpose shall be 4650 SW Macadam, Portland, Oregon, 97201,
and the address of the Sub-Adviser for this purpose shall be 30 West Third
Street, Fourth Floor, Cincinnati, Ohio 45202.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oregon. Any question of
interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940
Act shall be resolved by reference to such term or provision of the 1940
Act and to interpretations thereof, if any, by the U.S. courts or, in the
absence of any controlling decisions of any such court, by rules,
regulation or order of the Securities and Exchange Commission validly
issued pursuant to the 1940 Act. In addition, where the effect of a
requirement of the 1940 Act reflected in any provision of this Agreement is
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or general application, such provision shall
be deemed to incorporate the effect of such rule, regulation or order.
19. Captions. The captions herein are included for convenience of reference
only and shall be ignored in the construction or interpretation hereof.
20. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the
Agreement shall not be affected adversely and shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
ATTEST: PRIVATE CONSULTING GROUP, INC.
_______________________ By:_____________________________
Title:
ATTEST: MENCH FINANCIAL, INC.
_______________________ By:_________________________
Title
CUSTODY AGREEMENT
Dated January 1, 1995
As amended September 14, 1998
Between
UMB BANK, N.A.
and
THE SECURITY 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 2
(a) Safekeeping 3
(b) Manner of Holding Securities 3
(c) Free Delivery of Assets 4
(d) Exchange of Securities 4
(e) Purchases of Assets 5
(f) Sales of Assets 5
(g) Options 6
(h) Futures Contracts 6
(i) Segregated Accounts 6
(j) Depositary Receipts 7
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 7
(l) Interest Bearing Deposits 7
(m) Foreign Exchange Transactions 8
(n) Pledges or Loans of Securities 8
(o) Stock Dividends, Rights, Etc. 9
(p) Routine Dealings 9
(q) Collections 9
(r) Bank Accounts 9
(s) Dividends, Distributions and Redemptions 9
(t) Proceeds from Shares Sold 10
(u) Proxies and Notices; Compliance with the Shareholders 10
Communication Act of 1985
(v) Books and Records 10
(w) Opinion of Fund's Independent Certified Public 10
Accountants
(x) Reports by Independent Certified Public Accountants 10
(y) Bills and Others Disbursements 11
5. Subcustodians 11
(a) Domestic Subcustodians 11
(b) Foreign Subcustodians 11
(c) Interim Subcustodians 12
(d) Special Subcustodians 12
(e) Termination of a Subcustodian 12
(f) Certification Regarding Foreign Subcustodians 12
6. Standard of Care 12
(a) General Standard of Care 12
(b) Actions Prohibited by Applicable Law, Events Beyond
Custodian's Control, Armed Conflict, Sovereign Risk, etc. 12
(c) Liability for Past Records 13
(d) Advice of Counsel 13
(e) Advice of the Fund and Others 13
(f) Instructions Appearing to be Genuine 13
(g) Exceptions from Liability 13
7. Liability of the Custodian for Actions of Others 14
(a) Domestic Subcustodians 14
(b) Liability for Acts and Omissions of Foreign 14
Subcustodians
(c) Securities Systems, Interim Subcustodians, Special
Subcustodians, Securities Depositories and Clearing 14
Agencies
(d) Defaults or Insolvency's of Brokers, Banks, Etc. 14
(e) Reimbursement of Expenses 14
8. Indemnification 14
(a) Indemnification by Fund 14
(b) Indemnification by Custodian 15
9. Advances 15
10. Liens 15
11. Compensation 16
12. Powers of Attorney 16
13. Termination and Assignment 16
14. Additional Funds 16
15. Notices 16
16. Miscellaneous 17
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this 1st day of January, 1995, as amended
September 14, 1998, between UMB Bank, n.a., a national banking association with
its principal place of business located in 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, registered investment company shares 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; (ii) in
book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of sub-paragraph (3) below; or (iii) with the transfer
agents for other registered investment companies (in the case of registered
investment company shares owned by a Fund) in accordance with the provisions of
sub-paragraph (4) 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 O 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 that 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.
(4) The Custodian may hold shares of other registered investment
companies ("Underlying Funds") which are owned by a Fund with the transfer
agents for such Underlying Funds. In maintaining shares of Underlying Funds with
such transfer agents, each Fund investing in such shares and the Custodian shall
adhere to the following procedures designed to comply with the requirements of
Rule 17f-4 of the 1940 Act:
(i) The Custodian may deposit the shares directly or through one
or more agents or Subcustodians which are also qualified to act as custodians
for investment companies.
(ii) The Custodian shall hold the shares in accounts with the
transfer agents of the Underlying Funds, provided such accounts are maintained
by such transfer agents as segregated accounts containing only assets held for
the Custodian as Custodian of a Fund.
(iii) The books and records of the Custodian shall at all times
identify those shares of Underlying Funds belonging to one or more Funds which
are held by the transfer agents of such Underlying Funds.
(iv) The Custodian shall provide notice to the Funds of all
transfers to or from the account of a Fund held at the transfer agent of an
Underlying Fund.
(v) The Custodian shall, if reasonably requested by a Fund
pursuant to Instructions, provide such Fund with reports obtained by the
Custodian or any Subcustodian with respect to the internal accounting control
maintained by the transfer agent for an Underlying Fund.
(c) Free Delivery of Assets.
Notwithstanding any other provision of this Agreement and except as
provided in Sections 3 and 4 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) Purchases 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(l), and 4(m)
hereof, the Custodian may make payment therefor before receipt of an advice of
transaction; (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; and (iv) in the case of shares of Underlying Funds maintained with
transfer agents for such Underlying Funds pursuant to Section 4(b)(4) hereof,
payment for shares purchased shall be in accordance with the procedures of such
transfer agent.
(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: (i) 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; and
(ii) in the case of shares of Underlying Funds maintained with transfer agents
for such Underlying Funds pursuant to Section 4(b)(4) hereof, delivery of shares
sold shall be in accordance with the procedures of such transfer agent.
(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 and shares maintained by the Custodian with
the transfer agents for Underlying Funds pursuant to Paragraph (b)(4) 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) Depositary 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.
(l) Each Fund may from time to time appoint the Custodian as its agent
in the execution of currency exchange transactions. The Custodian agrees to
provide exchange rate and U.S. Dollar information, in writing, to the Funds.
Such information shall be supplied by the Custodian by the date the foreign
exchange transaction is executed. The Fund agrees to provide the Custodian with
information necessary to complete the foreign exchange transaction two business
days prior to settlement.
(2) 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. If, in its Instructions, a Fund does not direct the
Custodian to utilize a particular currency broker or Banking Institution, the
Custodian is authorized to select such currency broker or Banking Institution as
it deems appropriate to execute the Fund's foreign currency transaction.
(3) 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 or liability with respect to the selection of the currency
brokers or Banking Institutions with which a Fund deals or the performance of
such brokers or Banking Institutions.
(4) 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.
(5) The Custodian shall not be obligated to enter into foreign
exchange transactions as principal. However, if the Custodian has made available
to a Fund its services as a principal in foreign exchange transactions and
subject to any separate agreement between the parties relating to such
transactions, the Custodian shall enter into foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund, with the Custodian as principal.
(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, with a transfer agent for an Underlying Fund
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 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 (i) if the Custodian or any Subcustodian or Securities
System, or any subcustodian, transfer agent, 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: (a) 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 (b) 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 (ii) for any loss, damage, cost or expense resulting from "Sovereign
Risk." A "Sovereign Risk" shall mean nationalization, expropriation, currency
devaluation, revaluation or fluctuation, 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, Transfer Agents for Underlying funds, 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, transfer agent for an Underlying
Fund, Interim Subcustodian, Special Subcustodian, or Securities Depository and
Clearing Agency unless such loss, damage or expense is caused by, or results
from, the negligence or willful misfeasance of the Custodian.
(d) Defaults or Insolvency's 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 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 negligence or willful misfeasance of
the Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, transfer agent for an Underlying Fund, 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,
Kansas 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
Blvd., 10th Floor, Attn: Debbie Cadwell, Kansas City, Missouri 64106, or mailed
postage prepaid, to the Custodian's Securities Administration department, Post
Office Box 226, Attn: Debbie Cadwell, 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(b)
Authorized Person 3
Banking Institution 4(1)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2(c)(1)
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(1)
Liens 10
OCC 4(g)(1)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2(a)
Securities Depositories and 5(b)
Clearing Agencies
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2(c)(2)
Special Subcustodian 5(d)
Subcustodian 5
1940 Act 4(v)
Underlying Funds 4(b)(4)
<PAGE>
(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.
IN WITNESS WHEREOF, the parties hereto have caused this Custody Agreement
to be executed by their respective duly authorized officers.
SECURITY ULTRA FUND
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY EQUITY FUND
- Equity Series
- Social Awareness Series
- Value Series
- Small Company Series
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SBL FUND
- Series A, B, C, E, J, P, S, V and X
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY INCOME FUND
- Corporate Bond Series
- U. S. Government Series
- Limited Maturity Bond Series
- High Yield Series
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY GROWTH AND INCOME FUND
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY MUNICIPAL BOND FUND
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY CASH FUND
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
UMB BANK, N.A.
ATTEST: ---------------------------- By: ------------------------------
Name: Ralph R. Santoro
Title: Senior Vice President
Date: ------------------------------
- ------------------------------------ ------------------------------------
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------------------------------------
------------------------------------
- ------------------------------------ ------------------------------------
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------------------------------------
<PAGE>
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant Trust Company
SPECIAL SUBCUSTODIANS:
The Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
SECURITY ULTRA FUND
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY EQUITY FUND
- Equity Series
- Social Awareness Series
- Value Series
- Small Company Series
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SBL FUND
- Series A, B, C, E, J, P, S, V and X
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY INCOME FUND
- Corporate Bond Series
- U. S. Government Series
- Limited Maturity Bond Series
- High Yield Series
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY GROWTH AND INCOME FUND
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY MUNICIPAL BOND FUND
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY CASH FUND
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
SECURITY MANAGEMENT COMPANY, LLC
ATTEST: ---------------------------- By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Date: ------------------------------
Corporate Account
By:
Name:
Title:
Date:
UMB BANK, N.A.
ATTEST: ---------------------------- By: ------------------------------
Name: Ralph R. Santoro
Title: Senior Vice President
Date: ------------------------------
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SHAREHOLDER SERVICES AGREEMENT
[Name]
[Address]
[City, State, Zip]
Ladies and Gentlemen:
The Board of Directors of Advisor's Fund (the "Company"), an open-end
management investment company organized as a Kansas corporation and registered
with the Securities and Exchange Commission (the "SEC") under the Investment
Company Act of 1940 (the "1940 Act"), on behalf of the beneficial holders of
shares of common stock ("Shares") of each of the investment portfolios of the
Company (individually, a "Fund" and collectively, the "Funds"), have adopted a
Shareholder Services Plan for the Shares (the "Plan") which, among other things,
authorizes the Company to enter into this Agreement with you (the "Authorized
Firm"), concerning the provision of service activities to your clients, members,
or customers ("Customers") who may from time to time beneficially own such
Funds' Shares. The terms and conditions of this Agreement are as follows:
1. REFERENCE TO PROSPECTUS; DETERMINATION OF NET ASSET VALUE.
1.1 Reference is made to the prospectus for the Shares of each Fund
(individually, a "Prospectus" and collectively, the "Prospectuses") as
from time to time are effective under the Securities Act of 1933 (the
"1933 Act"). Terms defined therein and not otherwise defined herein are
used herein with the meaning so defined.
1.2 For purposes of determining the fees payable to you under Section 3, the
average daily net asset value of a Fund's Shares will be computed in the
manner specified in the Company's registration statement (as the same is
in effect from time to time) in connection with the computation of the net
asset value of such Fund's Shares for purposes of purchases and
redemptions.
2. SERVICES AS AUTHORIZED FIRM.
2.1 The Authorized Firm is hereby authorized and may from time to time
undertake to perform support services to Customers in connection with
investments in the Shares of a Fund, which services may include, but are
not limited to: the provision of personal, continuing services to
investors in each Fund; receiving, aggregating and processing purchase and
redemption orders; providing and maintaining retirement plan records;
communicating periodically with contractowners and answering questions and
handling correspondence from contractowners about their accounts; acting
as the sole shareholder of record and nominee for contractowners;
maintaining account records and providing beneficial owners with account
statements; processing dividend payments; issuing shareholder reports and
transaction confirmations; providing subaccounting services for Fund
shares held beneficially; forwarding shareholder communications to
beneficial owners; receiving, tabulating and transmitting proxies executed
by beneficial owners; [performing daily investment ("sweep") functions for
contractowners;] general account administration activities; and providing
such other similar services as the Company may reasonably request to the
extent the Authorized Firm is permitted to do so under applicable
statutes, rules, or regulations. Overhead and other expenses of the
Authorized Firm related to its "service activities," including telephone
and other communications expenses, may be included in the information
regarding amounts expended for such activities.
2.2 The Authorized Firm will provide such office space and equipment,
telephone facilities, and personnel (which may be any part of the space,
equipment, and facilities currently used in the Authorized Firms's
business, or any personnel employed by the Authorized Firm) as may be
reasonably necessary or beneficial in order to provide such support
services with respect to a Fund's Shares.
2.3 The minimum dollar purchase of a Fund's Shares (including Shares being
acquired by Customers pursuant to any exchange privileges described in the
Fund's Prospectus) shall be the applicable minimum amount set forth in the
Prospectus of such Fund, and no order for less than such amount shall be
accepted by the Authorized Firm. The procedures relating to the handling
of orders shall be subject to instructions which the Company shall forward
from time to time to the Authorized Firm. All orders for a Fund's Shares
are subject to acceptance or rejection by the Company in its sole
discretion, and the Company may, in its discretion and without notice,
suspend or withdraw the sale of a Fund's Shares, including the sale of
such Shares to the Authorized Firm for the account of any Customer or
Customers.
2.4 In no transaction shall the Authorized Firm act as dealer for its own
account; the Authorized Firm shall act solely for, upon the specific or
pre-authorized instructions of, and for the account of, its Customers. For
all purposes of this Agreement, the Authorized Firm will be deemed to be
an independent contractor, and will have no authority to act as agent for
the Company or any dealer of the Shares in any matter or in any respect.
No person is authorized to make any representations concerning the Company
or a Fund's Shares except those representations contained in the Fund's
then-current Prospectus and Statement of Additional Information and in
such printed information as the Company may subsequently prepare.
2.5 The Authorized Firm and its employees will, upon request, be available
during normal business hours to consult with the Company or its designees
concerning the performance of the Authorized Firm's responsibilities under
this Agreement. Any person authorized to direct the disposition of monies
paid or payable pursuant to Section 3 of this Agreement will provide to
the Company's Board of Directors, and the Company's Directors will review
at least quarterly, a written report of the amounts so expended.
In addition, the Authorized Firm will furnish to the Company or its
designees such information as the Company or its designees may reasonably
request (including, without limitation, periodic certifications confirming
the rendering of support services with respect to Shares described
herein), and will otherwise cooperate with the Company and its designees
(including, without limitation, any auditors designated by the Company),
in the preparation of reports to the Company's Board of Directors
concerning this Agreement and the monies paid or payable pursuant hereto,
as well as any other reports or filings that may be required by law.
3. FEES.
3.1 In consideration of the costs and expenses of furnishing the services and
facilities provided by the Authorized Firm hereunder, and subject to the
limitations of applicable law and regulations, the Authorized Firm will be
compensated quarterly at an annual rate of up to but not more than 0.50%
of the average daily net assets of the Fund attributable to the Fund's
Shares which are attributable to or held in the name of the Authorized
Firm for its Customers.
3.2 The fee rate with respect to any Fund may be prospectively increased or
decreased by the Company, in its sole discretion, at any time upon notice
to the Authorized Firm.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
4.1 By written acceptance of this Agreement, the Authorized Firm represents,
warrants, and agrees that: (i) the Authorized Firm will provide to
Customers a schedule of the services it will perform pursuant to this
Agreement and a schedule of any fees that the Authorized Firm may charge
directly to Customers for services it performs in connection with
investments in the Company on the Customer's behalf; and (ii) any and all
compensation payable to the Authorized Firm by Customers in connection
with the investment of their assets in the Company will be disclosed by
the Authorized Firm to Customers and will be authorized by Customers and
will not result in an excessive fee to the Authorized Firm.
4.2 The Authorized Firm agrees to comply with all requirements applicable to
it by reason of all applicable laws, including federal and state
securities laws, the Rules and Regulations of the SEC, including, without
limitation, all applicable requirements of the 1933 Act, the Securities
Exchange Act of 1934, the Investment Advisers Act of 1940, and the 1940
Act. The Company has furnished the Authorized Firm with a list of the
states or other jurisdictions in which the Company believes the Shares of
the Funds are qualified for sale, and the Authorized Firm agrees that it
will not purchase a Fund's Shares on behalf of a Customer's account in any
jurisdiction in which such Shares are not qualified for sale. The
Authorized Firm further agrees that it will maintain all records required
by applicable law or otherwise reasonably requested by the Company
relating to the services provided by it pursuant to the terms of this
Agreement.
4.3 The Authorized Firm agrees that under no circumstances shall the Company
be liable to the Authorized Firm or any other person under this Agreement
as a result of any action by the SEC affecting the operation or
continuation of the Plan.
5. EXCULPATION; INDEMNIFICATION.
5.1 The Company shall not be liable to the Authorized Firm and the Authorized
Firm shall not be liable to the Company except for acts or failures to act
which constitute lack of good faith or gross negligence and for
obligations expressly assumed by either party hereunder. Nothing contained
in this Agreement is intended to operate as a waiver by the Company or by
the Authorized Firm of compliance with any applicable law, rule, or
regulation.
5.2 The Authorized Firm will indemnify the Company and hold it harmless from
any claims or assertions relating to the lawfulness of the Authorized
Firm's participation in this Agreement and the transactions contemplated
hereby or relating to any activities of any persons or entities affiliated
with the Authorized Firm performed in connection with the discharge of its
responsibilities under this Agreement. If any such claims are asserted,
the Company shall have the right to manage its own defense, including the
selection and engagement of legal counsel of its choosing, and all costs
of such defense shall be borne by the Authorized Firm.
6. EFFECTIVE DATE; TERMINATION.
6.1 This Agreement will become effective with respect to each Fund on the date
of its acceptance by the Authorized Firm. Unless sooner terminated with
respect to any Fund, this Agreement will continue with respect to a Fund
until terminated in accordance with its terms, provided that the
continuance of the Plan is specifically approved at least annually in
accordance with the terms of the Plan.
6.2 This Agreement will automatically terminate with respect to a Fund in the
event of its assignment (as such term is defined in the 1940 Act). This
Agreement may be terminated with respect to any Fund by the Company or by
the Authorized Firm, without penalty, upon sixty days' prior written
notice to the other party. This Agreement may also be terminated with
respect to any Fund at any time without penalty by the vote of a majority
of the Company's Directors or a majority of the outstanding Shares of a
Fund on sixty days' written notice.
7. GENERAL.
7.1 All notices and other communications to either the Authorized Firm or the
Company will be duly given if mailed, telegraphed or telecopied to the
appropriate address set forth on page 1 hereof, or at such other address
as either party may provide in writing to the other party.
7.2 The Company may enter into other similar agreements for the provision of
Shareholder support services with any other person or persons without the
Authorized Firm's consent.
7.3 Upon receiving the consent of the Company, the Authorized Firm may, at its
expense, subcontract with any entity or person concerning the provision of
the services contemplated hereunder; provided, however, that the
Authorized Firm shall not be relieved of any of its obligations under this
Agreement by the appointment of such subcontractor and provided further,
that the Authorized Firm shall be responsible, to the extent provided in
Article 5 hereof, for all acts of such subcontractor as if such acts were
its own.
7.4 This Agreement supersedes any other agreement between the Company and the
Authorized Firm relating to support services in connection with a Fund's
Shares and relating to any other matters discussed herein. All covenants,
agreements, representations, and warranties made herein shall be deemed to
have been material and relied on by each party, notwithstanding any
investigation made by either party or on behalf of either party, and shall
survive the execution and delivery of this Agreement. The invalidity or
unenforceability of any term or provision hereof shall not affect the
validity or enforceability of any other term or provision hereof. The
headings in this Agreement are for convenience of reference only and shall
not alter or otherwise affect the meaning hereof. This Agreement may be
executed in any number of counterparts which together shall constitute one
instrument and shall be governed by and construed in accordance with the
laws (other than the conflict of laws rules) of the State of Kansas and
shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
7.5 It is expressly agreed that the obligations of the Company hereunder shall
not be binding upon any of the Directors, shareholders, nominees,
officers, agents or employees of the Company personally, but shall bind
only the property of the Company. The execution and delivery of this
Agreement have been authorized by the Directors, and this Agreement has
been signed and delivered by an authorized officer of the Directors,
acting as such, and neither such authorization by the Directors nor such
execution and delivery by such officer shall be deemed to have been made
by any of them individually or to impose any liability on any of them
personally, but shall bind only the property of the Company as provided in
the Company's Articles of Incorporation.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below.
Advisor's Fund
By:
Title:--------------------------
The foregoing Agreement is hereby accepted:
[Authorized Firm]
By:
Title:
Date:
[SBG LOGO]
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Security Benefit Life Insurance Company 700 SW Harrison St.
Security Benefit Group, Inc. Topeka, Kansas 66636-0001
Security Distributors, Inc. (785) 431-3000
Security Management Company, LLC
September 11, 1998
Advisor's Fund
700 Harrison Street
Topeka, KS 66636-0001
Dear Sir/Madam:
In connection with the registration under the Securities Act of 1933 of an
indefinite number of shares of common stock of Advisor's Fund (the "Company"), I
have examined such matters as I have deemed necessary to give this opinion.
On the basis of the foregoing, it is my opinion that the shares have been duly
authorized and, when paid for as contemplated by the Company's Registration
Statement, will be validly issued, fully paid, and non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ AMY J. LEE
Amy J. Lee, Esq.
Secretary
Advisor`s Fund
