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Registration No. 811-8843
Registration No. 333-57911
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Post-Effective Amendment No. 1 [x]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Post-Effective Amendment No. 2 [x]
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(Check appropriate box or boxes)
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
Copies To:
John D. Cleland, President Amy J. Lee, Secretary
Advisor's Fund Advisor's Fund
700 SW Harrison Street 700 SW Harrison Street
Topeka, KS 66636-0001 Topeka, KS 66636-0001
(Name and address of Agent for Service)
Approximate date of proposed public offering: November 29, 1999
It is proposed that this filing will become effective (check appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[_] on November 29, 1999, pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[x] on November 29, 1999, pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on November 29, 1999, pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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SECURITY EQUITY FUND
FORM N-1A
PART B. STATEMENT OF ADDITIONAL INFORMATION
ITEM 22. FINANCIAL STATEMENTS
To be filed by amendment.
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ADVISOR'S FUND
PROSPECTUS
NOVEMBER 29, 1999
* PCG Growth Series
* PCG Aggressive Growth Series
* SIM Growth Series
* SIM Conservative Growth Series
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The Securities and Exchange Commission has
not approved or disapproved these securities
or passed upon the accuracy or adequacy of
this prospectus. Any representation to the
contrary is a criminal offense.
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SERIES' OBJECTIVES.......................................................... 2
PCG Growth Series......................................................... 2
PCG Aggressive Growth Series.............................................. 2
SIM Growth Series......................................................... 2
SIM Conservative Growth Series............................................ 2
SERIES' PRINCIPAL INVESTMENT STRATEGIES..................................... 2
PCG Growth Series......................................................... 2
PCG Aggressive Growth Series.............................................. 2
SIM Growth Series......................................................... 2
SIM Conservative Growth Series............................................ 3
MAIN RISKS.................................................................. 4
Market Risk............................................................... 4
Smaller Companies......................................................... 4
Value Stocks.............................................................. 4
Growth Stocks............................................................. 4
Foreign Securities........................................................ 4
Emerging Markets.......................................................... 4
Options and Futures....................................................... 4
Short Sales............................................................... 4
Active Trading............................................................ 5
Interest Rate Risk........................................................ 5
Credit Risk............................................................... 5
Prepayment Risk........................................................... 5
Mortgage-Backed Securities................................................ 5
Restricted Securities..................................................... 5
High Yield Securities..................................................... 5
Investment Companies...................................................... 5
Additional Information.................................................... 6
INVESTMENT MANAGER.......................................................... 6
Management Fees........................................................... 6
Services Plan............................................................. 6
Portfolio Managers........................................................ 7
Year 2000 Compliance...................................................... 7
PURCHASE AND REDEMPTION OF SHARES........................................... 8
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS......................... 8
DETERMINATION OF NET ASSET VALUE............................................ 8
GENERAL INFORMATION......................................................... 9
Contractowner Inquiries................................................... 9
INVESTMENT POLICIES AND MANAGEMENT PRACTICES................................ 9
Convertible Securities and Warrants....................................... 9
Foreign Securities........................................................ 9
Emerging Markets.......................................................... 10
Smaller Companies......................................................... 10
Asset-Backed Securities................................................... 10
Mortgage-Backed Securities................................................ 10
Restricted Securities..................................................... 11
Lower Rated Debt Securities............................................... 11
Futures and Options....................................................... 11
Hybrid Instruments........................................................ 11
Swaps, Caps, Floors and Collars........................................... 12
When-Issued Securities and Forward Commitment Contracts................... 12
Cash Reserves............................................................. 12
Borrowing................................................................. 12
FINANCIAL HIGHLIGHTS........................................................ 13
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SERIES' OBJECTIVES
Described below are the investment objectives for each of the Series. The
Advisor's Fund Board of Directors may change the investment objectives without
shareholder approval.
As with any investment, there can be no guarantee that the Series will achieve
their objectives.
PCG GROWTH SERIES -- PCG Growth seeks long-term growth of capital.
PCG AGGRESSIVE GROWTH SERIES -- PCG Aggressive Growth seeks capital
appreciation.
SIM GROWTH SERIES -- SIM Growth seeks long-term growth of capital.
SIM CONSERVATIVE GROWTH SERIES -- SIM Conservative Growth seeks total return.
SERIES' PRINCIPAL INVESTMENT STRATEGIES
PCG GROWTH SERIES -- Securities selected for the PCG Growth Series will
generally be common stocks with a market capitalization greater than $1 billion,
but the Series is not limited in this area. In addition, the Series will
generally have approximately 15% of its assets invested in the stocks of mid to
small capitalization companies (those with a market capitalization of between
$200 million and $8 billion at the time of purchase). In selecting its
investments, the Series will emphasize the potential for capital appreciation
and will consider current income only when consistent with its investment
objective of long-term growth of capital.
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MARKET CAPITALIZATION is the value of a corporation as determined by the market
price of its outstanding common stock. It is calculated by multiplying the
number of outstanding shares by the market price of a share.
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PCG Growth Series is a focused portfolio and is expected to have low turnover.
Core positions are established and held until economic prospects of a company
change or intrinsic value is reached. It is intended for investors with a
long-term time horizon.
The investment philosophy is that of concentration. The PCG Growth Series uses a
proprietary modeling system, which examines numerous criteria to determine a
company's value. Fundamental analysis is used for all investment decisions.
Under adverse market conditions, the Series could invest some or all of its
assets in cash or money market securities. Although the Series would do this
only in seeking to avoid losses, the Series may be unable to pursue its
investment objective during that time, and it could reduce the benefit from any
upswing in the market.
PCG AGGRESSIVE GROWTH SERIES -- Securities selected for the PCG Aggressive
Growth Series will generally be common stocks with a market capitalization of
between $200 million and $8 billion at the time of purchase. Many of these
securities do not pay a dividend and as such dividend income would not be
considered a relevant criteria in selecting an investment.
The Series is intended for the investor seeking a maximum of capital
appreciation. The Series invests in companies which are believed to be
characterized by new or innovative products or services which should enhance
prospects for growth in future earnings. In-house research and market research
will be used to identify investments in promising emerging growth companies
involved in new technology, natural resources, niche markets and special
developments such as research discoveries, management changes, or new channels
of distribution.
The Series is not limited to investing in these situations and is not restricted
to investments in specific market sectors and may invest in any market sector.
Security positions are reviewed weekly for changes in fundamentals, news
announcements and/or technical changes in price. Based on the weekly review, all
positions are rated to be a "buy, hold or sell." Positions rated as a "sell" are
removed from the portfolio or are noted for continued monitoring and possible
sale.
Under adverse market conditions, the Series could invest some or all of its
assets in cash or money market securities. Although the Series would do this
only in seeking to avoid losses, the Series may be unable to pursue its
investment objective during that time, and it could reduce the benefit from any
upswing in the market.
SIM GROWTH SERIES -- SIM Growth Series pursue its investment objective through
asset allocation and selection of mutual funds to implement the asset allocation
strategy.
Asset allocation across asset classes (specifically stocks, bonds and cash) and
exposure to sub-asset classes within the asset classes (such as large growth
stocks or large value stocks) are based on the Investment Manager's assessment
of the relative attractiveness of the asset classes and sub-asset classes.
Shifts between stocks and bonds will normally be implemented gradually and the
Investment Manager will not attempt to precisely "time" the market.
Attractiveness of the asset classes and sub-asset classes is evaluated based on
an econometric analysis of multiple factors such as market valuation, economic
conditions, interest rates, and other relevant measures. The Investment Manager
uses a disciplined portfolio management approach which seeks to balance
investment risk and expected return to determine the overall asset allocation of
the Series.
The Investment Manager analyzes both qualitative and quantitative factors when
selecting mutual funds for the Series' portfolio. Qualitative factors that the
Investment Manager believes are important in selecting superior mutual funds
include tenure of the portfolio manager on the fund, total investment experience
of the portfolio manager, reputation of the investment management firm and its
professionals, and reasonableness of the fund's fees. The quantitative analysis
is primarily based on a technique called "style analysis".
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STYLE ANALYSIS seeks to determine through an optimization process the
"effective" asset allocation mix of a mutual fund. It then compares the
performance of the fund to the performance of a blended benchmark based on its
effective asset allocation mix to determine if the fund manager has consistently
performed well in the past.
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Mutual funds are allocated within the portfolios so that the weighted average of
their effective asset allocation mix matches the target asset allocation mix the
Investment Manager believes is appropriate at any point in time.
Mutual funds selected for the Series invest primarily in common stock and other
equity securities of U.S. issuers and foreign issuers, the debt securities of
the U.S. Government, its agencies and instrumentalities, debt securities of
high-grade domestic corporate issuers, debt securities of high grade foreign
issuers, real estate investment trusts, and money market securities.
Mutual fund holdings are primarily sold due to changes in the target asset
allocation mix of the Series. Mutual funds may also be sold if the Investment
Manager believes the quantitative or qualitative factors that lead it to
purchase the fund have deteriorated and a better mutual fund with similar
characteristics is available. Mutual funds may also be sold if a fund with the
same portfolio manager and objective, but with lower expenses, becomes
available.
Under adverse market conditions, the Series could invest some or all of its
assets in cash or money market securities. Although the Series would do this
only in seeking to avoid losses, the Series may be unable to pursue its
investment objective during that time, and it could reduce the benefit from any
upswing in the market.
SIM CONSERVATIVE GROWTH SERIES -- SIM Conservative Growth Series pursues its
investment objective through asset allocation and selection of mutual funds to
implement the asset allocation strategy.
Asset allocation across asset classes (specifically stocks, bonds and cash) and
exposure to sub-asset classes within the asset classes (such as large growth
stocks or large value stocks) are based on the Investment Manager's assessment
of the relative attractiveness of the asset classes and sub-asset classes.
Shifts between stocks and bonds will normally be implemented gradually and the
Investment Manager will not attempt to precisely "time" the market.
Attractiveness of the asset classes and sub-asset classes is evaluated based on
an econometric analysis of multiple factors such as market valuation, economic
conditions, interest rates, and other relevant measures. The Investment Manager
uses a disciplined portfolio management approach which seeks to balance
investment risk and expected return to determine the overall asset allocation of
the Series.
The Investment Manager analyzes both qualitative and quantitative factors when
selecting mutual funds for the Series' portfolio. Qualitative factors that the
Investment Manager believes are important in selecting superior mutual funds
include tenure of the portfolio manager on the fund, total investment experience
of the portfolio manager, reputation of the investment management firm and its
professionals, and reasonableness of the fund's fees. The quantitative analysis
is primarily based on a technique called "style analysis".
Mutual funds are allocated within the portfolios so that the weighted average of
their effective asset allocation mix matches the target asset allocation mix the
Investment Manager believes is appropriate at any point in time.
Mutual funds selected for the Series invest primarily in common stock and other
equity securities of U.S. issuers and foreign issuers, the debt securities of
the U.S. Government, its agencies and instrumentalities, debt securities of
high-grade domestic corporate issuers, debt securities of high grade foreign
issuers, real estate investment trusts, and money market securities.
Mutual fund holdings are primarily sold due to changes in the target asset
allocation mix of the Series. Mutual funds may also be sold if the Investment
Manager believes the quantitative or qualitative factors that lead it to
purchase the fund have deteriorated and a better mutual fund with similar
characteristics is available. Mutual funds may also be sold if a fund with the
same portfolio manager and objective, but with lower expenses, becomes
available.
Under adverse market conditions, the Series could invest some or all of its
assets in cash or money market securities. Although the Series would do this
only in seeking to avoid losses, the Series may be unable to pursue its
investment objective during that time, and it could reduce the benefit from any
upswing in the market.
MAIN RISKS
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Your investment in the portfolios is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Series will go up and down,
which means investors could lose money.
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Set forth below are the main risks to which the Series' are subject. Some of the
risks described below are indirect risks of a Series by virtue of investing in
the shares of other mutual funds which have that particular risk characteristic.
This is particularly the case for the SIM Growth Series and the SIM Conservative
Growth Series.
MARKET RISK -- While stocks have historically been a leading choice of long-term
investors, they fluctuate in price. Their prices tend to fluctuate more
dramatically over the shorter term than do the prices of other asset classes.
These movements may result from factors affecting individual companies, or from
broader influences like changes in interest rates, market conditions, investor
confidence or announcements of economic, political or financial information here
or abroad. Each of the Series, directly or indirectly, are exposed to market
risk.
SMALLER COMPANIES -- While potentially offering greater opportunities for
capital growth than larger, more established companies, the securities of
smaller companies may be particularly volatile, especially during periods of
economic uncertainty. Securities of smaller companies may present additional
risks because their earnings are less predictable, their share prices tend to be
more volatile and their securities often are less liquid than larger, more
established companies, among other reasons. The PCG Growth and PCG Aggressive
Growth Series are subject to the risks presented by investing in smaller
companies.
VALUE STOCKS -- Investments in value stocks are subject to the risk that their
intrinsic values may never be realized by the market, that a stock judged to be
undervalued may actually be appropriately priced, or that their prices may go
down. The SIM Growth and SIM Conservative Growth Series are indirectly subject
to the risks presented by investing in value stocks.
GROWTH STOCKS -- While potentially offering greater or more rapid capital
appreciation than value stocks, investments in growth stocks may lack the
dividend yield that can cushion stock prices in market downturns. Growth
companies often are expected to increase their earnings at a certain rate. If
expectations are not met, investors can punish the stocks, even if earnings do
increase. By virtue of their investment strategies, the PCG Growth, SIM Growth
and SIM Conservative Growth Series are subject, directly or indirectly, to the
risks associated with growth stocks.
FOREIGN SECURITIES -- Investing in foreign securities involves additional risks
such as currency fluctuations, differences in financial reporting standards, a
lack of adequate company information and political or economic instability. The
risks may be particularly acute in underdeveloped capital markets. The SIM
Growth and SIM Conservative Growth Series are indirectly subject to the risks of
investing in foreign securities.
EMERGING MARKETS -- All of the risks of investing in foreign securities are
heightened by investing in developing countries and emerging markets. The
markets of developing countries historically have been more volatile than the
markets of developed countries with mature economies. These markets often have
provided higher rates of return, and greater risks, to investors. The SIM Growth
and SIM Conservative Growth Series are indirectly subject to the risks of
investing in emerging markets.
OPTIONS AND FUTURES -- The mutual funds held by the SIM Growth and SIM
Conservative Growth Series may invest some of their assets in options and
futures. These practices are used primarily to hedge a fund's portfolio or gain
exposure to a market without buying individual securities. There is the risk
that such practices sometimes may reduce returns or increase volatility. These
practices also entail transactional expenses.
SHORT SALES -- The mutual funds held by the SIM Growth and SIM Conservative
Growth Series may be authorized to make short sales. A short sale is a
transaction in which the fund sells a security or currency in anticipation that
the market price of that security or currency will decline. A fund may make
short sales as a form of hedging to offset potential declines in long positions
in securities it owns and in order to maintain portfolio flexibility. A fund may
also enter into short sales of securities and currencies in order to hedge the
currency exchange risk associated with assets denominated in foreign currencies,
adjust the portfolio's exposure to a particular currency, manage risk or enhance
income, or as a substitute for purchasing or selling securities. The loss to a
fund could be substantial if the price of the security or currency sold short
does not decline in value.
ACTIVE TRADING -- The mutual funds held by the SIM Growth and SIM Conservative
Growth Series may engage in active trading which involves higher expenses
including higher brokerage commissions.
INTEREST RATE RISK -- Investments in fixed-income securities are subject to the
possibility that interest rates could rise sharply, causing the value of the
portfolios' securities, and share price, to decline. Longer term bonds and zero
coupon bonds are generally more sensitive to interest rate changes than
shorter-term bonds. Generally, the longer the average maturity of the bonds in a
portfolio, the more the share price will fluctuate in response to interest rate
changes. By virtue of its investment strategy, the SIM Conservative Growth
Series may, indirectly, be exposed to interest rate risk. CREDIT RISK -- It is
possible that some issuers of fixed-income securities will not make payments on
debt securities held by a mutual fund held in the portfolio, or there could be
defaults on repurchase agreements held by a fund. Also, an issuer may suffer
adverse changes in financial condition that could lower the credit quality of a
security, leading to greater volatility in the price of the security and in
shares of a mutual fund held in the portfolios. A change in the quality rating
of a bond can affect the bond's liquidity and make it more difficult for the
Series to sell. By virtue of its investment strategy, the SIM Conservative
Growth Series may, indirectly, be exposed to credit risk.
PREPAYMENT RISK -- The issuers of securities held by a Series may be able to
prepay principal due on the securities, particularly during periods of declining
interest rates. Securities subject to prepayment risk generally offer less
potential for gains when interest rates decline, and may offer a greater
potential for loss when interest rates rise. In addition, rising interest rates
may cause prepayments to occur at a slower than expected rate, thereby
effectively lengthening the maturity of the security and making the security
more sensitive to interest rate changes. Prepayment risk is a major risk of
mortgage-backed securities. By virtue of its investment strategy, the SIM
Conservative Growth Series may, indirectly, be exposed to prepayment risk.
MORTGAGE-BACKED SECURITIES -- The SIM Conservative Growth Series may invest in
other mutual funds which invest in mortgage-backed securities. A fund will
receive payments on its mortgage-backed securities that are part interest and
part return of principal. These payments may vary based on the rate at which
homeowners pay off their loans. When a homeowner makes a prepayment, the fund
receives a larger portion of its principal investment back, which means that
there will be a decrease in monthly interest payments. Some mortgage-backed
securities may have structures that make their reaction to interest rates and
other factors difficult to predict, making their prices very volatile.
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WHAT ARE MORTGAGE-BACKED SECURITIES? Home mortgage loans are typically grouped
together into "POOLS" by banks and other lending institutions, and interests in
these pools are then sold to investors, allowing the bank or other lending
institution to have more money available to loan to home buyers. When homeowners
make interest and principal payments, these payments are passed on to the
investors in the pool. Most of these pools are guaranteed by U.S. Government
agencies or by government sponsored private corporations-familiarly called
"GINNIE MAES," "FANNIE MAES" and "FREDDIE MACS."
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RESTRICTED SECURITIES -- The mutual funds in which the SIM Growth and SIM
Conservative Growth Series invest, may themselves invest in securities that are
restricted as to disposition under the federal securities laws. Since the market
for restricted securities is limited to certain qualified institutional
investors, the liquidity of these securities may be limited, and an underlying
mutual fund may, from time to time, hold a security that is illiquid.
HIGH YIELD SECURITIES -- Some mutual funds held by the SIM Conservative Growth
Series may invest in higher yielding, high risk debt securities. These
investments may present additional risk because these securities may be less
liquid than investment grade bonds and they tend to be more susceptible to high
interest rates and to real or perceived adverse economic and competitive
industry conditions. High yield securities are subject to more credit risk than
higher quality securities.
INVESTMENT COMPANIES -- Because the SIM Growth and SIM Conservative Growth
Series invest principally in other investment companies (mutual funds) they will
incur the pro rata share of the underlying investment companies' expenses. In
addition, the Investment Company Act of 1940 provides that an underlying
investment company whose shares are purchased by the SIM Growth or SIM
Conservative Growth Series will be obligated to redeem the 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. Therefore, it is
possible that the investment company shares held by these Series could be
illiquid. An underlying investment company may also determine to make payment of
a redemption by the Series wholly or partly by a distribution in kind of
securities from its portfolio, in lieu of redeeming in cash. This may impose
additional costs on the Series. The Series will also be subject to the effects
of business and regulatory developments that affect an underlying investment
company or the investment company industry generally.
ADDITIONAL INFORMATION -- For more information about the investment program of
the Series, including additional information about the risks of certain types of
investments, please see the "Investment Policies and Management Practices"
section of the Prospectus.
INVESTMENT MANAGER
Private Consulting Group, Inc., 4650 SW Macadam, Portland, Oregon 97201, is the
Series' Investment Manager. On August 31, 1999, the aggregate assets of all the
investment companies under the investment management of the Investment Manager
were approximately $2 million. On the same date, the total assets under the
management of the Investment Manager were $282 million.
The Investment Manager has engaged Mench Financial, Inc., 30 West Third Street,
Fourth Floor, Cincinnati, Ohio 45202, to provide investment advisory services to
the PCG Aggressive Growth Series. Mench currently manages approximately $120
million in assets.
MANAGEMENT FEES -- The following chart shows the investment management fees
charged by the Investment Manager to each Series.
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MANAGEMENT FEES
(expressed as a percentage of average net assets)
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PCG Growth Series......................... .75%
PCG Aggressive Growth Series.............. .75%
SIM Growth Series......................... .75%
SIM Conservative Growth Series............ .75%
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In addition to the management fees, 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.
The Investment Manager may waive its management fee to limit the total operating
expenses of a Series to a specified level. The Investment Manager also may
reimburse expenses of the Series from time to time to help maintain competitive
expense ratios. These arrangements are voluntary and may be terminated at any
time.
SERVICES PLAN -- The Fund has adopted a Services Plan (the "Plan") and a
Services Agreement for each Series. The Plan is administered by PCG and provides
that a fee will be paid to registered investment advisers, registered
broker-dealers, banks, trust companies and other persons or entities
("Authorized Firms") for providing services to persons who own variable
insurance contracts. The Plan provides that the Fund is authorized to make
payments to Authorized Firms, either directly to or through PCG.
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
Each Series pays an aggregate annual fee not to exceed 0.50 percent of the
average daily net asset value of the shares of each Series invested in the
variable insurance contracts.
Authorized Firms may charge additional fees to their clients who are
contractowners 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 clients
which relate to the investment of customers' assets in shares of the Fund. All
inquiries must be directed to an investor's Authorized Firm.
The Investment Manager may also make payments to banks, broker-dealers, or other
financial intermediaries for providing certain services to the Fund and/or
contractowners. Such payments are made out of the Investment Manager's own
resources and do not involve additional costs to the Fund or contractowners.
PORTFOLIO MANAGERS -- GARY A. MILLER, Chief Investment Officer of the Investment
Manager, has been the co-manager of the PCG Growth Series, SIM Growth Series and
SIM Conservative Growth Series since they began operations in 1999. Mr. Miller
has been employed with the Investment Manager since January 1999. Prior to
joining PCG, Mr. Miller was Chief Investment Officer of Portfolio Management
Consultants and PMC Investment Services. He is recognized as one of the
country's first practitioners of returns-based style analysis to evaluate mutual
fund managers and design fund of fund portfolios. Mr. Miller received a Bachelor
of Science from Humboldt State University in Engineering and a Master of Science
from the Georgia Institute of Technology. He is a Chartered Financial Analyst
(CFA).
TOD BILLINGS, Head Portfolio Manager of the Investment Manager, has been the
co-manager of the PCG Growth Series, SIM Growth Series and SIM Conservative
Growth Series since they began operations in 1999. Mr. Billings has been
employed as a Portfolio Manager with the Investment Manager for six years. He
has served as Director of Research and head Portfolio Manager of the Investment
Manager for the last three years. Mr. Billings, in conjunction with the
Investment Manager, 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.
THOMAS S. MENCH, Chairman-Chief Financial Officer of Mench Financial, Inc. has
been the portfolio manager of PCG Aggressive Growth Series since its inception
in 1999. Mr. Mench has over 25 years experience in the investment industry.
Prior to forming Mench Financial, Inc., Mr. Mench was employed by a national
financial services company for six years as Vice President and Chief Investment
Officer. Prior to that, a Cincinnati-based bank employed Mr. Mench in the
capacity of Trust Officer and a Director of Portfolio Management. As Chief
Investment Officer, Mr. Mench is responsible for the strategic direction of his
firm's investment policy. In this capacity, Mr. Mench determines the sector and
market allocations which are used in client portfolios.
YEAR 2000 COMPLIANCE -- Like other mutual funds, as well as other financial and
business organizations around the world, the Fund could be adversely affected if
the computer systems used by the Investment Manager and by Security Management
Company, LLC, the Fund's administrator ("Administrator"), and other service
providers, in performing their respective functions do not properly process and
calculate date-related information and data before, during and after January 1,
2000. Some computer software and hardware systems currently cannot distinguish
between the year 2000 and the year 1900 or some other date because of the way
date fields were encoded. This is commonly known as the "Year 2000 Problem." If
not addressed, the Year 2000 Problem could impact the services provided to the
Fund by the Investment Manager and the Administrator, as well as transfer
agency, accounting, custody, distribution and other services provided to the
Fund and its shareholders.
The Administrator has adopted a plan to be "Year 2000 Compliant" with respect to
both its internally built systems as well as systems provided by external
vendors. The Administrator considers a system "Year 2000 Compliant" when it is
able to correctly process, provide and/or receive data before, during and after
the Year 2000. The Administrator's overall approach to addressing the Year 2000
issue is as follows: (1) to inventory its internal and external hardware,
software, telecommunications and data transmissions to customers and conduct a
risk assessment with respect to the impact that a failure on any such system
would have on its business operations; (2) to modify or replace its internal
systems and obtain vendor certifications of Year 2000 compliance for systems
provided by vendors or replace such systems that are not Year 2000 Compliant;
and (3) to implement and test its systems for Year 2000 compliance. The
Administrator has completed the inventory of its internal and external systems
and has made substantial progress toward completing the modification/replacement
of its internal systems as well as towards obtaining Year 2000 Compliant
certifications from its external vendors. Overall systems testing commenced in
early 1998 and will extend through year end 1999.
The Investment Manager is aware of the potential of some electronic system
problems as a result of the Year 2000 Problem. Since 1998 the Investment Manager
has had a Year 2000 plan in effect and has taken steps to ensure that none of
its systems will be adversely affected by the Year 2000 Problem. The Investment
Manager has completed an inventory of its equipment and systems, including
software, to address these issues. The Investment Manager has no known legacy
systems, code, or equipment in place, and believes that its systems are not
substantially affected by the Year 2000 Problem. All equipment has been updated
and checked to ensure that the date rollovers will be properly handled. Testing
will continue through at least the end of 1999.
Although the Investment Manager and Administrator have taken steps to ensure
that their respective systems will function properly before, during and after
the Year 2000, their key operating systems and information sources are provided
by or through external vendors which creates uncertainty to the extent the
Investment Manager and Administrator are relying on the assurance of such
vendors as to whether their systems will be Year 2000 Compliant. The costs or
consequences of incomplete or untimely resolution of the Year 2000 issue are
unknown at this time but could have a material adverse impact on the operations
of the Fund, the Administrator and the Investment Manager.
The Year 2000 Problem is also expected to impact companies, which may include
issuers of portfolio securities held by the Fund, to varying degrees based upon
various factors, including, but not limited to, the company's industry sector
and degree of technological sophistication. Moreover, it is possible that
foreign companies and markets (especially emerging markets) will not be as
prepared for the Year 2000 Problem as domestic companies and markets. To the
extent that a Fund invests (directly or indirectly) in foreign or emerging
markets, its returns could be adversely effected. However, the Fund, the
Administrator and the Investment Manager are unable to predict what impact, if
any, the Year 2000 Problem will have on issuers of the portfolio securities
(foreign or domestic) held by the Fund.
PURCHASE AND REDEMPTION OF SHARES
Security Benefit Life Insurance Company (Security Benefit) purchases shares of
the Series for its variable annuity separate account. Security Benefit buys and
sells shares of the Series at the net asset value per share (NAV) next
determined after it submits the order to buy or sell. A Series' NAV is generally
calculated as of the close of trading on every day the New York Stock Exchange
is open.
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 Securities
and Exchange Commission.
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS
Each Series pays its shareholders dividends from net investment income, and
distributes any net capital gains that it has realized, at least annually. Such
dividends and distributions will be reinvested in additional shares of the
Series.
You may purchase shares of the Series only indirectly through the purchase of a
variable annuity contract issued by Security Benefit. The prospectus for such
variable annuity contract describes the federal tax consequences of your
purchase or sale of the contract.
DETERMINATION OF NET ASSET VALUE
The net asset value per share (NAV) of each Series is computed as of the close
of regular trading hours on the New York Stock Exchange (normally 3 p.m. Central
time) on days when the Exchange is open. The Exchange is open Monday through
Friday, except on observation of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Each Series' NAV is generally based upon the market value of securities held in
the Series' portfolio. If market prices are not available, the fair value of
securities is determined using procedures approved by the Fund's Board of
Directors.
Foreign securities are valued based on quotations from the primary market in
which they are traded, and are converted from the local currency into U.S.
dollars using current exchange rates. Foreign securities may trade in their
primary markets on weekends or other days when the Series does not price its
shares. Therefore, the NAV of the Series holding foreign securities may change
on days when shareholders will not be able to buy or sell shares of the Series.
GENERAL INFORMATION
CONTRACTOWNER INQUIRIES -- If you have questions concerning your account or wish
to obtain additional information, you may write to Advisor's Fund, 700 SW
Harrison Street, Topeka, Kansas 66636-0001, or call (785) 431-3112 or
1-800-888-2461, extension 3112.
INVESTMENT POLICIES AND MANAGEMENT PRACTICES
This section takes a detailed look at some of the types of securities the Series
may hold in their portfolios and the various kinds of management practices that
may be used in the portfolios. Some of the risks described below are indirect
risks of a Series by virtue of investing in the shares of other mutual funds
which may have that particular risk characteristic. The Series' holdings of
certain types of investments cannot exceed a maximum percentage of net assets.
These percentage limitations are set forth in the Statement of Additional
Information. While the percentage limitations provide a useful level of detail
about a Series' investment program, they should not be viewed as an accurate
gauge of the potential risk of the investment. The net effect of a particular
investment depends on its volatility and the size of its overall return in
relation to the performance of all the Series' other investments. Portfolio
Managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help a Series achieve its objective. In
seeking to meet its investment objective, a Series may invest in any type of
security or instrument whose investment characteristics are consistent with the
Series' investment program.
The Series are subject to certain investment policy limitations referred to as
"fundamental policies." The fundamental policies can not be changed without
shareholder approval. Some of the more important fundamental policies are that
each Series will not:
* with respect to 75% of its total assets, invest more than 5% of the value of
its assets in any one issuer other than the U.S. Government or its
instrumentalities and securities of other investment companies
* purchase more than 10% of the outstanding voting securities of any one issuer
* invest 25% or more of its total assets in any one industry.
The full text of each Series' fundamental policies are included in the Statement
of Additional Information.
The following pages describe some of the investments which may be made by the
Series, as well as some of their management practices.
CONVERTIBLE SECURITIES AND WARRANTS -- Each Series, directly or indirectly, may
invest in debt or preferred equity securities convertible into, or exchangeable
for, equity securities. Traditionally, convertible securities have paid
dividends or interest at rates higher than common stocks but lower than
nonconvertible securities. They generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. In recent years, convertible securities have been developed which
combine higher or lower current income with options and other features. Warrants
are options to buy a stated number of shares of common stock at a specified
price anytime during the life of the warrants (generally, two or more years).
FOREIGN SECURITIES -- Each Series may indirectly invest in foreign securities.
Foreign investments involve certain special risks, including, but not limited
to, (i) unfavorable changes in currency exchange rates; (ii) adverse political
and economic developments; (iii) unreliable or untimely information; (iv)
limited legal recourse; (v) limited markets; and (vi) higher operational
expenses.
Foreign investments are normally issued and traded in foreign currencies. As a
result, their values may be affected by changes in the exchange rates between
particular foreign currencies and the U.S. dollar. Foreign investments may be
subject to the risks of seizure by a foreign government, imposition of
restrictions on the exchange or transport of foreign currency, and tax
increases. There may also be less information publicly available about a foreign
company than about most U.S. companies, and foreign companies are usually not
subject to accounting, auditing and financial reporting standards and practices
comparable to those in the United States. The legal remedies for investors in
foreign investments may be more limited than those available in the United
States. Certain foreign investments may be less liquid (harder to buy and sell)
and more volatile than domestic investments, which means a Series may at times
be unable to sell its foreign investments at desirable prices. For the same
reason, a Series may at times find it difficult to value its foreign
investments. Brokerage commissions and other fees are generally higher for
foreign investments than for domestic investments. The procedures and rules for
settling foreign transactions may also involve delays in payment, delivery or
recovery of money or investments. Foreign withholding taxes may reduce the
amount of income available to distribute to shareholders of the Series.
EMERGING MARKETS -- Each Series may indirectly invest in emerging markets
foreign securities. The risks associated with foreign investments are typically
increased in less developed and developing countries, which are sometimes
referred to as emerging markets. For example, political and economic structures
in these countries may be young and developing rapidly, which can cause
instability. These countries are also more likely to experience high levels of
inflation, deflation or currency devaluation, which could hurt their economies
and securities markets. For these and other reasons, investments in emerging
markets are often considered speculative.
SMALLER COMPANIES -- Each Series, directly or indirectly, may invest in small-
or medium-sized companies. These companies are more likely than larger companies
to have limited product lines, markets or financial resources, or to depend on a
small, inexperienced management group. Stocks of these companies may trade less
frequently and in limited volume, and their prices may fluctuate more than
stocks of other companies. Stocks of these companies may therefore be more
vulnerable to adverse developments than those of larger companies.
ASSET-BACKED SECURITIES -- Each Series, directly or indirectly, may invest in
asset-backed securities. An underlying pool of assets, such as credit card
receivables, automobile loans, or corporate loans or bonds back these bonds and
provides the interest and principal payments to investors. On occasion, the pool
of assets may also include a swap obligation, which is used to change the cash
flows on the underlying assets. As an example, a swap may be used to allow
floating rate assets to back a fixed rate obligation. Credit quality depends
primarily on the quality of the underlying assets, the level of credit support,
if any, provided by the issuer, and the credit quality of the swap counterparty,
if any. The underlying assets (i.e. loans) are subject to prepayments, which can
shorten the securities' weighted average life and may lower their return. The
value of these securities also may change because of actual or perceived changes
in the creditworthiness of the originator, the servicing agent, the financial
institution providing credit support, or swap counterparty.
MORTGAGE-BACKED SECURITIES -- Each Series, directly or indirectly, may invest in
a variety of mortgage-backed securities. Mortgage lenders pool individual home
mortgages with similar characteristics to back a certificate or bond, which is
sold to investors such as the Series. Interest and principal payments generated
by the underlying mortgages are passed through to the investors. The three
largest issuers of these securities are the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage Corporation (Freddie Mac). GNMA certificates are
backed by the full faith and credit of the U.S. Government, while others, such
as Fannie Mae and Freddie Mac certificates, are only supported by the ability to
borrow from the U.S. Treasury or supported only by the credit of the agency.
Private mortgage bankers and other institutions also issue mortgage-backed
securities. Mortgage-backed securities are subject to scheduled and unscheduled
principal payments as homeowners pay down or prepay their mortgages. As these
payments are received, they must be reinvested when interest rates may be higher
or lower than on the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates. In addition, when
interest rates fall, the pace of mortgage prepayments picks up. These refinanced
mortgages are paid off at face value (par), causing a loss for any investor who
may have purchased the security at a price above par. In such an environment,
this risk limits the potential price appreciation of these securities and can
negatively affect a Series' net asset value. When rates rise, the prices of
mortgage-backed securities can be expected to decline, although historically
these securities have experienced smaller price declines than comparable quality
bonds. In addition, when rates rise and prepayments slow, the effective duration
of mortgage-backed securities extends, resulting in increased volatility.
Additional mortgage-backed securities in which these Series may invest include
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) and stripped mortgage securities.
CMOs are debt securities that are fully collateralized by a portfolio of
mortgages or mortgage-backed securities. All interest and principal payments
from the underlying mortgages are passed through to the CMOs in such a way as to
create, in most cases, more definite maturities than is the case with the
underlying mortgages. CMOs may pay fixed or variable rates of interest, and
certain CMOs have priority over others with respect to the receipt of
prepayments. Stripped mortgage securities (a type of potentially high-risk
derivative) are created by separating the interest and principal payments
generated by a pool of mortgage-backed securities or a CMO to create additional
classes of securities. Generally, one class receives only interest payments
(IOs) and another receives principal payments (POs). Unlike with other
mortgage-backed securities and POs, the value of IOs tends to move in the same
direction as interest rates. The Series can use IOs as a hedge against falling
prepayment rates (interest rates are rising) and/or a bear market environment.
POs can be used as a hedge against rising prepayment rates (interest rates are
falling) and/or a bull market environment. IOs and POs are acutely sensitive to
interest rate changes and to the rate of principal prepayments. A rapid or
unexpected increase in prepayments can severely depress the price of IOs, while
a rapid or unexpected decrease in prepayments could have the same effect on POs.
These securities are very volatile in price and may have lower liquidity than
most other mortgage-backed securities. Certain non-stripped CMOs may also
exhibit these qualities, especially those that pay variable rates of interest
that adjust inversely with, and more rapidly than, short-term interest rates. In
addition, if interest rates rise rapidly and prepayment rates slow more than
expected, certain CMOs, in addition to losing value, can exhibit characteristics
of longer-term securities and become more volatile. There is no guarantee a
Series' investment in CMOs, IOs, or POs will be successful, and a Series' total
return could be adversely affected as a result.
RESTRICTED SECURITIES -- Each Series, directly or indirectly, may invest in
restricted securities that are eligible for resale under Rule 144A of the
Securities Act of 1933. These securities are sold directly to a small number of
investors, usually institutions. Unlike public offerings, restricted securities
are not registered with the SEC. Although restricted securities which are
eligible for resale under Rule 144A may be readily sold to qualified buyers,
there may not always be a market for them and their sale may involve substantial
delays and additional costs. In addition, Series P and X may invest in
restricted securities that are not eligible for resale under Rule 144A. Because
there is no active market for these types of securities, selling a security that
is not a Rule 144A security may be difficult and/or may involve expenses that
would not be incurred in the sale of securities that were freely marketable.
LOWER RATED DEBT SECURITIES -- Each Series, directly or indirectly, 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"). The
total return and yield of junk bonds can be expected to fluctuate more than the
total return and yield of higher-quality bonds. Junk bonds (those rated below
BBB or in default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Successful
investment in lower-medium- and low-quality bonds involves greater investment
risk and is highly dependent on the Investment Manager's credit analysis. A real
or perceived economic downturn or higher interest rates could cause a decline in
high-yield bond prices by lessening the ability of issuers to make principal and
interest payments. These bonds are often thinly traded and can be more difficult
to sell and value accurately than high-quality bonds. Because objective pricing
data may be less available, judgment may play a greater role in the valuation
process. In addition, the entire junk bond market can experience sudden and
sharp price swings due to a variety of factors, including changes in economic
forecasts, stock market activity, large or sustained sales by major investors, a
high-profile default, or just a change in the market's psychology. This type of
volatility is usually associated more with stocks than bonds, but junk bond
investors should be prepared for it.
FUTURES AND OPTIONS -- Each Series, directly or indirectly, may utilize futures
contracts, options on futures and may purchase call and put options and write
call and put options on a "covered" basis. Futures (a type of potentially
high-risk derivative) are often used to manage or hedge risk because they enable
the investor to buy or sell an asset in the future at an agreed-upon price.
Options (another type of potentially high-risk derivative) give the investor the
right (where the investor purchases the options), or the obligation (where the
investor writes (sells) the options), to buy or sell an asset at a predetermined
price in the future. Those Series which invest in non-dollar denominated foreign
securities may also engage in forward foreign currency transactions. These
instruments may be bought or sold for any number of reasons, including: to
manage exposure to changes in securities prices and foreign currencies, to
manage exposure to changes in interest rates, and bond prices; as an efficient
means of adjusting overall exposure to certain markets; in an effort to enhance
income; to protect the value of portfolio securities; and to adjust portfolio
duration. Futures contracts and options may not always be successful hedges;
their prices can be highly volatile. Using them could lower a Series' total
return, and the potential loss from the use of futures can exceed the Series'
initial investment in such contracts.
HYBRID INSTRUMENTS -- Each Series, directly or indirectly, may invest in certain
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 a
Series may not be successful.
SWAPS, CAPS, FLOORS AND COLLARS -- Each Series, directly or indirectly, may
enter into interest rate and/or index swaps, and the purchase or sale of related
caps, floors and collars. A Series would enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio 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 Series anticipates purchasing at a later date. To
the extent a Series enters into these types of transactions, it will be done to
hedge and not as a speculative investment, and the Series will not sell interest
rate caps or floors if it does not own securities or other instruments providing
the income the Series may be obligated to pay. Interest rate swaps involve the
exchange by the Series with another party of their respective commitments to pay
or receive interest on a notional amount of principal. 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.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS -- Each Series, directly
or indirectly, may purchase and sell securities on a "when issued", "forward
commitment" or "delayed delivery" basis. The price of these securities is fixed
at the time of the commitment to buy, but delivery and payment can take place a
month or more later. During the interim period, the market value of the
securities can fluctuate, and no interest accrues to the purchaser. At the time
of delivery, the value of the securities may be more or less than the purchase
or sale price. When a Series purchases securities on this basis, there is a risk
that the securities may not be delivered and that the Series may incur a loss.
CASH RESERVES -- Each Series may establish and maintain reserves as the
Investment Manager or Sub-Adviser believes is advisable to facilitate the
Series' cash flow needs (e.g., redemptions, expenses and, purchases of portfolio
securities) or for temporary, defensive purposes. Such reserves may include
domestic, and for certain Series, foreign money market instruments as well as
certificates of deposit, bank demand accounts and repurchase agreements.
BORROWING -- Each Series may borrow money from banks as a temporary measure or
for emergency purposes and 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.
<PAGE>
The financial highlights table is intended to help you understand certain of the
Series' financial performance during the period since commencement of a Series.
As of July 31, 1999, PCG Growth Series and SIM Conservative Growth Series are
the only Series which have commenced operations. Certain information reflects
financial results for a single Series share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Series assuming reinvestment of all dividends and distributions. This
information has been audited by Ernst & Young LLP, whose report, along with the
Fund's financial statements, is included in its annual report, which is
available upon request.
- --------------------------------------------------------------------------------
PCG GROWTH SERIES
- --------------------------------------------------------------------------------
FISCAL PERIOD
ENDED JULY 31
-------------
1999(B)(C)(D)
PER SHARE DATA
Net asset value beginning of period.............................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)..................................... (0.01)
Net gain (loss) on securities (realized & unrealized)............ (0.12)
------
Total from investment operations................................. (0.13)
LESS DISTRIBUTIONS
Dividends (from net investment income)........................... ---
Distributions (from capital gains)............................... ---
------
Total distributions.............................................. ---
------
Net asset value end of period.................................... $ 9.87
======
Total return (a)................................................. (1.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)............................. $1,676
Ratio of expenses to average net assets.......................... 2.50%
Ratio of net investment income (loss) to average net assets...... (0.34)%
Portfolio turnover rate.......................................... 26%
- --------------------------------------------------------------------------------
SIM CONSERVATIVE GROWTH SERIES
- --------------------------------------------------------------------------------
FISCAL PERIOD
ENDED JULY 31
-------------
1999(B)(C)(D)
PER SHARE DATA
Net asset value beginning of period.............................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)..................................... 0.04
Net gain (loss) on securities (realized & unrealized)............ 0.08
-----
Total from investment operations................................. 0.12
LESS DISTRIBUTIONS
Dividends (from net investment income)........................... ---
Distributions (from capital gains)............................... ---
-----
Total distributions.............................................. ---
-----
Net asset value end of period.................................... $10.12
=====
Total return (a)................................................. 1.20%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)............................. $380
Ratio of expenses to average net assets.......................... 2.50%
Ratio of net investment income (loss) to average net assets...... 1.42%
Portfolio turnover rate.......................................... 44%
(a) Total return does not take into account any of the expenses associated with
an investment in variable insurance products offered by Security Benefit
Life Insurance Company. Shares of a series of Advisor's Fund are available
only through the purchase of such products.
(b) PCG Growth Series and SIM Conservative Growth Series were initially offered
on April 15, 1999, with net asset values of $10.00 per share. Percentage
amounts for the period have been annualized, except for total return.
(c) Fund expenses for PCG Growth Series and SIM Conservative Growth Series were
reduced by the Private Consulting Group, Inc., the Investment Manager,
during the period. Expense ratios absent such reimbursement would have been
as follows:
1999
----
PCG Growth Series...................... 3.06%
SIM Conservative Growth Series......... 7.83%
(d) Net investment income per share has been calculated using the weighted
monthly average number of capital shares outstanding.
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
BY TELEPHONE -- Call 1-800-888-2461.
BY MAIL -- Write to:
Advisor's Fund
700 SW Harrison
Topeka, KS 66636-0001
ON THE INTERNET -- Reports and other information about the Fund can be viewed
online or downloaded from:
SEC: http://www.sec.gov
SMC, LLC: http://www.securitybenefit.com
Additional information about the Fund (including the Statement of Additional
Information) can be reviewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, DC. Information about the
operation of the public reference room may be obtained by calling the Commission
at 1-800-SEC-0330. Copies may be obtained, upon payment of a duplicating fee, by
writing the Public Reference Section of the Commission, Washington, DC
20549-6009.
- --------------------------------------------------------------------------------
The Fund's prospectus is to be used with the attached variable annuity product
prospectus. The Series of the Fund correspond to the subaccounts offered in such
prospectuses.
ANNUAL/SEMI-ANNUAL REPORT -- Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION -- The Fund's Statement of Additional
Information and the Fund's annual or semi-annual report are available, without
charge upon request by calling the Fund's toll-free telephone number
1-800-888-2461, extension 3112. Shareholder inquiries should be addressed to
Advisor's Fund, 700 SW Harrison Street, Topeka, Kansas 66636-0001, or by calling
the Fund's toll-free telephone number listed above. The Fund's Statement of
Additional Information is incorporated into this prospectus by reference.
The Fund's Investment Company Act file number is listed below:
Advisor's Fund............................ 811-8843
<PAGE>
- --------------------------------------------------------------------------------
ADVISOR'S FUND
Member of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
(785) 431-3112
(800) 888-2461
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with Advisor's Fund Prospectus dated November 29, 1999, 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.
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 29, 1999
(785) 431-3112
(800) 888-2461
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
Private Consulting Group, Inc.
4650 SW Macadam Avenue
Portland, Oregon 97201
FUND ADMINISTRATOR
Security Management Company, LLC
700 SW Harrison
Topeka, Kansas 66636
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
WHAT IS ADVISOR'S FUND?.................................................. 3
INVESTMENT METHODS AND RISK FACTORS...................................... 3
Debt Securities........................................................ 4
American Depositary Receipts........................................... 5
Shares of Other Investment Companies................................... 6
Repurchase Agreements.................................................. 6
Asset-Backed Securities................................................ 7
Mortgage-Backed Securities............................................. 8
Real Estate Securities................................................. 8
Emerging Markets....................................................... 9
Brady Bonds............................................................ 9
Loan Participations and Assignments.................................... 9
Sovereign Debt......................................................... 10
Put and Call Options................................................... 11
Trading in Futures..................................................... 16
Swaps, Caps, Floors and Collars........................................ 21
Spread Transactions.................................................... 21
Hybrid Instruments..................................................... 22
Zero Coupon Securities................................................. 22
When-Issued Securities................................................. 23
Restricted Securities.................................................. 23
Warrants............................................................... 23
Certain Risks of Foreign Investing..................................... 24
INVESTMENT POLICY LIMITATIONS............................................ 25
OFFICERS AND DIRECTORS................................................... 26
REMUNERATION OF DIRECTORS AND OTHERS..................................... 27
SALE AND REDEMPTION OF SHARES............................................ 28
INVESTMENT MANAGEMENT.................................................... 28
Administrator, Transfer Agent and Dividend Disbursing Agent............ 28
Distribution........................................................... 28
Services Plan.......................................................... 28
PORTFOLIO TURNOVER....................................................... 29
DETERMINATION OF NET ASSET VALUE......................................... 29
PORTFOLIO TRANSACTIONS................................................... 30
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS...................... 30
Code Section 817(h) Diversification.................................... 31
Passive Foreign Investment Companies................................... 32
Options, Futures and Forward Contracts and Swap Agreements............. 32
Market Discount........................................................ 33
Original Issue Discount................................................ 33
Constructive Sales..................................................... 33
Foreign Taxation....................................................... 33
Foreign Currency Transactions.......................................... 33
Distributions.......................................................... 34
Other Taxes............................................................ 34
CAPITAL STOCK AND VOTING................................................. 34
CUSTODIAN................................................................ 34
INDEPENDENT AUDITORS..................................................... 34
PERFORMANCE INFORMATION.................................................. 34
FINANCIAL STATEMENTS..................................................... 35
APPENDIX................................................................. 36
<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. 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 SW 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 Manager"), an Oregon
corporation, which is ultimately controlled by Robert L. Keys and National
Financial Partners. Mench Financial, Inc. ("Mench" or the "Sub-Adviser"), an
Ohio corporation, will act as sub-adviser for PCG Aggressive Growth Series.
Pursuant to an investment advisory contract with the Fund, the Investment
Manager 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 Manager and the investment advisory
contract.) Mench receives a portion of the fee paid to the Investment Manager
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."
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 Manager 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 Manager or Sub-Adviser, 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 Manager or Sub-Adviser, 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 Manager or Sub-Adviser 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
Manager or Sub-Adviser 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 Manager 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 Manager 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 Manager'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 Manager 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 Manager 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
Manager'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 Manager, 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 Manager or Sub-Adviser will
consider the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Investment Manager
or Sub-Adviser 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 Manager or Sub-Adviser 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.
In accordance with Section 5(b)(1) of the Investment Company Act of 1940, for
purposes of investment restriction 1, the Series do not take into account the
purchase of securities of other investment companies in calculating the 5% limit
in any one issuer.
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 Manager'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.
NAME, ADDRESS, POSITIONS HELD WITH THE FUNDS AND PRINCIPAL OCCUPATIONS DURING
THE PAST FIVE YEARS
JOHN D. CLELAND*
- ----------------
POSITION HELD WITH THE FUND--President and Director
PRINCIPAL OCCUPATIONS--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.**
- ----------------------
2222 SW 29th Street, Topeka, Kansas 66611
POSITION HELD WITH THE FUND--Director
PRINCIPAL OCCUPATIONS--Business broker, Griffith & Blair Realtors. Prior to
1997, President, Neon Tube Light Company, Inc.
PENNY A. LUMPKIN**
- ------------------
3616 Canterbury Town Road, Topeka, Kansas 66610
POSITION HELD WITH THE FUND--Director
PRINCIPAL OCCUPATIONS--President, Vivians (Corporate Sales); Vice President,
Palmer News Companies, Inc. (Wholesalers, Retailers and Developers) and
Bellairre Shopping Center (Leasing and Shopping Center Management);
Secretary-Treasurer, Palmer News, Inc. (Wholesale Distributors).
MARK L. MORRIS, JR.**
- ---------------------
5500 SW 7th Street, Topeka, Kansas 66606
POSITION HELD WITH THE FUND--Director
PRINCIPAL OCCUPATIONS--Retired. Former General Partner, Mark Morris Associates
(Veterinary Research and Education).
JAMES R. SCHMANK*
- -----------------
POSITION HELD WITH THE FUND--Vice President and Director
PRINCIPAL OCCUPATIONS--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
- --------------
POSITION HELD WITH THE FUND--Vice President
PRINCIPAL OCCUPATIONS--Senior Vice President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
AMY J. LEE
- ----------
POSITION HELD WITH THE FUND--Secretary
PRINCIPAL OCCUPATIONS--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
- -----------------
POSITION HELD WITH THE FUND--Treasurer
PRINCIPAL OCCUPATIONS--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
- -----------------------
POSITION HELD WITH THE FUND--Assistant Secretary
PRINCIPAL OCCUPATIONS--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 Funds' 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.
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 July 31, 1999, is set forth below:
- -------------------------------------------------------------------------------
PENSION OR
RETIREMENT ESTIMATED
AGGREGATE BENEFITS ANNUAL
COMPENSATION ACCRUED AS BENEFITS
NAME OF DIRECTOR FROM ADVISOR'S PART OF FUND UPON
OF THE FUND FUND EXPENSES RETIREMENT
- -------------------------------------------------------------------------------
Donald A. Chubb, Jr. $500 N/A N/A
John D. Cleland 0 N/A N/A
Penny A. Lumpkin 500 N/A N/A
Mark L. Morris, Jr. 500 N/A N/A
James R. Schmank 0 N/A N/A
- -------------------------------------------------------------------------------
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 manager to the Fund.
The Investment Manager is a corporation organized under the laws of the State of
Oregon. The Investment Manager serves as investment adviser to the Fund under an
Investment Advisory Contract dated February 10, 1999, which was approved by the
Board of Directors of the Fund at a regular meeting held on February 10, 1999.
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 Manager 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 Manager 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 Manager
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 sub-adviser for PCG Aggressive Growth. The
Sub-Adviser 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 9, 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.
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 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 Manager or
Sub-Adviser, 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 affiliated broker/dealers (who will receive brokerage commissions
on such transactions) and may also be directed to brokers who furnish investment
information or research services to the Investment Manager or Sub-Adviser. 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 Manager or Sub-Adviser 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 Manager or Sub-Adviser with respect to all accounts as to which
it exercises investment discretion. The Investment Manager or Sub-Adviser 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 Manager or Sub-Adviser 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 Manager or Sub-Adviser, including other investment
companies. When selecting securities for purchase or sale for a Series, the
Investment Manager or Sub-Adviser may at the same time be purchasing or selling
the same securities for one or more of such other accounts. Subject to the
Investment Manager's and Sub-Adviser's obligation to seek best execution, such
purchases or sales may be executed simultaneously or "bunched." It is the policy
of the Investment Manager and Sub-Adviser 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 Manager or Sub-Adviser 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 Manager or Sub-Adviser 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.
For the period since inception (April 15, 1999), the average annual total return
for PCG Growth Series was -1.30% and the average annual total return for SIM
Conservative Growth Series was 1.20%. PCG Aggressive Growth Series and SIM
Growth Series have not yet commenced operations and therefore, do not have total
return figures. Fee waivers and/or expense reimbursements reduced the expenses
of the PCG Growth and SIM Conservative Growth Series and in the absence of such
waivers/reimbursements, the performance quoted would be reduced.
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.
As the PCG Growth and SIM Conservative Growth Series have been in operation for
less than a full year, their respective average annual total return numbers are
the same as their total return numbers.
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
The audited financial statements of the Fund which are contained in the Fund's
July 31, 1999 Annual Report are incorporated herein by reference. Copies of the
Annual Report are provided to every person requesting a copy of the Statement of
Additional Information.
<PAGE>
APPENDIX
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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>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Articles of Incorporation
(b) By-Laws
(c) Not Applicable
(d) (1) Advisory Agreement between Advisors' Fund and Private Consulting
Group, Inc.
(2) Subadvisory Agreement between Private Consulting Group, Inc. and Mench
Financial, Inc.
(e) Not Applicable
(f) Not Applicable
(g) Custody Agreement - UMB Bank
(h) (1) Administrative Services and Transfer Agency Agreement
(2) Form of Services Agreement(1)
(i) Opinion of Counsel(1)
(j) Consent of Independent Auditors
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(1) Incorporated herein by reference from the Exhibits filed with the
Registrant's Pre-Effective Amendment No. 1 to Registration Statement
333-57911 (October 16, 1998).
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH FUND
Through its various separate accounts, SBL might be deemed to control the
open-end management investment companies listed below. The approximate
percentage of ownership by the separate accounts for each company is as follows:
Security Ultra Fund 32.0%
Security Growth and Income Fund 39.0%
SBL Fund 100%
Advisor's Fund 100%
ITEM 25. INDEMNIFICATION
A policy of insurance covering Security Management Company, LLC, and certain
other entities, insures the Registrant's directors and officers against
liability arising by reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their duties.
Reference is also made to Article Eleventh of the Registrant's Articles of
Incorporation (Item 23.(a)) 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 26. BUSINESS OR 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 27. PRINCIPAL UNDERWRITER
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Certain accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
will be maintained by Security Management Company, LLC, is 700 SW Harrison
Street, Topeka, Kansas, 66636-0001; Private Consulting Group, Inc., 4650 SW
Macadam, Portland, Oregon, 97201 and Mench Financial, Inc., 30 West Third
Street, Fourth Floor, Cincinnati, Ohio, 45202. Records relating to the duties of
the Registrant's custodian are maintained by UMB, n.a., 928 Grand Avenue, Kansas
City, Missouri, 64106.
ITEM 29. MANAGEMENT SERVICES
Not Applicable
ITEM 30. UNDERTAKINGS
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Fund has duly caused this registration statement to be signed on its
behalf by the undersigned, duly authorized, in the City of Topeka, and State of
Kansas on the 24th day of September, 1999.
ADVISOR'S FUND
(The Fund)
By: JOHN D. CLELAND
-----------------------------------
John D. Cleland, President
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed below by the following persons in the capacities and on the date
indicated:
Date: September 24, 1999
-----------------------------------
DONALD A. CHUBB, JR. Director
- ------------------------------------
Donald A. Chubb, Jr.
JOHN D. CLELAND President and Director
- ------------------------------------
John D. Cleland
PENNY A. LUMPKIN Director
- ------------------------------------
Penny A. Lumpkin
MARK L. MORRIS, JR. Director
- ------------------------------------
Mark L. Morris, Jr.
JAMES R. SCHMANK Director
- ------------------------------------
James R. Schmank
BRENDA M. HARWOOD Treasurer (Principal Financial Officer)
- ------------------------------------
Brenda M. Harwood
<PAGE>
ARTICLES OF INCORPORATION
OF
ADVISOR'S FUND
FIRST.
The name of the corporation (hereinafter called the Corporation) is
ADVISOR'S FUND.
SECOND
The purposes for which the Corporation is formed are as follows:
(1) To engage in the business of an incorporated open-end investment
company of the management type investing and reinvesting its assets in
accordance with the provisions of these Articles of Incorporation. The general
nature of its business shall be to buy, hold, sell, exchange, pledge and
otherwise deal in notes, stock, bonds, options or other securities and financial
instruments of whatsoever nature; to do any and all acts and things necessary or
incidental thereto to the extent permitted business corporations under the laws
of the State of Kansas as from time to time amended; to borrow money or
otherwise obtain credit and to secure the same by mortgaging, pledging or
otherwise subjecting as security the assets of the Corporation; and to sell,
hold, transfer, purchase and reissue (all without any vote or consent of
stockholders of the Corporation) the shares of its own capital stock.
(2) To engage in any lawful act or activity for which corporations may be
organized under the Kansas General Corporation Code as it may be amended from
time to time.
THIRD
The address of its registered office in the State of Kansas is 700 SW
Harrison Street, Topeka, Shawnee County, Kansas, 66636; and the name of its
resident agent at such address is Advisor's Fund.
FOURTH
(1) The Corporation shall have authority to issue 50 million shares of
common stock, consisting of four series designated as follows, with the number
of authorized shares as indicated: (i) PCG Growth Series, 12,500,000 shares;
(ii) PCG Aggressive Growth Series, 12,500,000; (iii) SIM Growth Series,
12,500,000 and (iv) SIM Conservative Growth Series, 12,500,000. All shares of
the common stock are to be without par value or stated capital. The board of
directors of the Corporation is expressly authorized to cause additional shares
of capital stock of the Corporation to be issued in one or more additional
series or classes as may be established from time to time by setting or changing
in one or more respects the designations, preferences, conversion or other
rights, voting powers, qualifications, dividend or other limitations or
restrictions of such shares of stock and to increase or decrease the number of
shares so authorized to be issued in any such series or class.
(2) The board of directors of the Corporation is expressly authorized to
classify and reclassify any unissued shares of capital stock into one or more
additional or other classes or series as may be established from time to time by
setting or changing in any one or more respects the designation, preferences,
conversion or other rights, voting powers, qualifications, dividend or other
limitations, or restrictions of such shares of stock.
(3) The board of directors may authorize the issuance and sale of stock in
such amounts and on such terms and conditions, for such purposes and for such
amount or kind of consideration as the board of directors shall determine,
subject to any limits required by then applicable law. All shares shall be
issued on a fully paid and non-assessable basis.
(4) The Corporation may issue and sell fractions of shares having pro rata
all the rights of full shares, including, without limitation, the right to vote
and receive dividends; and wherever the words "share" or "shares" are used in
these articles or in the bylaws, they shall be deemed to include fractions of
shares where the context does not clearly indicate that only full shares are
intended.
(5) At all meetings of stockholders each stockholder of the Corporation of
any class or series shall be entitled to one vote on each matter submitted to a
vote at such meeting for each share of stock standing in his or her name on the
books of the Corporation on the date, fixed in accordance with the Bylaws, for
determination of stockholders entitled to vote at such meeting. No stockholder
of the Corporation shall be entitled to exercise any right of cumulative voting.
(6) No shares need be offered to existing shareholders before being
offered to others and no shareholder shall have any right to purchase or
subscribe for any shares of the capital stock of the Corporation of any class or
series which may be issued or sold other than such right, if any, as the Board
of Directors, in its discretion, may determine. In connection with the
acquisition of all or substantially all of the assets of another entity, the
board of directors may issue or cause to be issued shares of the Corporation and
accept in payment thereof, in lieu of cash such assets of such entity as the
board determines is appropriate. No shares shall be sold by the Corporation
during any period when determination of the net asset value is suspended.
(7) From and after the close of business on the day when the shares are
properly tendered for repurchase the owner shall, with respect of said shares,
cease to be a stockholder of the Corporation and shall have only the right to
receive the repurchase price therefor. Repurchase of shares is conditional upon
the Corporation having funds or property legally available therefor.
(8) The Corporation, pursuant to a resolution by the Board of Directors
and without the vote or consent of the stockholders of the Corporation, shall
have the right to redeem at net asset value all shares of capital stock of the
Corporation in any stockholder account in which there has been (a) a failure to
provide the Corporation with a tax identification number; or (b) failure to
maintain ownership of a specified minimum number or value of shares of any class
or series of stock of the Corporation, such redemption to be effected at such
price, at such time and subject to such conditions as may be required or
permitted by applicable law.
(9) Payment for redeemed stock shall be made in cash unless, in the
opinion of the board of directors, which shall be conclusive, conditions exist
which make it advisable for the Corporation to make payment wholly or partially
in securities or other property or assets of the class or series of the shares
being redeemed.
(10) The net asset value of each share of the Corporation outstanding
shall be determined in accordance with the Corporation's current prospectus.
(11) The board of directors may suspend the right of stockholders of any
or all classes or series of shares to require the Corporation to redeem shares
held by them for such periods and to the extent permitted by, or in accordance
with, the Investment Company Act of 1940. The board of directors may in the
absence of a ruling by a responsible regulatory official, terminate such
suspension at such time as the board of directors, in its discretion, shall deem
reasonable, such determination to be conclusive.
(12) Shares of any class or series which have been redeemed shall
constitute authorized but unissued shares subject to classification and
reclassification as provided in these Articles.
(13) The board of directors may suspend the determination of net asset
value for all or any part of any period during which the New York Stock Exchange
is normally closed, or during which trading on the New York Stock Exchange or in
the markets normally utilized by the Corporation is restricted by government
order, or during which an emergency exists such as would make disposal by the
Corporation of securities owned by the Corporation unreasonable or
impracticable. The determination of whether trading on the New York Stock
Exchange or in the markets normally utilized by the Corporation is restricted or
whether such an emergency, as herein provided, exists, shall be by applicable
rules and regulations of the Securities and Exchange Commission or other
governmental authority. The suspension shall become effective at such time as
the board of directors shall specify in their declaration or resolution, but not
later than the close of business on the next succeeding business day following
the declaration or resolution. After such suspension becomes effective, there
shall be no determination of net asset value until the board of directors shall
declare the suspension terminated. The suspension shall terminate in any event
on the first day on which the New York Stock Exchange is open, the restricted
trading on the New York Stock Exchange or in the markets utilized by the
Corporation has ended or the emergency shall have expired in accordance with the
official ruling of the Securities and Exchange Commission or other governmental
authority or, in the absence of such ruling, upon the determination of the board
of directors.
(14) The board of directors may delegate any of its powers and duties
under this article with respect to appraisal of assets and liabilities and
determination of net asset value or with respect to suspension of the
determination of net asset value to an officer or agent of the Corporation.
FIFTH
(1) The name and mailing address of the incorporator is as follows:
Security Benefit Group, Inc.
700 SW Harrison
Topeka, Kansas 66636
(2) The power of the incorporator to act on behalf of the Corporation
shall terminate upon the filing of these Articles of Incorporation with the
Secretary of State. The names and mailing addresses of the persons who are to
serve as directors until their successors are elected and qualified are:
John D. Cleland, 700 SW Harrison St., Topeka, Kansas 66636
Donald A. Chubb, Jr., 700 SW Harrison St., Topeka, Kansas 66636
Penny A. Lumpkin, 700 SW Harrison St., Topeka, Kansas 66636
Mark L. Morris, Jr., 700 SW Harrison St., Topeka, Kansas 66636
James R. Schmank, 700 SW Harrison St., Topeka, Kansas 66636
SIXTH
The number of Directors of the Corporation shall be as provided in the
Bylaws. Unless otherwise provided by the Bylaws of the Corporation, the
Directors of the Corporation need not be stockholders therein.
SEVENTH
(1) Except as may be otherwise specifically provided by (i) statute, (ii)
the Articles of Incorporation of the Corporation as from time to time amended or
(iii) Bylaw provisions adopted from time to time by the stockholders or
directors of the Corporation, all powers of management, direction and control of
the Corporation shall be, and hereby are, vested in the board of directors.
(2) The board of directors, subject to the provisions of this article and
applicable law, may in its discretion enter into any contract with any person,
firm, partnership or corporation, irrespective of whether or not one or more of
the directors or officers of this corporation may also be an officer, partner,
director, shareholder or member of such other person, firm, partnership or
corporation, and such contract shall not be invalidated or rendered voidable by
reason of any such relationship. No person holding such relationship shall be
liable because of such relationship for any loss or expense to the Corporation
under or by reason of such contract, or accountable for any profit realized
directly or indirectly therefrom, provided that such contract when executed was
reasonable and fair, consistent with the provisions of these articles of
incorporation and approved by a majority of the board of directors of this
Corporation who are not so related, or by the vote of a majority of the
outstanding shares of this Corporation.
(3) Any contract entered into pursuant to the terms of this article shall
be consistent with and subject to the requirements of the Investment Company Act
of 1940, including any amendment thereto, or other applicable act of Congress
hereafter enacted, with respect to its duration, termination, authorization,
approval, assignment amendment or renewal.
EIGHTH
(1) The board of directors may from time to time declare and pay dividends
with the amount, source and payment thereof to be within their discretion and
calculated on the of generally accepted accounting principles.
(2) The board of directors has the power, in its discretion, to distribute
for any year as ordinary dividends and as capital gains distributions,
respectively, amounts sufficient to enable the Corporation as a regulated
investment company to avoid any liability for federal income tax in respect to
that year. In the case of a dividend payable in shares of stock or cash at the
election of a shareholder, the board of directors may prescribe whether a
shareholder failing to express his or her election before a given time shall be
deemed to have elected to take cash rather than shares, or to take shares rather
than cash, or to take shares with cash adjustment of fractions.
NINTH
The board of directors shall have power to make, and from time to time
alter, amend and repeal the Bylaws of the Corporation; provided, however, that
the paramount power to make, alter, amend and repeal the Bylaws, or any
provision thereof, or to adopt new Bylaws, shall always be vested in the
stockholders, which power may be exercised by the affirmative vote of the
holders of a majority of the outstanding shares of stock of the Corporation
entitled to vote, at any annual or special meeting of the stockholders;
provided, further, that thereafter the directors shall have the power to
suspend, repeal, amend or otherwise alter the Bylaws or any portion thereof so
enacted by the stockholders, unless the stockholders in enacting such Bylaws or
portion thereof shall otherwise provide.
TENTH
The Corporation reserves the right to alter, amend or repeal any provision
contained in these Articles of Incorporation in the manner now or hereafter
prescribed by the statutes of Kansas, and all rights and powers conferred herein
are granted subject to this reservation, provided, however, that any amendment
or repeal of the Eleventh Article of these Articles of Incorporation shall not
adversely affect any right or protection existing hereunder immediately prior to
such amendment or repeal. The Corporation reserves the right and privilege to
amend its Articles of Incorporation from time to time so as to authorize other
or additional series or classes of shares of stock, to increase or decrease the
number of shares of stock of any series or class now or hereafter authorized and
to vary the preferences, qualifications, limitations, restrictions and the
special or relative rights or other characteristics in respect of the shares of
each series or class, in the manner and upon such minimum vote of the
stockholders entitled to vote thereon as may at the time be prescribed or be
permitted by the laws of Kansas, or such larger vote as may then be required by
the Articles of Incorporation of the Corporation.
ELEVENTH
(1) No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of his or her fiduciary duty as
a director, PROVIDED that nothing contained in this Article shall eliminate or
limit the liability of a director (a) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (c) under the provisions of K.S.A. 17-6424 and amendments thereto, or (d)
for any transaction from which the director derived an improper personal
benefit. If the General Corporation Code of the State of Kansas is amended after
the filing of these Articles of Incorporation to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the General Corporation Code of the State of Kansas,
as so amended.
(2) Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
(3) Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them or between this Corporation
and its stockholders or any class of them, any court of competent jurisdiction
within the state of Kansas, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver of receivers appointed for this Corporation under the provisions of
K.S.A. 17-6901, and amendments thereto, or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of K.S.A. 17-6808, and amendments thereto, may order a meeting of
the creditors or class of creditors, or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the court directs. If a majority in number representing 3/4 in value
of the creditors or class of creditors, or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement and the reorganization, if sanctioned by the court to
which the application has been made, shall be binding on all creditors or class
or creditors, or on all the stockholders or class of stockholders, of this
Corporation, as the case may be, and also on this Corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name on behalf of the
Incorporator, Security Benefit Group, Inc., at Topeka, Kansas, on this 29th day
of April, 1998.
ROGER K. VIOLA
-----------------------------------
Roger K. Viola
Sr. Vice President, General Counsel
& Secretary
Security Benefit Group, Inc.
ATTEST:
AMY J. LEE
- -----------------------------------
Amy J. Lee, Assistant Secretary
Security Benefit Group, Inc.
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
The foregoing instrument was acknowledged before me this 29th day of April,
1998, by Roger K. Viola, Sr. Vice President, General Counsel and Secretary and
Amy J. Lee, Assistant Secretary, each of Security Benefit Group, Inc., a Kansas
Corporation, on behalf of said Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial seal
at Topeka, Kansas, on this 29th day of April, 1998.
[NOTARY SEAL]
ANNETTE E. CRIPPS
-----------------------------------
Notary Public
My Appointment Expires: 7/8/2001
---------------
<PAGE>
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 30th day of September, 1998.
JOHN D. CLELAND
-----------------------------------
John D. Cleland, President
AMY J. LEE
-----------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
BE IT REMEMBERED, that before me, Jana R. Selley, 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 30th day of September, 1998.
[NOTARY SEAL]
JANA R. SELLEY
-----------------------------------
Notary Public
My Commission Expires: June 14, 2000
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
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF COMMON STOCK OF
ADVISOR'S FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
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, and
whose registered office is 700 SW Harrison Street, Topeka, Shawnee County,
Kansas, do hereby certify that pursuant to the authority expressly vested in the
Board of Directors by the provisions of the corporation's Articles of
Incorporation, the Board of Directors of said corporation by unanimous written
consent dated the 9th day of September, 1998, adopted resolutions authorizing
the corporation to authorize the issuance of an indefinite number of shares of
capital stock of each of the four series of common stock of the corporation,
which resolutions are provided in their entirety as follows:
WHEREAS, K.S.A. 17-6602 has been amended to allow the board of
directors of a corporation that is registered as an open-end
investment company under the Investment Company Act of 1940 (the "1940
Act") to approve, by resolution, an amendment of the corporation's
Articles of Incorporation, to allow the issuance of an indefinite
number of shares of the capital stock of the corporation;
WHEREAS, the corporation is registered as an open-end investment
company under the 1940 Act; and
WHEREAS, the Board of Directors desires to authorize the issuance of
an indefinite number of shares of capital stock of each of the four
series of common stock of the corporation;
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the corporation
are hereby directed and authorized to issue an indefinite number of
shares without par value of capital stock of each series of the
corporation, including: PCG Growth Series, PCG Aggressive Growth
Series, SIM Growth Series and SIM Conservative Growth Series;
FURTHER RESOLVED, that, the appropriate officers of the corporation
be, and they hereby are, authorized and directed to take such action
as may be necessary under the laws of the State of Kansas or as they
deem appropriate to cause the foregoing resolutions to become
effective.
The undersigned do hereby certify that the foregoing amendment to the
corporation's Articles of Incorporation has been duly adopted in accordance with
the provisions of K.S.A. 17-6602.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 30th day of September, 1998.
JOHN D. CLELAND
-----------------------------------
John D. Cleland, President
AMY J. LEE
-----------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, Jana R. Selley, a Notary Public in and for
the County and State aforesaid, came John D. Cleland, President, and Amy J. Lee,
Secretary, of Advisor's Fund, a Kansas corporation, personally known to me to be
the persons who executed the foregoing instrument of writing as President and
Secretary, respectively, and duly acknowledged the execution of the same this
30th day of September, 1998.
[NOTARY SEAL]
JANA R. SELLEY
-----------------------------------
Notary Public
My Commission Expires: June 14, 2000
<PAGE>
BYLAWS
OF
ADVISOR'S FUND
OFFICES
1. REGISTERED OFFICE AND REGISTERED AGENT. The location of the registered
office and the name of the registered agent of the Corporation in the State
of Kansas shall be as stated in the Articles of Incorporation or as shall
be determined from time the time by the Board of Directors and on file in
the appropriate public offices of the State of Kansas pursuant to
applicable provisions of law.
2. CORPORATE OFFICES. The Corporation may have such other corporate offices
and places of business anywhere within or without the State of Kansas as
the Board of Directors may from time to time designate or the business of
the Corporation may require.
3. CORPORATE RECORDS. The books and records of the Corporation may be kept at
any one or more offices of the Corporation within or without the State of
Kansas, except as otherwise required by applicable law.
4. STOCKHOLDERS' RIGHT OF INSPECTION. A stockholder of record, upon written
demand to inspect the records of the Corporation pursuant to any statutory
or other legal right, shall be privileged to inspect such records only
during the usual and customary hours of business and in such manner as will
not unduly interfere with the regular conduct of the business of the
Corporation.
STOCKHOLDERS' MEETINGS
5. PLACE OF MEETINGS. Meetings of the stockholders may be held at any place
within or without the State of Kansas, as shall be determined from time to
time by the Board of Directors. Meetings of the stockholders for any
purpose other than the election of Directors may be held at such place as
shall be specified in the notice thereof.
6. ANNUAL MEETING. No annual meeting of stockholders is required to be held
for the purpose of electing Directors or any other reason, except when
specifically and expressly required under state or federal law. When an
annual meeting is held for the purpose of electing Directors, such
Directors shall hold office until the next annual meeting at which
Directors are to be elected and until their successors are elected and
qualified, or until their earlier resignation or removal.
7. SPECIAL MEETINGS. Special meetings of the stockholders for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the
President, or a Vice President, by the Board of Directors or by the holders
of not less than 10% of all outstanding shares of stock entitled to vote at
any annual meeting, provided that (a) such request shall state the purpose
of such meeting and the matters to be acted on, and (b) the stockholders
requesting such meeting shall have paid to the Corporation the reasonably
estimated cost of preparing and mailing the notice thereof, which the
Secretary shall determine and specify to such stockholders. A special
meeting shall be called by any officer directed to do so by the Board of
Directors.
The "call" and the "notice" of any such meeting shall be deemed to be
synonymous.
8. NOTICE OF MEETINGS. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise in respect of any change, conversion or exchange of stock or for
the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days and
not less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders
shall apply to any adjournment of the meeting; provided, however, that the
Board of Directors may fix a new record date for the adjourned meeting.
Written or printed notice of each meeting of the stockholders, whether
annual or special, stating the place, date and time thereof and in case of
a special meeting, the purpose or purposes thereof shall be delivered or
mailed to each stockholder entitled to vote thereat, not less than ten (10)
days nor more than sixty (60) days prior to the meeting unless as to a
particular matter, other or further notice is required by law, in which
case such other or further notice shall be given. The holders of a majority
of shares entitled to vote at the meeting and present in person or by
proxy, whether or not sufficient to constitute a quorum, or any officer
present and entitled to preside or act as Secretary of such meeting, may
adjourn the meeting without determining the date of the new meeting. Any
business that might have been transacted at the meeting originally called
may be transacted at any such adjourned meeting at which a quorum is
present. Any notice of a stockholders' meeting sent by mail shall be deemed
to be delivered when deposited in the United States mail with postage
prepaid thereon, addressed to the stockholder at his or her address as it
appears on the books of the Corporation.
9. REGISTERED STOCKHOLDERS - EXCEPTIONS - STOCK OWNERSHIP PRESUMED. The
Corporation shall be entitled to treat the holders of the shares of stock
of the Corporation, as recorded on the stock record or transfer books of
the Corporation, as the holders of record and as the holders and owners in
fact thereof and, accordingly, the Corporation shall not be required to
recognize any equitable or other claim to or interest in any such shares on
the part of any other person or other claim to or interest in any such
shares on the part of any other person, firm, partnership, corporation or
association, whether or not the Corporation shall have express or other
notice thereof, except as is otherwise expressly required by law, and the
term "stockholder" as used in these Bylaws means one who is a holder of
record of shares of the Corporation; provided, however, that if permitted
by law, (a) shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the Bylaws of such
corporation may prescribe, or, in the absence of such provision, as the
Board of Directors of such corporation may determine; (b) shares held by a
person in a fiduciary capacity may be voted by such person; and, (c) a
stockholder whose shares are pledged shall be entitled to vote such shares,
unless in the transfer of the shares by the pledgor on the books of the
Corporation, (s)he shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee or his/her proxy may represent said
stock and vote thereon.
10. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. To the extent, if any, and in
the manner permitted by statute and unless otherwise provided in the
Articles of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the Corporation, or any action which may
be taken at any annual or special meeting of such stockholders, may be
taken by written consent without a meeting.
11. WAIVER OF NOTICE. Whenever any notice is required to be given under the
provisions of these Bylaws, the Articles of Incorporation of the
Corporation, or of any law, a waiver thereof, if not expressly prohibited
by law, in writing signed by the person or persons entitled to notice
shall, whether before or after the time stated therein, be deemed the
equivalent to the giving of such notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when a
person attends a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened.
12. QUORUM. Except as otherwise may be provided by law, by the Articles of
Incorporation of the Corporation or by these Bylaws, the holders of
one-third of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall be required for and shall
constitute a quorum at all meetings of the stockholders for the transaction
of any business. Every decision of a majority in amount of shares of such
quorum shall be valid as a corporate act, subject to the following
exceptions: (a) Directors shall be elected by a plurality of the votes of
the stockholders present in person or represented by proxy at the meeting
and entitled to vote on the election of directors; and (b) specific
instances in which a larger vote is required by law or by the Articles of
Incorporation or by these Bylaws.
If a quorum be not present at any meeting, the stockholders entitled to
vote thereat, present in person or by proxy, shall have power to adjourn
the meeting from time to time without notice other than announcement at the
meeting, until the requisite amount of voting stock shall be present. If
the adjournment is for more than thirty (30) days, or if after adjournment
a new record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. At any subsequent session of the meeting at which a
quorum is present in person or by proxy any business may be transacted
which could have been transacted at the initial session of the meeting if a
quorum had been present.
13. PROXIES. At any meeting of the stockholders, every stockholder having the
right to vote shall be entitled to vote in person or by proxy executed by
an instrument in writing subscribed by such a stockholder and bearing a
date not more than three (3) years prior to said meeting unless said
instrument provides that it shall be valid for a longer period.
14. VOTING. Each stockholder shall have one vote for each share of stock having
voting power registered in his/her name on the books of the Corporation and
except where the transfer books of the Corporation shall have been closed
or a date shall have been fixed as a record date for the determination of
its stockholders entitled to vote, no share of stock shall be voted at any
election for directors which shall have been transferred on the books of
the Corporation within twenty (20) days next preceding such election of
Directors. There shall be no cumulative voting in the election of
Directors. Voting shall be by ballot for the election of Directors and on
such matters as may be required by law, provided that voting by ballot on
any matter may be waived by the unanimous consent of those stockholders
entitled to vote present at the meeting. A stockholder holding stock in a
fiduciary capacity shall be entitled to vote the shares so held, and a
stockholder whose stock is pledged shall be entitled to vote unless, in the
transfer by the pledgor on the books of the Corporation, (s)he shall have
expressly empowered the pledgee to vote thereon, in which case only the
pledgee or his/her proxy may represent said stock and vote thereon.
15. STOCKHOLDERS' LISTS. A complete list of the stockholders entitled to vote
at every election of Directors, arranged in alphabetical order, with the
address of and the number of voting shares held by each stockholder, shall
be prepared by the officer having charge of the stock books of the
Corporation and for at least ten (10) days prior to the date of the
election shall be open at the place where the election is to be held,
during the usual hours for business, to the examination of any stockholder
and shall be produced and kept open at the place of the election during the
whole time thereof the inspection of any stockholder present. The original
or duplicate stock ledger shall be the only evidence as to who are
stockholders entitled to examine such lists, or the books of the
Corporation, or to vote in person or by proxy, at such election. Failure to
comply with the foregoing shall not affect the validity or any action taken
at any such meeting.
16. CONDUCT OF MEETING. The Chairman of the Board, or if no Chairman has been
elected, the President, shall preside as chairman at all meetings of the
stockholders. The Chairman shall conduct each such meeting in a
businesslike and fair manner, but shall not be obligated to follow any
technical, formal or parliamentary rules or principles of procedure.
Bylaws, the Chairman of the meeting shall have the power and duty to
determine whether a nomination, or any business proposed to be brought
before the meeting was made in accordance with any procedures followed by
the Corporation, and, if any proposed nomination or business is not in
accordance with such procedures, to declare that such defective nomination
or proposal shall be disregarded. The Chairman's rulings on procedural
matters shall be conclusive and binding on all stockholders. Without
limiting the generality of the foregoing, the Chairman shall have all the
powers usually vested in the Chairman of a meeting of stockholders.
BOARD OF DIRECTORS
17. OFFICES. The Directors may have one or more offices at such place or places
within or without the State of Kansas as the Board of Directors may from
time to time determine.
18. MANAGEMENT. The management of all affairs, property and business of the
corporation shall be vested in a Board of Directors, consisting of a
minimum of three (3) and a maximum of nine (9) directors. Unless required
by the Articles of Incorporation, Directors need not be stockholders. Each
person who shall serve on the Board of Directors and who shall be
recommended and nominated for election or reelection as a director shall be
a person who is in good standing in his/her community and who shall not, at
the time of election or reelection, have attained his/her 70th birthday. In
addition to the power and authorities by these Bylaws and the Articles of
Incorporation expressly conferred upon it, the Board of Directors may
exercise all such powers of the Corporation, and do all such lawful acts
and things as are not by statute or by the Articles of Incorporation or by
these Bylaws directed or required to be exercised or done by the
stockholders.
19. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Vacancies and newly created
directorships resulting from any increase in the authorized number of
Directors may be filled by a majority of the Directors then in office,
though less than a quorum, or by a sole remaining Director, unless it is
otherwise provided in the Articles of Incorporation or these Bylaws, and
the Directors so chosen shall hold office until the next annual election of
Directors and until their successors are duly elected and qualified, or
until their earlier resignation or removal. If there are no Directors in
office, then an election of Directors may be held in the manner provided by
statute.
20. CONSENT TO SERVE. Every Director of the Corporation, upon his/her election,
shall qualify by accepting the office of the Director, and his/her
attendance at, or his/her written approval of the minutes of, any meeting
of the Board subsequent to his/her election shall constitute his/her
acceptance of such office; or (s)he may execute such acceptance by a
separate writing, which shall be placed in the minute book.
21. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held
without notice at such times and places either within or without the State
of Kansas as shall from time to time be fixed by resolution adopted by the
full Board of Directors. Any business may be transacted at a regular
meeting.
22. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called
at any time by the Chairman of the Board, the President, the Vice President
or the Secretary, or by any two (2) or more of the Directors. The place may
be within or without the State of Kansas as designated in the notice.
23. NOTICE OF SPECIAL MEETINGS. Written or printed notice of each special
meeting of the Board, stating the place, day and hour of the meeting and
the purpose or purposes thereof, shall be mailed to each Director addressed
to him/her at his/her residence or usual place of business at least three
(3) days before the day on which the meeting is to be held, or shall be
sent to him/her by telegram, or delivered to him/her personally, at least
two (2) days before the day on which the meeting is to be held. If mailed,
such notice shall be deemed to be delivered when it is deposited in the
United States mail with postage thereon addressed to the Director at
his/her residence or usual place of business. If given by telegraph, such
notice shall be deemed to be delivered when it is delivered to the
telegraph company. The notice may be given by any officer having authority
to call the meeting. "Notice" and "call" with respect to such meetings
shall be deemed to be synonymous. Any meeting of the Board of Directors
shall be a legal meeting without any notice thereof having been given if
all Directors shall be present without objection.
24. MEETINGS BY CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS EQUIPMENT.
Unless otherwise restricted by the Articles of Incorporation, these Bylaws,
or applicable law members of the Board of Directors of the Corporation, or
any committee designated by the board, may participate in a meeting of the
board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant hereto
shall constitute presence in person at such meeting.
25. QUORUM. Unless otherwise required by law, the Articles of Incorporation or
these Bylaws, a majority of the total number of Directors shall be
necessary at all meetings to constitute a quorum for the transaction of
business, and except as may be otherwise provided by law, the Articles of
Incorporation or these Bylaws, the act of a majority of the Directors
present at any meeting at which there is a quorum shall be the act of the
Board of Directors.
If at least two (2) Directors or one-third (1/3) of the whole Board of
Directors, whichever is greater, is present at any meeting at which a
quorum is not present, a majority of the Directors present at such meeting
shall have power successively to adjourn the meeting from time to time to a
subsequent date, without notice to any Directors other than announcement at
the meeting. At such adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the original
meeting which was adjourned.
26. STANDING OR TEMPORARY COMMITTEES. The Board of Directors may, by resolution
or resolutions passed by a majority of the whole Board, designate one (1)
or more committees, each committee to consist of one (1) or more Directors
of the Corporation. The Board may designate one (1) or more Directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not
(s)he or they constitute a quorum, may unanimously appoint another member
of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member. Any such committee, to the extent provided
in the resolution of the Board of Directors or in these Bylaws, shall have
and may exercise all of the powers and authority of the Board of Directors
in the management of the business and affairs of the Corporation, including
the power or authority to declare a dividend or to authorize the issuance
of stock; but no such committee shall have the power or authority of the
Board of Directors with respect to amending the Articles of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or
amending the Bylaws of the Corporation.
Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of
Directors. All committees so appointed shall keep regular minutes of the
transactions at their meetings and shall cause them to be recorded in books
kept for that purpose in the office of the Corporation and shall report the
same to the Board of Directors at its next meeting. The Secretary or an
Assistant Secretary of the Corporation may act as Secretary of the
committee if the committee so requests.
27. COMPENSATION. Unless otherwise restricted by the Articles of Incorporation,
the Board of Directors may, by resolution, fix the compensation to be paid
Directors for serving as Directors of the Corporation and may, by
resolution, fix a sum which shall be allowed and paid for attendance at
each meeting of the Board of Directors and may provide for reimbursement of
expenses incurred by Directors in attending each meeting; provided that
nothing herein contained shall be construed to preclude any Director from
serving the Corporation in any other capacity and receiving his/her regular
compensation therefor. Members of special or standing committees may be
allowed similar compensation for attending committee meetings. Nothing
herein contained shall be construed to preclude any Director or committee
member from serving the Corporation in any other capacity and receiving
compensation therefor.
28. RESIGNATIONS. Any Director may resign at any time upon written notice to
the Corporation. Such resignation shall take effect at the time specified
therein or shall take effect upon receipt thereof by the Corporation if no
time is specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
29. REMOVAL. Any Director may be removed, with or without cause, by the holders
of a majority of the shares then entitled to vote at an election of
Directors.
30. INDEMNIFICATION AND LIABILITY OF DIRECTORS, OFFICERS EMPLOYEES OR AGENTS.
Each person who is or was a Director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise (including the heirs, executors,
administrators and estate of such person) shall be indemnified by the
Corporation and be entitled to advancement of expenses as of right to the
full extent permitted or authorized by the laws of the State of Kansas, as
now in effect and as hereafter amended, regarding any liability, judgment,
fine, amount paid in settlement, cost and expense (including attorneys'
fees) asserted or threatened against and incurred by such person in his/her
capacity as or arising out of his/her status as a Director, officer,
employee or agent of the Corporation or, if serving at the request of the
Corporation, as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. The
indemnification and advancement of expenses provided by this Bylaw
provision shall not be exclusive of any other rights to which those
indemnified may be entitled under the Articles of Incorporation, under any
other Bylaw or under any agreement, vote of stockholders or disinterested
directors or otherwise, and shall not limit in any way any right which the
Corporation may have to make different or further indemnification with
respect to the same or different persons or classes of persons. The
Corporation shall have the power to purchase and maintain insurance on
behalf of persons entitled to indemnification hereunder against any
liability asserted against such person and incurred by such person in any
capacity discussed herein, or arising out of such person's status as such,
whether or not the Corporation would have the power to indemnify such
person against such liability.
To the fullest extent permitted by the Kansas General Corporation Code and
the Investment Company Act of 1940, no Director or officer of the
Corporation shall be liable to the Corporation or to its stockholders for
monetary damages. Without limiting the foregoing, no person shall be liable
to the Corporation for any loss, damage, liability or expense suffered by
it on account of any action taken or omitted to be taken by him/her as a
Director or officer of the Corporation or of any other corporation which
(s)he serves as a Director or officer at the request of the Corporation, if
such person (a) exercised the same degree of care and skill as a prudent
person would have exercised under the circumstances in the conduct of
his/her own affairs, or (b) took or omitted to take such action in reliance
upon advice of counsel for the Corporation, or for such other corporation,
or upon statement made or information furnished by Directors, officers,
employees or agents of the Corporation, or of such other corporation, which
(s)he had no reasonable grounds to disbelieve.
In the event any provision of this section 30 shall be in violation of the
Investment Company Act of 1940, as amended, or of the rules and regulations
promulgated thereunder, such provisions shall be void to the extent of such
violations.
31. ACTION WITHOUT A MEETING. Unless otherwise restricted by law, the Articles
of Incorporation or these Bylaws, any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if written consent thereto is signed by all
members of the Board of Directors or of such committee, as the case may be,
and such written consent is filed with the minutes of proceedings of the
Board or committee.
32. TERM OF OFFICE. Except as may otherwise be provided by law, the Articles of
Incorporation or these Bylaws, each Director shall hold office until the
next annual election and until a successor shall be duly elected and
qualified, or until his/her written resignation shall have been filed with
the Secretary of the Corporation.
33. WAIVER. Any notice provided or required to be given to the Directors may be
waived in writing by any of them. Attendance of a Director at any meeting
shall constitute a waiver of notice of such meeting except where (s)he
attends for the express purpose of objecting to the transaction of any
business thereat because the meeting is not lawfully called or convened.
OFFICERS
34. OFFICERS -- WHO SHALL CONSTITUTE. (a) The officers of the Corporation shall
be a President, a Secretary, a Treasurer, and any Chairman of the Board,
Vice Presidents, Assistant Secretaries, or Assistant Treasurers elected by
the Board. The Board shall elect a President, a Secretary and a Treasurer
at its first meeting. The Board then, or from time to time, may elect one
or more of the other prescribed officers as it may deem advisable, but need
not elect any officers other than a President, a Secretary and a Treasurer.
The Board may, if it desires, elect or appoint additional officers and may
further identify or describe any one or more of the officers of the
Corporation. In the discretion of the Board of Directors, the office of
Chairman of the Board of Directors may remain unfilled. The Chairman of the
Board of Directors, if any, shall at all times be, and other officers may
be, members of the Board of Directors. Except for the Chairman of the
Board, officers of the Corporation need not be members of the Board of
Directors. Any two (2) or more offices may be held by the same person.
(b) TERM OF OFFICE. Each officer of the Corporation shall hold his/her office
at the pleasure of the Board of Directors or for such other period as the
Board may specify at the time of his/her election or appointment, or until
his/her death, resignation or removal by a majority of the Board, whichever
first occurs. In any event, each officer of the Corporation who is not
reelected or reappointed at the annual election of officers by the Board
next succeeding his/her election or appointment shall be deemed to have
been removed by the Board, unless the Board provides otherwise at the time
of his/her election or appointment.
(c) OTHER AGENTS. The Board from time to time may also appoint such other
agents for the Corporation as it shall deem necessary or advisable, each of
whom shall serve at the pleasure of the Board or for such period as the
Board may specify, and shall exercise such powers, have such titles and
perform such duties as shall be determined from time to time by the Board
or by an officer empowered by the Board to make such determinations.
35. CHAIRMAN OF THE BOARD. If a Chairman of the Board be elected, (s)he shall
preside at all meetings of the stockholders and Directors at which (s)he
may be present and shall have such other duties, powers and authority as
any be prescribed elsewhere in these Bylaws. The Board of Directors may
delegate such other authority and assign such additional duties to the
Chairman of the Board, other than those conferred by law exclusively upon
the President, as it may from time to time determine, and, to the extent
permissible by law, the Board may designate the Chairman of the Board as
the Chief Executive Officer of the Corporation with all of the powers
otherwise conferred upon the President of the Corporation under paragraph
36 of these Bylaws, or it may, from time to time, divide the
responsibilities, duties and authority for the general control and
management of the Corporation's business and affairs between the Chairman
of the Board and the President.
36. THE PRESIDENT. Unless the Board otherwise provides, the President shall be
the Chief Executive Officer of the Corporation with such general executive
powers and duties of supervision and management as are usually vested in
the office of the Chief Executive Officer of a corporation, and (s)he shall
carry into effect all directions and resolutions of the Board. The
President, in the absence of the Chairman of the Board or if there be no
Chairman of the Board, shall preside at all meetings of the stockholders
and Directors.
The President may execute all bonds, notes, debentures, mortgages and other
instruments for and in the name of the Corporation and may execute all
other instruments for and in the name of the Corporation.
Unless the Board otherwise provides, the President, or any person
designated in writing by him/her, shall have full power and authority on
behalf of this Corporation (a) to attend and vote or take action at any
meeting of the holders of securities of corporations in which this
Corporation may hold securities, and at such meetings shall possess and may
exercise any and all rights and powers incident to being a holder of such
securities, and (b) to execute and deliver waivers of notice and proxies
for and in the name of the Corporation with respect to any securities held
by this Corporation.
(S)he shall, unless the Board otherwise provides, be ex officio a member of
all standing committees.
(S)he shall have such other or further duties and authority as may be
prescribed elsewhere in these Bylaws or from time to time by the Board of
Directors.
If a Chairman of the Board be elected or appointed and designated as the
Chief Executive Officer of the Corporation, as provided in paragraph 35 of
these Bylaws, the President shall perform such duties as may be
specifically delegated to him/her by the Board of Directors or are
conferred by law exclusively upon him/her, and in the absence, disability,
or inability or refusal to act of the Chairman of the Board, the President
shall perform the duties and exercise the powers of the Chairman of the
Board.
37. VICE PRESIDENT. In the absence of the President or in the event of his/her
disability or inability or refusal to act, any Vice President may perform
the duties and exercise the powers of the President until the Board
otherwise provides. Vice Presidents shall perform such other duties as the
Board may from time to time prescribe.
38. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall attend all
sessions of the Board and all meetings of the stockholders, shall prepare
minutes of all proceedings at such meetings and shall preserve them in a
minute book of the Corporation kept for that purpose. (S)he shall perform
similar duties for the executive and other standing committees when
requested by the Board or any such committee.
It shall be the principal responsibility of the Secretary to give, or cause
to be given, notice of all meetings of the stockholders and of the Board of
Directors, but this shall not lessen the authority of others to give such
notice as is authorized elsewhere in these Bylaws.
The Secretary shall see that all books, records, lists and information, or
duplicates, required to be maintained in Kansas, or elsewhere, are so
maintained.
The Secretary shall have the general duties, responsibilities and
authorities of a Secretary of a Corporation and shall perform such other
duties and have such other responsibility and authority as may be
prescribed elsewhere in these Bylaws or from time to time by the Board of
Directors or the Chief Executive Officer of the Corporation, under whose
direct supervision (s)he shall be.
In the absence of the Secretary or in the event of his/her disability, or
inability or refusal to act, any Assistant Secretary may perform the duties
and exercise the powers of the Secretary until the Board otherwise
provides. Assistant Secretaries shall perform such other duties as the
Board of Directors may from time to time prescribe.
39. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall be the principal
financial and accounting officer of the Corporation. The Treasurer shall
have responsibility for the safekeeping of the funds and securities of the
Corporation, shall keep or cause to be kept full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
keep, or cause to be kept, all other books of account and accounting
records of the Corporation. (S)he shall deposit or cause to be deposited
all moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors or by any officer of the Corporation to whom such authority has
been granted by the Board.
(S)he shall disburse, or permit to be disbursed, the funds of the
Corporation as may be ordered, or authorized generally, by the Board, and
shall render to the Chief Executive Officer of the Corporation and the
Directors whenever they may require it, an account of all his/her
transactions as Treasurer and of those under his/her jurisdiction, and of
the financial condition of the Corporation.
(S)he shall perform such other duties and shall have such other
responsibility and authority as may be prescribed elsewhere in these Bylaws
or from time to time by the Board of Directors.
(S)he shall have the general duties, powers and responsibility of a
Treasurer of a corporation and shall, unless otherwise provided by the
Board, be the Chief Financial and Accounting Officer of the Corporation.
If required by the Board, (s)he shall give the Corporation a bond in a sum
and with one or more sureties satisfactory to the Board, for the faithful
performance of the duties of his/her office and for the restoration to the
Corporation, in the case of his/her death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other
property of whatever kind in his/her possession or under his/her control
which belong to the Corporation.
In the absence of the Treasurer or in the event of his/her disability, or
inability of refusal to act, any Assistant Treasurer may perform the duties
and exercise the powers of the Treasurer until the Board otherwise
provides. Assistant Treasurers shall perform such other duties and have
such other authority as the Board of Directors may from time to time
prescribe.
40. DUTIES OF OFFICERS MAY BE DELEGATED. If any officer of the Corporation be
absent or unable to act, or for any other reason that the Board may deem
sufficient, the Board may delegate, for the time being, some or all of the
functions, duties, powers and responsibilities of any officer to any other
officer, or to any other agent or employee of the Corporation or other
responsible person, provided a majority of the whole Board concurs.
41. REMOVAL. Any officer or agent elected or appointed by the Board of
Directors, and any employee, may be removed or discharged by the Board
whenever in its judgment the best interests of the Corporation would be
served thereby, but such removal or discharge shall be without prejudice to
the contract rights, if any, of the person so removed or discharged.
STOCK
42. CERTIFICATES FOR SHARES OF STOCK. Certificates for shares of stock shall be
issued in numerical order, and each stockholder shall be entitled to a
certificate signed by, or in the name of the Corporation by, the Chairman
of the Board or the President or a Vice President, and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary,
certifying the number of shares owned by him/her. To the extent permitted
by statute, any of or all of the signatures on such certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such
certificate is issued, such certificate may nevertheless be issued by the
Corporation with the same effect as if such officer, transfer agent or
registrar who signed such certificate, or whose facsimile signature shall
have been used thereon, had not ceased to be such officer, transfer agent
or registrar of the Corporation. Subject to applicable law, the Board of
Directors may authorize the issuance of some or all of the shares of any or
all classes or series without certificates and may establish such
conditions as it may determine in connection with the issuance of
certificates.
43. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer
books of the Corporation, kept at the office of the Corporation or of the
transfer agent designated to transfer the class of stock, and before a new
certificate is issued the old certificate shall be surrendered for
cancellation. Until and unless the Board appoints some other person, firm
or corporation as its transfer agent (and upon the revocation of any such
appointment, thereafter, until a new appointment is similarly made) the
Secretary of the Corporation shall be the transfer agent of the Corporation
without the necessity of any formal action of the Board, and the Secretary,
or any person designated by him/her, shall perform all of the duties
thereof.
44. LOST CERTIFICATES. The Board of Directors may direct that a new certificate
or certificates be issued in place of any certificate or certificates
theretofore issued by the Corporation, alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of the fact by the person
claiming the certificate or certificates to be lost, stolen or destroyed.
When authorizing such issue of a replacement certificate or certificates,
the Secretary may, as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or
certificates, or his/her legal representative, to give the Corporation and
its transfer agents and registrars, if any, a bond in such sum as it may
direct to indemnify it against any claim that may be made against it with
respect to the certificate or certificates alleged to have been lost,
stolen or destroyed, or with respect to the issuance of such new
certificate or certificates.
45. REGULATIONS. The Board of Directors shall have power and authority to make
all such rules and regulations as it may deem expedient concerning the
issue, transfer, conversion and registration of certificates for shares of
stock of the Corporation, not inconsistent with the laws of the State of
Kansas, the Articles of Incorporation of the Corporation and these Bylaws.
DIVIDENDS AND FINANCE
46. DIVIDENDS. Dividends upon the outstanding shares of stock of the
Corporation, subject to the provisions of the Articles of Incorporation and
of any applicable law and of these Bylaws, may be declared by the Board of
Directors at any meeting. Subject to such provisions, dividends may be paid
in cash, in property, or in shares of stock of the Corporation.
47. CREATION OF RESERVES. The Directors may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any
proper purpose or may abolish any such reserve in the manner in which it
was created.
48. DEPOSITORIES. The moneys of the Corporation shall be deposited in the name
of the Corporation in such bank or banks or other depositories as the Board
of Directors shall designate, and shall be drawn out only by check signed
by persons designated by resolution adopted by the Board of Directors,
except that the Board of Directors may delegate said powers in the manner
hereinafter provided in this Bylaw 48. The Board of Directors may by
resolution authorize an officer or officers of the Corporation to designate
any bank or banks or other depositories in which moneys of the Corporation
may be deposited, and to designate the persons who may sign checks drawn on
any particular account or accounts of the Corporation, whether created by
direct designation of the Board of Directors or by authorized officer or
officers as aforesaid.
49. FISCAL YEAR. The Board of Directors shall have power to fix and from time
to time change the fiscal year of the Corporation. In the absence of action
by the Board of Directors, the fiscal year of the Corporation shall end
each year on the date which the Corporation treated as the close of its
first fiscal year, until such time, if any, as the fiscal year shall be
changed by the Board of Directors.
50. FIXING OF CAPITAL, TRANSFERS OF SURPLUS. Except as may be specifically
otherwise provided in the Articles of Incorporation, the Board of Directors
is expressly empowered to exercise all authority conferred upon it or the
Corporation by any law or statute, and in conformity therewith, relative
to:
the determination of what part of the consideration received for shares of
the Corporation shall be capital;
increasing or reducing capital;
transferring surplus to capital or capital to surplus;
all similar or related matters;
provided that any concurrent action or consent by or of the Corporation and
its stockholders required to be taken or given pursuant to law shall be
duly taken or given in connection therewith.
51. LOANS TO OFFICERS AND DIRECTORS PROHIBITED. The Corporation shall not loan
money to any officer or director of the Corporation.
52. BOOKS, ACCOUNTS AND RECORDS. The books, accounts and records of the
Corporation, except as may be otherwise required by applicable law of the
State of Kansas, may be kept outside the State of Kansas, at such place or
places as the Board of Directors may from time to time determine. The Board
of Directors shall determine whether, to what extent and the conditions
upon which the book, accounts and records of the Corporation, or any of
them, shall be open to the inspection of the stockholders, and no
stockholder shall have any right to inspect any book, account or record of
the Corporation, except as conferred by law or by resolution of the
stockholders or Directors.
MISCELLANEOUS
53. WAIVER OF NOTICE. Whenever any notice is required to be given under the
provisions of the statutes of Kansas, or of the Articles of Incorporation
or of these Bylaws, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, Directors or members of a committee of directors need be
specified in any written waiver of notice unless so required by the
Articles of Incorporation of these Bylaws.
54. CONTRACTS. The Board of Directors may authorize any officer or officers, or
agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
55. AMENDMENTS. These Bylaws may be altered, amended or repealed, or new Bylaws
may be adopted, in any of the following ways: (i) by the holders of a
majority of the outstanding shares of stock of the Corporation entitled to
vote, or (ii) by a majority of the full Board of Directors and any change
so made by the stockholders may thereafter be further changed by a majority
of the directors; provided, however, that the power of the Board of
Directors to alter, amend or repeal the Bylaws, or to adopt new Bylaws, may
be denied as to any Bylaws or portion thereof as the stockholders shall so
expressly provide.
Dated: May 1, 1998 AMY J. LEE
-------------------------------
Amy J. Lee
Secretary
<PAGE>
AMENDMENT TO THE
BYLAWS
OF
ADVISOR'S FUND
The following amendment was made to the Bylaws of Advisor's Fund, dated May 1,
1998, at the regular meeting of the Board of Directors held on July 23, 1999,
deleting paragraph 13 in its entirety and inserting in lieu thereof:
13. PROXIES. At any meeting of the stockholders, every stockholder having the
right to vote shall be entitled to vote in person or by proxy executed by
an instrument in writing subscribed by such a stockholder and bearing a
date not more than three (3) years prior to said meeting unless said
instrument provides that it shall be valid for a longer period. A
stockholder voting by proxy may do so via electronic, including via the
Internet, or telephonic transmission provided that any such electronic
transmission must either contain or be accompanied by information from
which it can be determined that the stockholder authorized the
transmission. A copy, facsimile or other reliable reproduction of the
instrument may be substituted for the original instrument for any purpose
for which the original instrument could be used.
Dated: July 23, 1999 AMY J. LEE
-------------------------------
Amy J. Lee
Secretary
<PAGE>
ADVISORY AGREEMENT
THIS AGREEMENT is made this 10th day of February, 1999, by and between 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.
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: ADVISOR'S FUND
CHRIS SWICKARD By: JOHN D. CLELAND
- ----------------------------------- ------------------------------------
Title: Assistant Secretary Title: President
ATTEST: PRIVATE CONSULTING GROUP, INC.
ANNA NYE By: ROBERT L. KEYS
- ----------------------------------- ------------------------------------
Title: Chief Operating Officer Title:
<PAGE>
EXHIBIT A
PCG Aggressive Growth Series
PCG Growth Series
SIM Growth Series
SIM Conservative Growth Series
<PAGE>
EXHIBIT B
For all services rendered by the Adviser hereunder, the Fund shall pay to the
Adviser an annual fee as follows:
1. .75 percent of the average daily closing value of the net assets of the PCG
Aggressive Growth Series
2. .75 percent of the average daily closing value of the net assets of the PCG
Growth Series
3. .75 percent of the average daily closing value of the net assets of the SIM
Growth Series
4. .75 percent of the average daily closing value of the net assets of the SIM
Conservative Growth Series
The fee payable hereunder shall be computed daily and payable monthly. If this
Agreement shall be effective for only a portion of a year, then the Adviser's
compensation for said year shall be prorated for such portion. For purposes of
calculating the fee hereunder, the value of the net assets of a 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 Adviser's compensation for the
preceding month shall be made as promptly as possible after the end of each
month.
Capitalized terms in this Schedule B have the same meaning as set forth in the
body of the Advisory Agreement to which this schedule attached.
<PAGE>
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this 10th day of February, 1999, 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.
ANNA NYE By: ROBERT L. KEYS
- ------------------------------------- ----------------------------------
Title:
ATTEST: MENCH FINANCIAL, INC.
ANNA NYE By: THOMAS S. MENCH
- ------------------------------------- ----------------------------------
Title: Chairman - CIO
<PAGE>
CUSTODY AGREEMENT
Dated January 1, 1995
As amended September 24, 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 24, 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, electronically or in writing,
to the Funds prior to the value date of said foreign exchange transaction. The
Fund agrees to provide the Custodian with information necessary to complete the
foreign exchange transaction two business days prior to the value date of said
transaction.
(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)
(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: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY EQUITY FUND
- Equity Series
- Social Awareness Series
- Value Series
- Small Company Series
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SBL FUND
- Series A, B, C, E, J, P, S, V and X
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY INCOME FUND
- Corporate Bond Series
- U. S. Government Series
- Limited Maturity Bond Series
- High Yield Series
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY GROWTH AND INCOME FUND
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY MUNICIPAL BOND FUND
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY CASH FUND
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
ADVISOR'S FUND
- PCG Growth Series
- PCG Aggressive Growth Series
- SIM Growth Series
- SIM Conservative Growth Series
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY MANAGEMENT COMPANY, LLC
(Corporate Account)
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: Senior Vice President
Date: September 24, 1998
UMB BANK, N.A.
ATTEST: R. WM. BLOEMKER By: RALPH R. SANTORO
---------------------------- -------------------------------
Name: Ralph R. Santoro
Title: Senior Vice President
Date: September 24, 1998
<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: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY EQUITY FUND
- Equity Series
- Social Awareness Series
- Value Series
- Small Company Series
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SBL FUND
- Series A, B, C, E, J, P, S, V and X
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY INCOME FUND
- Corporate Bond Series
- U. S. Government Series
- Limited Maturity Bond Series
- High Yield Series
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY GROWTH AND INCOME FUND
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY MUNICIPAL BOND FUND
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY CASH FUND
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
ADVISOR'S FUND
- PCG Growth Series
- PCG Aggressive Growth Series
- SIM Growth Series
- SIM Conservative Growth Series
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: President
Date: September 24, 1998
SECURITY MANAGEMENT COMPANY, LLC
(Corporate Account)
ATTEST: AMY J. LEE By: JOHN D. CLELAND
---------------------------- -------------------------------
Name: John D. Cleland
Title: Senior Vice President
Date: September 24, 1998
UMB BANK, N.A.
ATTEST: R. WM. BLOEMKER By: RALPH R. SANTORO
---------------------------- -------------------------------
Name: Ralph R. Santoro
Title: Senior Vice President
Date: September 24, 1998
<PAGE>
UMB Financial Corporation
CUSTODY FEE SCHEDULE
Security Management Group of Mutual Funds
NET ASSET VALUE CHARGES
A fee to be computed as of month-end and payable on the last day of each
month of the portfolios' fiscal year, at the annual rate of:
0.275 basis points on the combined net assets of all portfolios, subject to a
$100.00 per month minimum per portfolio.
PORTFOLIO TRANSACTION CHARGES
DTC Book-Entry Transactions* $5.00
PTC Book-Entry Transactions* 11.50
Federal Book-Entry Transactions* 7.50
Physical Transactions* 18.00
Third Party (Bank Book-Entry) Transactions 15.00
Principal & Interest Paydowns 3.00
Options/Futures 25.00
Corporate Actions/Calls/Reorgs 30.00
*A TRANSACTION INCLUDES BUYS, SELLS, MATURITIES, AND FREE SECURITY MOVEMENTS.
OUT OF POCKET EXPENSES
Including, but not limited to, security transfer fees, certificate fees,
shipping/courier fees or charges, FDIC insurance premiums, and remote system
access charges.
UMB Bank, N.A. agrees that the foregoing fees and charges will be in effect for
a period of three years beginning December 1, 1996, unless otherwise agreed by
the parties.
IN WITNESS WHEREOF, the parties hereto have executed this amendment to the
Custody Agreement dated January 1, 1995, this 26th day of November, 1996.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
- ------------------------------------- -------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Equity Fund
Equity Series
Social Awareness Series
AMY J. LEE By: JOHN D. CLELAND
- ------------------------------------- -------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
- ------------------------------------- -------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
Limited Maturity Bond Series
U.S. Government Bond Series
High Yield Series
AMY J. LEE By: JOHN D. CLELAND
- ------------------------------------- -------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
- ------------------------------------- -------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
- ------------------------------------- -------------------------------
Name: John D. Cleland
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S, J and P
AMY J. LEE By: JOHN D. CLELAND
- ------------------------------------- -------------------------------
Name: John D. Cleland
Title: President
ATTEST: UMB Bank, N.A.
R. WM. BLOEMKER By: PATRICIA A. PETERSON
- ------------------------------------- -------------------------------
Name: Patricia A. Peterson
Title: Senior Vice President
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are hereby made
parties to the Custody Agreement dated January 1, 1995, as amended September 24,
1998, with UMB Bank, n.a. ("Custodian"), and agree to be bound by all the terms
and conditions contained in said Agreement:
List of Funds:
Security Equity Fund, Enhanced Index Series
Security Equity Fund, Select 25 Series
ATTEST: SECURITY EQUITY FUND
- Enhanced Index Series
- Select 25 Series
AMY J. LEE
- -------------------------------------
Amy J. Lee By: JAMES R. SCHMANK
-------------------------------
Title: Vice President
ATTEST: UMB Bank, n.a.
By: RALPH R. SANTORO
- ------------------------------------- -------------------------------
Title: Senior Vice President
Date: February 16, 1999
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant Trust Company
SPECIAL SUBCUSTODIANS:
The Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
SECURITY EQUITY FUND
- Enhanced Index Series
- Select 25 Series
ATTEST: AMY J. LEE By: JAMES R. SCHMANK
------------------------------ -------------------------------
Name: James R. Schmank
Title: Vice President
Date: January 27, 1999
UMB BANK, N.A.
ATTEST: By: RALPH R. SANTORO
------------------------------ -------------------------------
Name: Ralph R. Santoro
Title: Senior Vice President
Date: February 16, 1999
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are hereby made
parties to the Custody Agreement dated January 1, 1995, as amended September 24,
1998, with UMB Bank, n.a. ("Custodian"), and agree to be bound by all the terms
and conditions contained in said Agreement:
List of Funds:
SBL Fund, Series H
SBL Fund, Series Y
Security Income Fund, Capital Preservation Series
ATTEST: SBL FUND
- Series H
- Series Y
AMY J. LEE By: JAMES R. SCHMANK
- ------------------------------ --------------------------------
Amy J. Lee, Secretary Title: Vice President
ATTEST: SECURITY INCOME FUND
- Capital Preservation Series
AMY J. LEE By: JOHN D. CLELAND
- ------------------------------ --------------------------------
Amy J. Lee, Secretary John D. Cleland
Title: President
ATTEST: UMB Bank, n.a.
R. W. BLOEMKER By: RALPH R. SANTORO
- ------------------------------ --------------------------------
R. William Bloemker Title: Senior Vice President
Assistant Secretary Date: April 26, 1999
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant Trust Company
SPECIAL SUBCUSTODIANS:
The Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
SBL FUND
- Series H
- Series Y
ATTEST: AMY J. LEE By: James R. Schmank
----------------------------- -------------------------------
Amy J. Lee, Secretary Name: James R. Schmank
Title: Vice President
Date: April 30, 1999
SECURITY INCOME FUND
- Capital Preservation Series
ATTEST: AMY J. LEE By: JOHN D. CLELAND
----------------------------- -------------------------------
Amy J. Lee, Secretary Name: John D. Cleland
Title: President
Date: April 30, 1999
UMB BANK, N.A.
ATTEST: R. W. BLOEMKER By: RALPH R. SANTORO
----------------------------- -------------------------------
R. William Bloemker Name: Ralph R. Santoro
Assistant Secretary Title: Senior Vice President
Date: April 26, 1999
<PAGE>
ADVISOR'S FUND
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
This Agreement is made as of this 9th day of October, 1998, by and between the
Advisor's Fund, a Kansas corporation ("Fund"), and Security Management Company,
LLC, a Kansas limited liability company ("SMC, LLC"), located in Topeka, Kansas.
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, Security Management Company, LLC is willing to provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to PCG AGGRESSIVE GROWTH SERIES, PCG GROWTH SERIES, SIM GROWTH SERIES
and SIM CONSERVATIVE GROWTH SERIES (the "Series") of the Fund under the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties agree as follows:
1. EMPLOYMENT OF SECURITY MANAGEMENT COMPANY, LLC
SMC, LLC will provide the Series with general administrative, fund
accounting, transfer agency, and dividend disbursing services described and
set forth in Schedule A attached hereto and made a part of this Agreement
by reference. SMC, LLC agrees to maintain sufficient trained personnel,
equipment and supplies to perform such services in conformity with the
current prospectus of the Series and such other reasonable standards of
performance as the Fund may from time to time specify, and otherwise in an
accurate, timely and efficient manner.
2. COMPENSATION
As consideration for the services described in Section A, the Fund agrees
to pay SMC, LLC a fee as described and set forth in Schedule B attached
hereto and made a part of this Agreement by reference, as it may be amended
from time to time, such fee to be calculated and accrued daily and payable
monthly.
3. EXPENSES
A. EXPENSES OF SMC, LLC. SMC, LLC shall pay all of the expenses incurred
in providing the Series the services and facilities described in this
agreement, whether or not such expenses are billed to SMC, LLC or the
Fund, except as otherwise provided herein.
B. EXPENSES OF SERIES. Expenses to be incurred in the operation of the
Series shall be borne by the Series, except as provided by Section 3.A.
Expenses to be borne by the Series include, but are not limited to,
taxes; interest; brokerage fees and commissions, if any; fees of
directors who are not "interested persons" of the Fund as that term is
defined in the 1940 Act; Securities and Exchange Commission ("SEC")
fees and state Blue Sky qualification fees; advisory and administration
fees; charges of custodians, transfer and dividend disbursing agents;
insurance premiums; outside auditing and legal expenses; costs of
maintenance of "corporate existence"; costs of preparation and
transmission of registration statements and other SEC filings;
typesetting and printing of prospectuses for regulatory purposes and
for distribution to shareholders of the Fund; costs of shareholders'
reports and corporate meetings; and any extraordinary expenses.
4. INSURANCE
The Fund and SMC, LLC agree to procure and maintain, separately or as joint
insureds with themselves, their directors, employees, agents and others,
and other investment companies for which SMC, LLC acts as investment
advisor and transfer agent, a policy or policies of insurance against loss
arising from breaches of trust, errors and omissions, and a fidelity bond
meeting the requirements of the 1940 Act, in the amounts and with such
deductibles as may be agreed upon from time to time, and to pay such
portions of the premiums therefor as amount of the coverage attributable to
each party is to the aggregate amount of the coverage for all parties or,
with respect to the errors and omissions coverage, on the basis of the
respective insureds' net assets or other reasonable basis.
5. REGISTRATION AND COMPLIANCE
A. SMC, LLC represents that as of the date of this agreement it is
registered as a transfer agent with the Securities and Exchange
Commission ("SEC") pursuant to Subsection 17A of the Securities
Exchange Act of 1934 and the rules and regulations thereunder, and
agrees to maintain said registration and comply with all of the
requirements of said Act, rules and regulations so long as this
Agreement remains in force.
B. The Fund represents that it is a diversified management investment
company registered with the SEC in accordance with the 1940 Act and the
rules and regulations thereunder, and authorized to sell its shares
pursuant to the 1940 Act, the Securities Act of 1933 and the rules and
regulations thereunder.
6. LIABILITY AND INDEMNIFICATION
SMC, LLC shall be liable for any actual losses, claims, damages or expenses
(including any reasonable counsel fees and expenses) resulting from SMC,
LLC's bad faith, willful misfeasance, reckless disregard of its obligations
and duties, negligence or failure to properly perform any of its
responsibilities or duties under this Agreement. SMC, LLC shall not be
liable and shall be indemnified and held harmless by the Fund, for any
claim, demand or action brought against it arising out of, or in connection
with:
A. Bad faith, willful misfeasance, reckless disregard of its duties or
negligence of the Board of Directors of the Fund, or SMC, LLC's acting
upon any instructions properly executed and authorized by the Board of
Directors of the Fund;
B. SMC, LLC acting in reliance upon advice given by independent counsel
retained by the Board of Directors of the Fund.
In the event that SMC, LLC requests the Fund to indemnify or hold it
harmless hereunder, SMC, LLC shall use its best efforts to inform the Fund
of the relevant facts concerning the matter in question. SMC, LLC shall use
reasonable care to identify and promptly notify the Fund concerning any
matter which presents, or appears likely to present, a claim for
indemnification against the Fund.
The Fund shall have the election of defending SMC, LLC against any claim
which may be the subject of indemnification hereunder. In the event the
Fund so elects, it will so notify SMC, LLC and thereupon the Fund shall
take over defenses of the claim, and if so requested by the Fund, SMC, LLC
shall incur no further legal or other claims related thereto for which it
would be entitled to indemnity hereunder provided, however, that nothing
herein contained shall prevent SMC, LLC from retaining, at its own expense,
counsel to defend any claim. Except with the Fund's prior consent, SMC, LLC
shall in no event confess any claim or make any compromise in any matter in
which the Fund will be asked to indemnify or hold SMC, LLC harmless
hereunder.
PUNITIVE DAMAGES. SMC, LLC shall not be liable to the Fund, or any
third party, for punitive, exemplary, indirect, special or
consequential damages (even if SMC, LLC has been advised of the
possibility of such damages) arising from its obligations and the
services provided under this agreement, including but not limited to
loss of profits, loss of use of the shareholder accounting system, cost
of capital and expenses of substitute facilities, programs or services.
FORCE MAJEURE. Anything in this Agreement to the contrary
notwithstanding, SMC, LLC shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national
emergencies, work stoppages, fire, flood, catastrophe, earthquake, acts
of God, insurrection, war, riot, failure of communication or
interruption.
7. DELEGATION OF DUTIES
SMC, LLC may, at its discretion, delegate, assign or subcontract any of the
duties, responsibilities and services governed by this Agreement to its
affiliate, Security Benefit Group, Inc., whether or not by formal written
agreement, or to any third party, provided that such arrangement with a
third party has been approved by the Board of Directors of the Fund. SMC,
LLC shall, however, retain ultimate responsibility to the Fund, and shall
implement such reasonable procedures as may be necessary, for assuring that
any duties, responsibilities or services so assigned, subcontracted or
delegated are performed in conformity with the terms and conditions of this
Agreement.
8. AMENDMENT
This Agreement and the schedules forming a part hereof may be amended at
any time, without shareholder approval, by a writing signed by each of the
parties hereto. Any change in the Fund's registration statements or other
documents of compliance or in the forms relating to any plan, program or
service offered by its current prospectus which would require a change in
SMC, LLC's obligations hereunder shall be subject to SMC, LLC's approval,
which shall not be unreasonably withheld.
9. TERMINATION
This Agreement may be terminated by either party without cause upon 120
days' written notice to the other, and at any time for cause in the event
that such cause remains unremedied for more than 30 days after receipt by
the other party of written specification of such cause.
In the event the Fund designates a successor to any of SMC, LLC's
obligations hereunder, SMC, LLC shall, at the expense and pursuant to the
direction of the Fund, transfer to such successor all relevant books,
records and other data of the Fund in the possession or under the control
of SMC, LLC.
10. SEVERABILITY
If any clause or provision of this Agreement is determined to be illegal,
invalid or unenforceable under present or future laws effective during the
term hereof, then such clause or provision shall be considered severed
herefrom and the remainder of this Agreement shall continue in full force
and effect.
11. TERM
This Agreement initially shall become effective upon its approval by a
majority vote of the Board of Directors of the Fund, including a majority
vote of the Directors who are not "interested persons" of the Fund or SMC,
LLC, as defined in the 1940 Act, and shall continue until terminated
pursuant to its provisions.
12. APPLICABLE LAW
This Agreement shall be subject to and construed in accordance with the
laws of the State of Kansas.
SECURITY MANAGEMENT COMPANY, LLC
By: JAMES R. SCHMANK
-------------------------------
James R. Schmank, President
ATTEST:
AMY J. LEE
- -----------------------------------
Amy J. Lee, Secretary
ADVISOR'S FUND
By: JOHN D. CLELAND
-------------------------------
John D. Cleland, President
ATTEST:
AMY J. LEE
- -----------------------------------
Amy J. Lee, Secretary
<PAGE>
ADVISOR'S FUND
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
SCHEDULE A
Security Management Company, LLC agrees to provide the Series the following
Administrative facilities and services:
1. FUND AND PORTFOLIO ACCOUNTING
A. Maintenance of Fund General Ledger and Journal.
B. Preparing and recording disbursements for direct series expenses.
C. Preparing daily money transfers.
D. Reconciliation of all Series bank and custodian accounts.
E. Assisting Fund independent auditors as appropriate.
F. Prepare daily projection of available cash balances.
G. Record trading activity for purposes of determining net asset values and
daily dividend.
H. Prepare daily portfolio evaluation report to value portfolio securities
and determine daily accrued income.
I. Determine the daily net asset value per share.
J. Determine the daily, monthly, quarterly, semiannual or annual dividend
per share.
K. Prepare monthly, quarterly, semiannual and annual financial statements.
L. Provide financial information for reports to the Securities and Exchange
Commission in compliance with the provisions of the 1940 Act and the
Securities Act of 1933, the Internal Revenue Service and other
regulatory agencies as required.
M. Provide financial, yield, net asset value, etc. information to NASD and
other survey and statistical agencies as instructed by the Fund.
N. Report to the Audit Committee of the Board of Directors, if applicable.
2. ADMINISTRATIVE
A. Provide registration and other administrative services necessary to
qualify the shares of the Series for sale in those jurisdictions
determined from time to time by the Fund's Board of Directors (commonly
known as "Blue Sky Registration").
B. Provide registration with and reports to the Securities and Exchange
Commission in compliance with the provisions of the 1940 Act and the
Securities Act of 1933.
C. Prepare and review Series prospectus and Statement of Additional
Information.
D. Prepare proxy statements and oversee proxy tabulation for annual
meetings.
E. Prepare Board materials and maintain minutes of Board meetings.
F. Draft, review and maintain contractual agreements between Fund and
Investment Advisor, Custodian, Distributor and Transfer Agent.
G. Oversee printing of proxy statements, financial reports to shareholders,
prospectuses and Statements of Additional Information.
H. Provide oversight regarding shareholder transactions, administrative
services, compliance with contractual agreements and the provisions of
the 1940 Act and the Securities Act of 1933.
<PAGE>
SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES
Security Management Company, LLC agrees to provide the Series the following
transfer agency and dividend disbursing services:
1. Maintenance of shareholder accounts, including processing of new accounts.
2. Posting address changes and other file maintenance for shareholder
accounts.
3. Posting all transactions to the shareholder file, including:
A. Direct purchases
B. Wire order purchases
C. Direct redemptions
D. Wire order redemptions
E. Draft redemptions
F. Direct exchanges
G. Transfers
H. Certificate issuances
I. Certificate deposits
4. Monitor fiduciary processing, insuring accuracy and deduction of fees.
5. Prepare daily reconciliations of shareholder processing to money movement
instructions.
6. Handle bad/returned check collections. Immediately liquidate shares
purchased and return to the shareholder the check and confirmation of the
transaction.
7. Issuing all checks and stopping and replacing lost checks.
8. Draft clearing services.
A. Maintenance of signature cards and appropriate corporate resolutions.
B. Comparison of the signature on the check to the signatures on the
signature card for the purpose of paying the face amount of the check
only.
C. Receiving checks presented for payment and liquidating shares after
verifying account balance.
D. Ordering checks in quantity specified by the Series for the
shareholder, if applicable.
9. Mailing confirmations, checks and/or certificates resulting from
transaction requests to shareholders.
10. Performing all of the Series' other mailings, including:
A. Dividend and capital gain distributions.
B. Semiannual and annual reports.
C. 1099/year-end shareholder reporting.
D. Systematic withdrawal plan payments.
E. Daily confirmations.
11. Answering all service related telephone inquiries from shareholders and
others, including:
A. General and policy inquiries (research and resolve problems).
B. Fund yield inquiries.
C. Taking shareholder processing requests and account maintenance changes
by telephone as described above.
D. Submit pending requests to correspondence.
E. Monitor on-line statistical performance of unit.
F. Develop reports on telephone activity.
12. Respond to written inquiries (research and resolve problems), including:
A. Initiate shareholder account reconciliation proceeding when
appropriate.
B. Notify shareholder of bad/returned investment checks.
C. Respond to financial institutions regarding verification of deposit.
D. Initiate proceedings regarding lost certificates.
E. Respond to complaints and log activities.
F. Correspondence control.
13. Maintaining and retrieving all required past history for shareholders and
provide research capabilities as follows:
A. Daily monitoring of all processing activity to verify back-up
documentation.
B. Provide exception reports.
C. Microfilming.
D. Storage, retrieval and archive.
14. Prepare materials for annual meetings.
A. Address and mail annual proxy and related material.
B. Prepare and submit to Fund and affidavit of mailing.
C. Furnish certified list of shareholders (hard copy or microfilm) and
inspectors of election.
15. Report and remit as necessary for state escheat requirements.
<PAGE>
ADVISOR'S FUND
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to the Series:
Annual Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Accounting Fee: Per Series, the greater of $15,000 per year or 0.03%
(based on average daily net asset values).
Annual Administration Fee: Per Series, 0.045% (based on average daily net asset
values)
If this Agreement shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees set forth above.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the incorporation by reference of our report dated
August 27, 1999 in the Registration Statement (Form N-1A) and related Prospectus
of Advisor's Fund filed with the Securities and Exchange Commission in this
Post-Effective Amendment No. 1 under the Securities Act of 1933 (Registration
No. 333-57911) and Post-Effective Amendment No. 2 under the Investment Company
Act of 1940 (Registration No. 811-8843).
Ernst & Young LLP
Kansas City, Missouri
September 29, 1999
