1933 Act Registration No. 333-49752
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
MET INVESTORS SERIES TRUST
(BlackRock Equity Portfolio)
(BlackRock U.S. Government Income Portfolio)
[Exact Name of Registrant as Specified in Charter]
Area Code and Telephone Number: (800)848-3854
610 Newport Center Drive
Suite 1350
Newport Beach, California 92660
-----------------------------------
(Address of Principal Executive Offices)
Elizabeth M. Forget
President
Met Investors Series Trust
610 Newport Center Drive
Suite 1350
Newport Beach, California 92660
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[X] immediately on filing pursuant to paragraph (b)
[ ] on _____ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on _____ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph(a)(2)
[ ] on _____ pursuant to paragraph (a)(2) of Rule 485
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
SECURITY FIRST TRUST
11365 West Olympic Boulevard
Los Angeles, California 90064
December 15, 2000
Dear Contract Owner:
As an Owner of a variable annuity contract (the "Contract") issued by
Security First Life Insurance Company (the "Insurance Company"), you have the
right to instruct the Insurance Company how to vote certain shares of the
BlackRock Equity Series and BlackRock U.S. Government Income Series (the
"Portfolios") of the Security First Trust (the "Trust") at a Special Meeting of
Shareholders to be held on January 26, 2001. Although you are not directly a
shareholder of the Portfolios, some or all of your Contract value is invested,
as provided by your Contract, in one or more of these Portfolios. Accordingly,
you have the right under your Contract to instruct the Insurance Company how to
vote each Portfolio's shares that are attributable to your Contract at the
Special Meeting. Before the Special Meeting, I would like your vote on the
important proposal described in the accompanying Prospectus/Proxy Statement.
The Prospectus/Proxy Statement describes the proposed reorganization of
the Trust's BlackRock Equity Series and BlackRock U.S. Government Income Series.
All of the assets of each Portfolio would be acquired by a corresponding new
series of Met Investors Series Trust in exchange for shares of such new series
and the assumption by the series of the identified liabilities of the
Portfolios. You will receive Class A shares of each corresponding series having
an aggregate net asset value equal to the aggregate net asset value of your
Portfolio's shares. Details about each new series' investment objective,
performance, and management team are contained in the attached Prospectus/Proxy
Statement. For federal income tax purposes, the transaction is expected to be a
non-taxable event for shareholders and Owners.
The Board of Trustees has approved the proposal for each Portfolio and
recommends that you vote FOR the proposal.
I realize that this Prospectus/Proxy Statement will take time to
review, but your vote is very important. Please take the time to familiarize
yourself with the proposal. If you attend the meeting, you may give your voting
instructions in person. If you do not expect to attend the meeting, please
complete, date, sign and return the enclosed voting instructions form in the
enclosed postage-paid envelope. You may also fax your completed and signed
voting instructions form (both front and back sides) to us at 1- 888-796-9932,
or vote through the Internet. Instructions on how to complete the voting
instructions form or vote through the Internet are included immediately after
the Notice of Special Meeting.
<PAGE>
If you have any questions about the voting instructions form please
call the Security First Trust at 1-800- 421-3794. If we do not receive your
completed voting instructions form or your Internet vote within several weeks,
you may be contacted by ALAMO Direct, our proxy solicitor, who will remind you
to pass on your voting instructions.
Thank you for taking this matter seriously and participating in this
important process.
Sincerely,
Richard C. Pearson
President
Security First Trust
<PAGE>
SECURITY FIRST TRUST
11365 West Olympic Boulevard
Los Angeles, California 90064
BlackRock Equity Series
BlackRock U.S. Government Income Series
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on January 26, 2001
To the Shareholders of Security First Trust:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders of
the BlackRock Equity Series and BlackRock U.S. Government Income Series of
Security First Trust (the "Trust"), a Massachusetts business trust, will be held
at the offices of Met Investors Series Trust, 610 Newport Center Drive, Suite
1350, Newport Beach, California 92660 on January 26, 2001 at 10:30 a.m. Pacific
Time and any adjournments thereof (collectively, the "Special Meeting") for the
following purposes:
1. To consider and act upon an Agreement and Plan of Reorganization
(the "Plan") providing for the acquisition of all of the assets
of BlackRock Equity Series ("SF Equity") by BlackRock Equity
Portfolio ("BlackRock Equity"), a series of Met Investors Series
Trust ("MIT"), in exchange for shares of BlackRock Equity and the
assumption by BlackRock Equity of the identified liabilities of
SF Equity. The Plan also provides for distribution of these
shares of BlackRock Equity to shareholders of SF Equity in
liquidation and subsequent termination of SF Equity. A vote in
favor of the Plan is a vote in favor of the liquidation and
dissolution of SF Equity.
2. To consider and act upon an Agreement and Plan of Reorganization
(the "Plan") providing for the acquisition of all of the assets
of BlackRock U.S. Government Income Series ("SF Government") by
BlackRock U.S. Government Income Portfolio ("BlackRock
Government"), a series of MIT, in exchange for shares of
BlackRock Government and the assumption by BlackRock Government
of the identified liabilities of SF Government. The Plan also
provides for distribution of these shares of BlackRock Government
to shareholders of SF Government in liquidation and subsequent
termination of SF Government. A vote in favor of the Plan is a
vote in favor of the liquidation and dissolution of SF
Government.
The Board of Trustees has fixed the close of business on November 27,
2000 as the record date for determination of shareholders entitled to notice of
and to vote at the Special Meeting.
By order of the Board of Trustees
Cheryl J. Finney
Assistant Secretary
December 15, 2000
==
CONTRACT OWNERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE REQUESTED TO
COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING VOTING INSTRUCTIONS FORM IN THE
ENCLOSED ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES, OR
FOLLOW THE INSTRUCTIONS IN THE MATERIALS RELATING TO INTERNET VOTING.
INSTRUCTIONS FOR THE PROPER EXECUTION OF THE VOTING INSTRUCTIONS FORM ARE SET
FORTH IMMEDIATELY FOLLOWING THIS NOTICE. IT IS IMPORTANT THAT THE FORM BE
RETURNED PROMPTLY.
<PAGE>
INSTRUCTIONS FOR SIGNING VOTING INSTRUCTIONS FORM
The following general rules for signing voting instructions forms may
be of assistance to you and avoid the time and expense to the Trust involved in
validating your vote if you fail to sign your voting instructions form properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the voting instructions form.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the
registration on the voting instructions form.
3. All Other Accounts: The capacity of the individual signing the
voting instructions form should be indicated unless it is
reflected in the form of registration. For example:
Registration Valid Signature
Corporate Accounts
(1) ABC Corp. . . . . . . . . . . . . . . . . . . . . . .ABC Corp.
(2) ABC Corp. . . . . . . . . . . . . . . . . John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer . . . . . . . . . . . . . . .John Doe
(4) ABC Corp. Profit Sharing Plan . . . . . . . .John Doe, Trustee
Trust Accounts
(1) ABC Trust . . . . . . . . . . . . . . . Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78 . . . . . . . . . . . . . . . . . .Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA . . . . . . . . . John B. Smith
(2) Estate of John B. Smith . . . . .John B. Smith, Jr., Executor
<PAGE>
INSTRUCTIONS FOR VOTING OVER THE INTERNET
To vote your voting instructions form via the Internet follow the four easy
steps below.
1. Read the accompanying proxy information and voting instructions form.
2. Go to https://vote.proxy-direct.com.
3. Enter the 14-digit "CONTROL NO." from the middle of your voting instructions
form.
4. Follow the simple online instructions.
You do not need to return your voting instructions form if you vote via an
Internet site.
<PAGE>
ACQUISITION OF ASSETS OF
BLACKROCK EQUITY SERIES
and
BLACKROCK U.S. GOVERNMENT INCOME SERIES
each a series of
Security First Trust
11365 West Olympic Boulevard
Los Angeles, California 90064
(800) 421-3794
BY AND IN EXCHANGE FOR SHARES OF
BLACKROCK EQUITY PORTFOLIO
and
BLACKROCK U.S. GOVERNMENT INCOME PORTFOLIO
each a series of
Met Investors Series Trust
610 Newport Center Drive, Suite 1350
Newport Beach, California 92660
(800) 848-3854
PROSPECTUS/PROXY STATEMENT
DATED DECEMBER 15, 2000
This Prospectus/Proxy Statement is being furnished in connection with
proposed Agreements and Plans of Reorganization (each a "Plan" and collectively,
the "Plans") which will be submitted to shareholders of BlackRock Equity Series
and BlackRock U.S. Government Income Series (collectively, the "SF Portfolios")
for consideration at a Special Meeting of Shareholders to be held on January 26,
2001 at 10:30 a.m. Pacific Time at the offices of Met Investors Series Trust,
610 Newport Center Drive, Suite 1350, Newport Beach, California 92660, and any
adjournments thereof (the "Meeting").
GENERAL
The Board of Trustees of Security First Trust has approved the proposed
reorganizations of the SF Portfolios, which are each series of Security First
Trust, into corresponding series of Met Investors Series Trust (collectively,
the "Met Portfolios"), as set forth below:
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------- -----------------------------------------------------------
SF Portfolios Met Portfolios
<S> <C>
--------------------------------------------------- -----------------------------------------------------------
--------------------------------------------------- -----------------------------------------------------------
BlackRock Equity Series ("SF Equity") BlackRock Equity Portfolio ("BlackRock Equity")
--------------------------------------------------- -----------------------------------------------------------
--------------------------------------------------- -----------------------------------------------------------
BlackRock U.S. Government Income Series ("SF BlackRock U.S. Government Income Portfolio ("BlackRock
Government") Government")
--------------------------------------------------- -----------------------------------------------------------
</TABLE>
Security First Trust is a Massachusetts business trust and Met
Investors Series Trust is a recently organized Delaware business trust. Each of
the Met Portfolios is a new series organized specifically to receive all the
assets and carry on the business of the respective SF Portfolio. The SF
Portfolios and the Met Portfolios are sometimes referred to respectively in this
Prospectus/Proxy Statement individually as a "Portfolio" and collectively as the
"Portfolios".
Security First Life Insurance Company (the "Insurance Company") is the
record owner of the SF Portfolios' shares and at the Meeting will vote the
shares of the respective SF Portfolio held in its applicable separate account.
The Insurance Company is an indirect wholly-owned subsidiary of Metropolitan
Life Insurance Company ("MetLife"), a New York life insurance company and a
leading provider of insurance and financial products and services to individual
and group customers.
As an owner of a variable annuity contract or a variable life insurance
policy (a "Contract") issued by the Insurance Company, you have the right to
instruct the Insurance Company how to vote the shares of the SF Portfolio that
are attributable to your Contract at the Meeting. Although you are not directly
a shareholder of the Portfolio, you have this right because some or all of your
Contract value is invested, as provided by your Contract, in one or more of the
SF Portfolios. For simplicity, in this Prospectus/Proxy Statement:
o "Record Holder" of an SF Portfolio refers to the Insurance Company which holds
the SF Portfolio's shares of record;
o "shares" refers generally to your shares of beneficial interest in a
Portfolio; and
o "shareholder" or "Contract Owner" refers to you.
In the reorganizations, all of the assets of each SF Portfolio will be
acquired by the corresponding Met Portfolio in exchange for Class A shares of
that Met Portfolio and the assumption by that Met Portfolio of the identified
liabilities of the respective SF Portfolio (the "Reorganization" and
collectively the "Reorganizations"). If the Reorganizations are approved, Class
A shares of the Met Portfolio corresponding to the SF Portfolio in which you
currently are a shareholder will be distributed to the Record Holder in
liquidation of that SF Portfolio, and each SF Portfolio will be terminated as a
series of Security First Trust. You will then hold that number of full and
fractional shares of the corresponding Met Portfolio which have an aggregate net
asset value equal to the aggregate net asset value of your shares of the SF
Portfolio in which you currently are a shareholder.
Each SF Portfolio is a separate diversified series of Security First
Trust, an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). Each corresponding Met
Portfolio is a separate diversified series of Met Investors Series Trust, also
an open-end management investment company registered under the 1940 Act. Because
Met Investors Series Trust was recently organized, it has conducted no
operations to date. The investment objectives of each SF Portfolio are identical
to those of the corresponding Met Portfolio, and are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------- -------------------------------------------------------------
Portfolio Investment Objective
<S> <C>
------------------------------------------------------- -------------------------------------------------------------
------------------------------------------------------- -------------------------------------------------------------
SF Equity and BlackRock Equity To provide growth of capital and income.
------------------------------------------------------- -------------------------------------------------------------
------------------------------------------------------- -------------------------------------------------------------
SF Government and BlackRock Government To provide current income.
------------------------------------------------------- -------------------------------------------------------------
</TABLE>
The investment strategies for the SF Portfolios and the corresponding Met
Portfolios are substantially identical.
This Prospectus/Proxy Statement explains concisely the information
about a Met Portfolio that you should know before voting on a Reorganization.
Please read it carefully and keep it for future reference. Additional
information concerning the Met Portfolios is provided in the "Additional
Information" section of this Prospectus/Proxy Statement. Additional information
concerning the SF Portfolios and the Reorganizations is contained in the
documents described below, all of which have been filed with the Securities and
Exchange Commission ("SEC"):
<TABLE>
<CAPTION>
--------------------------------------------------------------------- --------------------------------------------------
Information about the SF Portfolios: How to Obtain this Information:
----------------------------------- -------------------------------
<S> <C>
--------------------------------------------------------------------- --------------------------------------------------
--------------------------------------------------------------------- --------------------------------------------------
Prospectus of Security First Trust relating to SF Equity and SF Copies are available upon request and without
Government, dated November 30, 2000 charge if you:
Statement of Additional Information of Security First Trust o Write to Security
First Trust at the relating to SF Equity and SF Government, address listed on the cover page of this
dated November 30, 2000 Prospectus/Proxy Statement; or
Annual Report of Security First Trust relating to SF Equity and SF
Government, for the year ended July 31, 2000 o Call (800) 421-3794 toll-free.
--------------------------------------------------------------------- --------------------------------------------------
--------------------------------------------------------------------- --------------------------------------------------
Information about the Reorganizations: How to Obtain this Information:
------------------------------------- -------------------------------
--------------------------------------------------------------------- --------------------------------------------------
--------------------------------------------------------------------- --------------------------------------------------
Statement of Additional Information dated December 15, 2000, which A copy is available upon request and without
relates to this Prospectus/Proxy Statement
and the Reorganizations charge if you:
o Write
to
Met
Investors
Series
Trust
at
the
address
listed
on
the
cover
page
of
this
Prospectus/Proxy
Statement;
or
o Call (800) 848-3854 toll-free.
--------------------------------------------------------------------- --------------------------------------------------
</TABLE>
You can also obtain copies of any of these documents without charge on
the EDGAR database on the SEC's Internet site at http://www.sec.gov. Copies are
available for a fee by electronic request at the following E-mail address:
[email protected], or from the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549.
Information relating to the SF Portfolios contained in the Prospectus
of Security First Trust dated November 30, 2000 (SEC File No. 811-2480) is
incorporated by reference in this document. (This means that such information is
legally considered to be part of this Prospectus/Proxy Statement.) The Statement
of Additional Information dated December 15, 2000 relating to this
Prospectus/Proxy Statement and the Reorganizations, which includes the financial
statements of Security First Trust relating to the SF Portfolios for the year
ended July 31, 2000 (the Met Portfolios have not yet issued financial
statements), is incorporated by reference in its entirety in this document.
-------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED THAT THE INFORMATION
IN THIS PROSPECTUS/PROXY STATEMENT IS ACCURATE OR ADEQUATE, NOR HAS IT APPROVED
OR DISAPPROVED THESE SECURITIES. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A
CRIMINAL OFFENSE.
-------------------------------------------------------------------------------
An investment in a Portfolio of Met Investors Series Trust through a
Contract:
o is not a deposit of, or guaranteed by, any bank
o is not insured by the FDIC, the Federal Reserve Board or any other government
agency
o is not endorsed by any bank or government agency
o involves investment risk, including possible loss of the purchase payment of
your original investment
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY....................................................................7
Why are the Reorganizations being proposed?.......................7
What are the key features of the Reorganizations?.................7
After the Reorganizations, what shares of a Met
Portfolio will I own?....................................8
How will a Reorganization affect me?...............................8
How do the Trustees recommend that I vote?.........................9
How do the Portfolios' investment objectives,
principal investment strategies and risks compare?.........9
How do other important features of the Portfolios compare?........12
How do the Portfolios' fees and expenses compare?.................12
How do the Portfolios' performance records compare?...............14
Will I be able to purchase and redeem shares, change
my investment options, annuitize and receive
distributions the same way?...............................16
Who will be the Manager, Adviser and Portfolio
Manager of my Portfolio after the Reorganizations? What
will the management and advisory fees be after the
Reorganizations?.....................................16
What will be the primary federal tax consequences
of the Reorganizations?...............................18
RISKS...................................................................18
Are the risk factors for the Portfolios the same?..............18
What are the primary risks of investing in each Portfolio?.....18
Are there any other risks of investing in each Portfolio?......22
INFORMATION ABOUT THE REORGANIZATIONS...................................22
Reasons for the Reorganizations................................22
Agreements and Plans of Reorganization.........................24
Federal Income Tax Consequences................................26
Pro-forma Capitalization.......................................27
Distribution of Shares.........................................28
Purchase and Redemption Procedures.............................28
Exchange Privileges............................................29
Dividend Policy................................................29
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS.........................29
Form of Organization...........................................30
Capitalization.................................................30
Shareholder Liability..........................................31
Shareholder Meetings and Voting Rights.........................31
Liquidation....................................................33
Liability and Indemnification of Trustees......................33
VOTING INFORMATION CONCERNING THE MEETING...............................34
Shareholder Information........................................36
Control Persons and Principal Holders of Securities............37
FINANCIAL STATEMENTS AND EXPERTS........................................37
LEGAL MATTERS...........................................................37
ADDITIONAL INFORMATION..................................................37
OTHER BUSINESS..........................................................47
EXHIBIT A Form of Agreement and Plan of Reorganization..............A-1
<PAGE>
SUMMARY
This section summarizes the primary features and consequences of the
Reorganizations. It may not contain all of the information that is important to
you. To understand the Reorganizations, you should read this entire
Prospectus/Proxy Statement and the exhibit.
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement,
the Prospectus and Statement of Additional Information relating to the SF
Portfolios, and the form of the Agreement and Plan of Reorganization, which is
attached to this Prospectus/Proxy Statement as Exhibit A.
Why are the Reorganizations being proposed?
The Reorganizations are part of an overall restructuring designed to
provide operating efficiencies which will result from maintaining a single trust
of investment portfolios to be offered in connection with the Insurance
Company's insurance products and to employee benefit plans, consistency across
the entire group of those investment portfolios, and the enhanced flexibility
afforded by a Delaware business trust in comparison to the SF Portfolios'
previous form of organization. To accomplish the restructuring, the holders of
beneficial interests in shares of other portfolios of Security First Trust, as
well as shareholders of various portfolios of another investment company in the
MetLife family of funds, are also being asked to approve reorganizations of
those portfolios into portfolios of Met Investors Series Trust.
What are the key features of the Reorganizations?
Each Plan sets forth the key features of the Reorganization to which it
relates. For a complete description of the Reorganizations, see Exhibit A. Each
Plan generally provides for the following:
o the transfer of all of the assets of each SF Portfolio to the corresponding
Met Portfolio in exchange for Class A shares of that Met Portfolio;
o the assumption by that Met Portfolio of the identified liabilities of the
respective SF Portfolio (the identified liabilities consist only of those
liabilities reflected on the SF Portfolio's statement of assets and liabilities
determined immediately preceding the Reorganization);
o the liquidation of that SF Portfolio by distribution of Class A shares of the
corresponding Met Portfolio to the SF Portfolio's shareholders; and
o the structuring of each Reorganization as a tax-free reorganization for
federal income tax purposes.
The Reorganizations are expected to be completed on or about February
5, 2001.
After the Reorganizations, what shares of a Met Portfolio will I own?
If you own shares of SF Equity or SF Government, you will own Class A
shares of BlackRock Equity or Black Rock Government, respectively.
The new shares you receive will have the same total value as your
shares of SF Equity or SF Government, respectively, as of the close of business
on the day immediately prior to the Reorganizations.
How will a Reorganization affect me?
It is anticipated that the Reorganizations will result in operating
efficiencies that will benefit you as well as the Record Holders. The
Reorganizations are also expected to have the following additional benefits:
o COST SAVINGS: The operating expenses of the portfolios offered by
Met Investors Series Trust may potentially decrease over the long
term in comparison to those of the SF Portfolios due to the
spreading of fixed costs over a larger pool of assets in the Met
Investors Series Trust and efficiencies in portfolio management.
o MORE INVESTMENT CHOICES: It is anticipated that on the effective
date of the Reorganizations, Met Investors Series Trust will offer
more investment portfolios than are currently available through
Security First Trust. Your Insurance Company may choose to make
these additional portfolios available under your Contract.
The Reorganizations will not affect your Contract rights. The value of
your Contract will remain the same immediately following a Reorganization. Met
Investors Series Trust will sell its shares on a continuous basis at net asset
value only to insurance companies and to employee benefit plans that are
qualified plans under federal tax law. Your Insurance Company will keep the same
separate account. Your Contract values will be allocated to the same separate
account and that separate account will invest in the corresponding Met Portfolio
after the Reorganizations. After the Reorganizations your Contract values will
depend on the performance of the applicable Met Portfolio rather than that of
your SF Portfolio. Neither Security First Trust nor Contract Owners will bear
any costs of the Meeting, this proxy solicitation or any adjourned session. All
of the costs of the Reorganizations will be paid by MetLife or one of its
affiliates.
Like the SF Portfolios, the Met Portfolios will declare and pay
dividends from net investment income and will distribute net realized capital
gains, if any, to the Insurance Company separate accounts (not to you) at least
once a year. These dividends and distributions will continue to be reinvested by
your Insurance Company in additional Class A shares of the applicable Met
Portfolio. Dividends and distributions paid on an SF Portfolio are automatically
reinvested in additional shares of the Portfolio, unless a shareholder elects to
have dividends and/or distributions paid in cash.
How do the Trustees recommend that I vote?
The Trustees of Security First Trust, including the Trustees who are
not "interested persons" (the "Disinterested Trustees"), as such term is defined
in the 1940 Act, have concluded that the Reorganizations would be in the best
interest of the shareholders of SF Equity and SF Government, as applicable, and
that their interests will not be diluted as a result of the Reorganizations.
Accordingly, the Trustees have submitted the Plans for the approval of the
shareholders of SF Equity and SF Government.
THE TRUSTEES RECOMMEND THAT YOU VOTE FOR THE PROPOSED REORGANIZATION WHICH
APPLIES TO YOUR SF PORTFOLIO.
The Trustees of Met Investors Series Trust have also approved the Plans on
behalf of BlackRock Equity and BlackRock Government.
How do the Portfolios' investment objectives, principal investment
strategies and risks compare?
Because the Met Portfolios are new portfolios organized specifically to
receive all the assets and carry on the business of the respective SF
Portfolios, the investment objectives of the Met Portfolios and the SF
Portfolios are identical. However, the investment objectives of the Met
Portfolios are non-fundamental, which means that they may be changed by vote of
the Trustees and without shareholder approval, while the investment objectives
of the SF Portfolios are fundamental, which means that they cannot be changed
without shareholder approval. The investment strategies for the SF Portfolios
and the corresponding Met Portfolios are substantially identical.
The following tables summarize a comparison of the SF Portfolios and
the Met Portfolios with respect to their investment objectives and principal
investment strategies, as set forth in the Prospectus and Statement of
Additional Information relating to the SF Portfolios, and in the "Additional
Information" section of this Prospectus/Proxy Statement relating to the Met
Portfolios.
<TABLE>
<CAPTION>
------------------ -------------------------------------------------------------------------------
SF Equity and BlackRock Equity
<S> <C>
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
Investment To provide growth of capital and income.
Objective
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
Principal Normally invest at least 65% of their assets in common stocks; seek to invest
Investment in stocks and market sectors in similar proportion to the S&P 500
Strategies Index.
Are managed to take advantage of trends in the domestic
stock market that favor different styles of stock
selection including value or growth stocks issued by all
different sizes of companies (small, medium and large.)
Each initially screens for value and growth stocks from
companies with market capitalizations of at least $1
billion.
Emphasize securities believed to be undervalued.
May also invest up to 20% of their total assets in U.S. government
securities, including U.S. Treasury and agency obligations.
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
SF Government and BlackRock Government
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
Investment To provide current income.
Objective
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
Principal Normally invest at least 80% of their total assets in debt securities and at
Investment least 65% of their total assets in U.S. government securities (primary
Strategies obligations of or guaranteed by the U.S. government or its agencies),
including direct obligations of the U.S. Treasury, such as
Treasury bills, notes and bonds; securities purchased are
rated in the highest rating category.
Select debt securities from several categories, including
residential and commercial mortgage-backed securities
(such as collateralized mortgage obligations and GNMA
certificates), and non-mortgage asset backed securities.
Securities purchased are rated in the highest rating
category; current average weighted maturity for their
fixed income securities is 5.65 years; their investment
securities are structured to have comparable duration to
their benchmark (approximately 5.67 years currently).
------------------ -------------------------------------------------------------------------------
</TABLE>
The principal risks of investing in the Met Portfolios are the same as
those of investing in the respective SF Portfolios. They include:
For all Portfolios:
o Interest rate risk - the value of investments in debt securities
or stocks purchased primarily for dividend income may decline when
prevailing interest rates rise or increase when interest rates go
down; due to the increasing difficulty of predicting changes in
interest rates over longer periods of time, fixed income
securities with longer maturities are more volatile than those
with shorter maturities.
For SF Equity and BlackRock Equity:
o Market risk - a Portfolio's share price can fall because of
weakness in the broad market, a particular industry, or specific
holdings
o Investment style risk - different investment styles such as growth
or value investing tend to shift in or out of favor, depending on
market and economic conditions as well as investor sentiment
o Market capitalization risk - investments primarily in issuers in
one market capitalization category (large, medium or small) carry
the risk that due to current market conditions that category may
be out of favor; investments in medium and small capitalization
companies may be subject to special risks which cause them to be
subject to greater price volatility and more significant declines
in market downturns than securities of larger companies
For SF Government and BlackRock Government:
o Credit risk - the value of investments in debt securities may be
adversely affected if an issuer fails to pay principal and
interest on the obligation on a timely basis
o Mortgage-related security risk - changes in interest rates
generally affect the value of a mortgage-backed security; some
mortgage-backed securities may be structured so that they may be
particularly sensitive to changes in interest rates; and
investments in mortgage-related securities are subject to special
risks if the issuer of the security prepays the principal prior to
the security's maturity (including increased volatility in the
price of the security and wider fluctuations in response to
interest rates)
o Asset-backed security risk - if non-mortgage asset-backed
securities fail to pay interest or repay principal, the assets
backing these securities may not be sufficient to support the
payments on the securities
For a detailed discussion of the Portfolios' risks, see the section entitled
"Risks" below.
Each Portfolio may invest some or all of its assets in money market
instruments or utilize other investment strategies as a temporary defensive
measure during, or in anticipation of, adverse market conditions. This strategy,
which would be employed only in seeking to avoid losses, is inconsistent with
the Portfolios' principal investment objectives and strategies, and could result
in lower returns and loss of market opportunities.
The Portfolios have other investment policies, practices and
restrictions which, together with their related risks, are also set forth in the
Prospectus and Statement of Additional Information relating to the SF
Portfolios, the "Additional Information" section below with respect to the Met
Portfolios and the Statement of Additional Information relating to this
Prospectus/Proxy Statement.
Because the SF Portfolios and the corresponding Met Portfolios have
identical investment objectives and substantially identical investment
strategies, it is not anticipated that the securities held by an SF Portfolio
will be sold in significant amounts in order to comply with the policies and
investment practices of the respective Met Portfolio in connection with a
Reorganization.
How do other important features of the Portfolios compare?
o Met Investors Advisory Corp., formerly known as Security First Investment
Management Corporation, is the investment adviser to the SF Portfolios and the
Manager of Met Investors Series Trust.
o BlackRock Advisors, Inc., the investment sub-adviser of the SF Portfolios,
serves in the same capacity with respect to the Met Portfolios pursuant to an
Advisory Agreement with Met Investors Advisory Corp. and is called the Adviser
of the Met Portfolios. Unlike Security First Trust, Met Investors Advisory Corp.
will have the authority, upon receipt of permission from the SEC and with the
approval of the Board of Trustees of Met Investors Series Trust, to change a Met
Portfolio's Adviser without shareholder approval under certain conditions.
o In the case of each Reorganization, the portfolio managers of the respective
SF Portfolio and the Met Portfolio will be the same.
The Met Portfolios' Manager, Adviser and portfolio managers are
described in more detail below.
How do the Portfolios' fees and expenses compare?
The SF Portfolios offer one class of shares. The Met Portfolios
currently offer two classes of shares (Classes A and B) but Class B is not part
of the Reorganizations. You will not pay any initial or deferred sales charge in
connection with the Reorganizations.
The following tables allow you to compare the various fees and expenses
that you may pay for buying and holding shares of the SF Portfolios and Class A
shares of the Met Portfolios. The tables entitled "BlackRock Equity Pro Forma"
and "BlackRock Government Pro Forma" show you what the fees and expenses are
estimated to be assuming the Reorganizations take place.
The amounts for shares of the SF Portfolios set forth in the following
tables and in the examples are based on the expenses for the SF Portfolios for
the fiscal year ended July 31, 2000. The Met Portfolios are newly organized and
have not commenced operations to date. The amounts for Class A shares of the Met
Portfolios set forth in the following tables and in the examples are based on
what the estimated expenses of the Met Portfolios would have been for the fiscal
year ended July 31, 2000, as adjusted to reflect the current fee schedule.
The shares of the SF Portfolios and the Class A shares of the Met
Portfolios are not charged any initial or deferred sales charge, any 12b-1 fees,
or any other transaction fees.
THESE TABLES DO NOT REFLECT THE CHARGES AND FEES ASSESSED BY THE INSURANCE
COMPANY UNDER YOUR CONTRACT.
Fees and Expenses (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
----------------------------- --------------------- -------------------------------
SF Equity BlackRock Equity
Pro Forma
(Class A)
<S> <C> <C>
----------------------------- --------------------- -------------------------------
----------------------------- --------------------- -------------------------------
Management Fees 0.70% 0.65%
====
----------------------------- --------------------- -------------------------------
----------------------------- --------------------- -------------------------------
Other Expenses 0.10% 0.10%
------ -----
----------------------------- --------------------- -------------------------------
----------------------------- --------------------- -------------------------------
Total Annual Portfolio 0.80% 0.75%
====
Operating Expenses
----------------------------- --------------------- -------------------------------
----------------------------- --------------------- -------------------------------
SF Government BlackRock Government Pro Forma
(Class A)
----------------------------- --------------------- -------------------------------
----------------------------- --------------------- -------------------------------
Management Fees 0.55% 0.55%
----------------------------- --------------------- -------------------------------
----------------------------- --------------------- -------------------------------
Other Expenses 0.16% 0.16%
----- -----
----------------------------- --------------------- -------------------------------
----------------------------- --------------------- -------------------------------
Total Annual Portfolio 0.71% 0.71%
Operating Expenses
----------------------------- --------------------- -------------------------------
The tables below show examples of the total expenses you would pay on a
$10,000 investment over one-, three-, five- and ten-year periods. The examples
are intended to help you compare the cost of investing in the SF Portfolios
versus the Met Portfolios pro forma, assuming the Reorganizations take place.
The examples assume a 5% average annual return, that you redeem all of your
shares at the end of each time period, that the Portfolios' operating expenses
are before waiver (if applicable), that they remain the same and that you
reinvest all of your dividends. To the extent that fees are waived, the expenses
would be lower. The examples are for illustration only, and your actual costs
may be higher or lower.
THE EXAMPLES DO NOT REFLECT THE FEES AND EXPENSES IMPOSED BY THE
CONTRACTS FOR WHICH THE PORTFOLIOS SERVE AS INVESTMENT VEHICLES. IF THOSE FEES
AND EXPENSES HAD BEEN INCLUDED, YOUR COSTS WOULD BE HIGHER.
Examples of Portfolio Expenses
-------------------------- ------------------------ -----------------------------
SF Equity BlackRock Equity
Pro Forma (Class A)
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
After 1 year $83 $77
==
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
After 3 years $259 $240
===
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
After 5 years $450 $416
===
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
After 10 years $1,002 $929
===
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
SF Government BlackRock Government
Pro Forma (Class A)
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
After 1 year $73 $73
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
After 3 years $227 $227
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
After 5 years $395 $395
-------------------------- ------------------------ -----------------------------
-------------------------- ------------------------ -----------------------------
After 10 years $883 $883
-------------------------- ------------------------ -----------------------------
</TABLE>
How do the Portfolios' performance records compare?
The following charts show how the SF Portfolios have performed in the
past. Past performance is not an indication of future results.
PERFORMANCE DOES NOT REFLECT THE FEES AND EXPENSES IMPOSED BY THE
CONTRACTS FOR WHICH THE PORTFOLIOS SERVE AS INVESTMENT VEHICLES. IF THOSE FEES
AND EXPENSES HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
The Met Portfolios have been recently organized and have not yet
engaged in any operations; consequently, they do not have an investment
performance record. After the Reorganizations, BlackRock Equity and BlackRock
Government, as the successors respectively to SF Equity and SF Government, will
assume and publish the investment performance record of SF Equity and SF
Government, as applicable.
Year-by-Year Total Return (%)
The charts below show the percentage gain or loss for the shares of
each SF Portfolio in each full calendar year since the inception of each
Portfolio on May 19, 1993. The charts should give you a general idea of the
risks of investing in the SF Portfolio by showing how a Portfolio's return has
varied from year-to-year. These charts include the effects of Portfolio
expenses. Total return amounts are based on the inception date of each SF
Portfolio, which may have occurred before your Contract began; accordingly, your
investment results may differ.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
SF Equity
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
1994 1995 1996 1997 1998 1999
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
30%
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
20% 28.0 29.3 23.2 20.7
=== ==== ==== ==== ===
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
10% 18.5
=== ====
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
0%
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-10% -6.3
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
.........Best Quarter: 4th Quarter 1998 +20.80%
.........Worst Quarter: 3rd Quarter 1998 -11.16%
For the quarter ended September 30, 2000, the Portfolio's total return
was -3.36%.
-----------------------------------------------------------------------------------------------------------------
SF Government
-----------------------------------------------------------------------------------------------------------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
1994 1995 1996 1997 1998 1999
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
20%
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
15%
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
10% 13.5
===
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
0% -2.9 3.6 7.0 7.4 -2.5
== ==== === === === ====
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
-10%
-------------- --------------- ---------------- --------------- ---------------- --------------- ----------------
</TABLE>
.........Best Quarter: 2nd Quarter 1995 +4.48%
.........Worst Quarter: 2nd Quarter 1999 -1.66%
=== ==== ===
For the quarter ended September 30, 2000, the Portfolio's total return
was 3.09%.
The next set of tables lists each SF Portfolio's average annual total
return over the past one and five years and since inception (through
12/31/1999). These tables include the effects of Portfolio expenses and are
intended to provide you with some indication of the risks of investing in each
SF Portfolio by comparing its performance with an appropriate widely recognized
index of securities, which you can find at the bottom of each table. An index
does not reflect fees or expenses. It is not possible to invest directly in an
index.
Average Annual Total Return (for the period ended 12/31/1999)
<TABLE>
<CAPTION>
----------------------------------- -------------- ----------------- ---------------- ---------------------
Inception 1 year 5 Years Performance Since
Date Inception
<S> <C> <C> <C> <C>
----------------------------------- -------------- ----------------- ---------------- ---------------------
----------------------------------- -------------- ----------------- ---------------- ---------------------
SF Equity 5/19/93 20.72% 23.90% 16.89%
====== ======
----------------------------------- -------------- ----------------- ---------------- ---------------------
----------------------------------- -------------- ----------------- ---------------- ---------------------
S&P 500 Index 21.04% 28.54% 22.40%*
====== ====== ======
----------------------------------- -------------- ----------------- ---------------- ---------------------
* From April 30, 1993
========
The S&P 500 Index is an unmanaged index that measures the stock performance
of 500 large- and medium-sized publicly traded companies and is often used
to indicate the performance of the overall stock market.
----------------------------------- -------------- ----------------- ---------------- ---------------------
Inception 1 year 5 Years Performance Since
Date Inception
----------------------------------- -------------- ----------------- ---------------- ---------------------
----------------------------------- -------------- ----------------- ---------------- ---------------------
SF Government 5/19/93 -2.5% 5.65% 4.08%
----------------------------------- -------------- ----------------- ---------------- ---------------------
----------------------------------- -------------- ----------------- ---------------- ---------------------
Lehman Brothers Intermediate -2.25% 7.43% 5.43%
====== ===== =====
Government Bond Index
----------------------------------- -------------- ----------------- ---------------- ---------------------
</TABLE>
The Lehman Brothers Intermediate Government Bond Index is an unmanaged
index that measures the performance of all U.S. Treasury and agency
securities with remaining maturities of from one to ten years and issue
amounts of at least $100 million outstanding.
For a detailed discussion of the manner of calculating total return,
please see the Statement of Additional Information relating to this
Prospectus/Proxy Statement. Generally, the calculations of total return assume
the reinvestment of all dividends and capital gain distributions on the
reinvestment date.
Will I be able to purchase and redeem shares, change my investment
options, annuitize and receive distributions the same way?
A Reorganization will not affect your right to purchase and redeem
shares, to change among your Insurance Company's separate account options, to
annuitize, and to receive distributions as permitted by your Contract. After the
Reorganizations, you will be able under your current Contract to purchase
additional Class A shares of the Met Portfolios. For more information, see
"Purchase and Redemption Procedures", "Exchange Privileges" and "Dividend
Policy" below.
Who will be the Manager, Adviser and Portfolio Manager of my Portfolio
after the Reorganizations? What will the management and advisory fees
be after the Reorganizations?
Management of the Portfolios
The overall management of the SF Portfolios and of the Met Portfolios
is the responsibility of, and is supervised by, the Boards of Trustees of
Security First Trust and Met Investors Series Trust, respectively.
Manager
Met Investors Advisory Corp. (the "Manager") is the investment manager
for each Met Portfolio. The Manager selects and pays the fees of the
Advisers for each Met Portfolio and monitors each Adviser's investment
program. Security First Group, Inc., an affiliate of MetLife, owns all of
the outstanding common shares of the Manager.
Facts about the Manager:
----------------------------------------------------------------------
o The Manager was formerly known as Security First Investment
Management Corporation and is an indirect subsidiary of MetLife.
o The Manager manages with its affiliates the family of investment
portfolios sold to separate accounts of MetLife's insurance
company subsidiaries to fund variable life insurance contracts and
variable annuity certificates and contracts, with assets of
approximately $423 billion as of September 30, 2000.
o The Manager is located at 610 Newport Center Drive, Suite 1350,
Newport Beach, California 92660.
----------------------------------------------------------------------
Adviser
BlackRock Advisors, Inc. ("the Adviser") is the investment adviser to each Met
Portfolio. Pursuant to an Advisory Agreement with the Manager, the Adviser
furnishes continuously an investment program for each Met Portfolio, makes
day-to-day investment decisions on behalf of the Portfolio, and arranges for the
execution of Portfolio transactions.
Facts about the Adviser:
----------------------------------------------------------------------
o The Adviser is a wholly-owned subsidiary of BlackRock, Inc., which
is in turn a subsidiary of PNC Bank, N.A. BlackRock, Inc. is a
fully integrated money management firm with global fixed income,
equity and cash management capabilities.
o BlackRock, Inc. and its subsidiaries managed or administered $191
billion in assets as of September 30, 2000.
o The Adviser is located at 345 Park Avenue, New York, New York 10154.
----------------------------------------------------------------------
Portfolio Management
The day-to-day management of BlackRock Equity is handled by R. Andrew Damm.
----------------------------------------------------------------------
o R. Andrew Damm, Managing Director of the Adviser. Mr. Damm
specializes in large cap growth and core equity products. He is
also responsible for risk modeling and quantitative analysis.
Prior to joining BlackRock in July, 2000, Mr. Damm was with PNC
Asset Management Group. He joined PNC in 1995 as Senior Investment
Strategist, responsible for managing the equity portion of
balanced portfolios and the asset allocation for PNC's blended
portfolio products. Previously he was a portfolio manager with
PNC's Investment Management and Trust Division. He has managed SF
Equity since July, 2000.
----------------------------------------------------------------------
The day-to-day management of BlackRock Government is handled by Scott
Amero.
----------------------------------------------------------------------
o Scott Amero, Managing Director of the Adviser. Mr. Amero joined
BlackRock in 1990 and has been a Managing Director since March,
1998. He is also a member of the Adviser's Investment Strategy
Group and a Vice President for BlackRock's family of closed-end
mutual funds and the Smith Barney Adjustable Rate Government
Income Fund. He has managed SF Government since March, 1998.
----------------------------------------------------------------------
Management Fees
For its management and supervision of the daily business affairs of the
Met Portfolios, the Manager is entitled to receive a monthly fee at the
following annual rates equal to:
----------------------------------------------------------------------
o For BlackRock Equity: 0.65% of the Portfolio's average daily net
assets.
o For BlackRock Government: 0.55% of the Portfolio's average daily
net assets.
o The Manager may, at its discretion, reduce or waive its fee or
reimburse a Portfolio for certain of its other expenses in order
to reduce the expense ratios. Unless otherwise agreed upon, the
Manager may also reduce or cease these voluntary waivers and
reimbursements at any time.
---------------------------------------------------------------------
Advisory Fees
Under the terms of the Advisory Agreement, the Adviser is paid by the
Manager for providing advisory services to each Met Portfolio. The Met
Portfolios do not pay a fee to the Adviser.
What will be the primary federal tax consequences of the
Reorganizations?
Prior to or at the completion of the Reorganizations, each SF Portfolio
and each Met Portfolio will have received an opinion from the law firm of
Sullivan & Worcester LLP that the applicable Reorganization has been structured
so that no gain or loss will be realized by the Portfolio or its Record Holder
for federal income tax purposes as a result of receiving shares of voting stock
of the respective Met Portfolio in connection with the Reorganization. The
holding period and aggregate tax basis of shares of voting stock of the Met
Portfolios that are received by the Record Holder of the SF Portfolios will be
the same as the holding period and aggregate tax basis of shares of the SF
Portfolios previously held by such Record Holder, provided that such shares of
the SF Portfolios are held as capital assets. In addition, the holding period
and tax basis of the assets of the SF Portfolios in the hands of the respective
Met Portfolios as a result of the Reorganizations will be the same as in the
hands of the SF Portfolios immediately prior to the Reorganizations, and no gain
or loss will be recognized by the Met Portfolios upon the receipt of the assets
of the applicable SF Portfolio in exchange for voting stock of the Met Portfolio
and the assumption by the Met Portfolio of the SF Portfolio's identified
liabilities. Met Investors Series Trust believes that the Contract Owners will
have no taxable income as a consequence of a Reorganization.
RISKS
Are the risk factors for the Portfolios the same?
Yes. The risk factors are essentially the same due to the substantial
similarities of the investment objectives and policies between the SF Portfolios
and the corresponding Met Portfolios. The risks of each Met Portfolio are
described in greater detail in the "Additional Information" section below.
What are the primary risks of investing in each Portfolio?
An investment in each Portfolio is subject to certain risks. There is
no assurance that investment performance of either an SF Portfolio or the
corresponding Met Portfolio will be positive or that the Portfolios will meet
their investment objectives. The following tables and discussions highlight the
primary risks associated with investment in each of the Portfolios.
<TABLE>
<CAPTION>
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Interest Rate Risk.
<S> <C> <C>
---------------------------------------- ------------------------------------------------------------------------
--------------------- ------------------ ------------------------------------------------------------------------
SF Equity BlackRock Equity Each normally invests at least 65% of its assets in common stocks, and
each may invest up to 20% of their assets in U.S. government
securities.
--------------------- ------------------ ------------------------------------------------------------------------
--------------------- ------------------ ------------------------------------------------------------------------
SF Government BlackRock Each normally invests at least 80% of its assets in debt securities
Government and at least 65% of its assets in U.S. government securities; debt
securities selected may include
residential and commercial
mortgage-backed securities, such as
collateralized mortgage obligations
("CMOs") and GNMA certificates; in
addition, the current average weighted
maturity for fixed income securities of
the Portfolio is 5.65 years and the
duration of Portfolio's benchmark is
approximately 5.67 years currently.
--------------------- ------------------ ------------------------------------------------------------------------
The values of debt securities are subject to change when prevailing
interest rates change. When interest rates go up, the value of debt securities
and certain dividend paying stocks tends to fall. If your Portfolio invests a
significant portion of its assets in debt securities or stocks purchased
primarily for dividend income and interest rates rise, then the value of your
investment may decline. Alternatively, when interest rates go down, the value of
debt securities and certain dividend paying stocks may rise.
Interest rate risk will affect the price of a fixed income security
more if the security has a longer maturity because changes in interest rates are
increasingly difficult to predict over longer periods of time. Fixed income
securities with longer maturities will therefore be more volatile than other
fixed income securities with shorter maturities. Conversely, fixed income
securities with shorter maturities will be less volatile but generally provide
lower returns than fixed income securities with longer maturities. The average
maturity and duration of a Portfolio's fixed income investments will affect the
volatility of the Portfolio's share price.
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Market Risk.
---------------------------------------- ------------------------------------------------------------------------
--------------------- ------------------ ------------------------------------------------------------------------
SF Equity BlackRock Equity Each normally invests at least 65% of its assets in common stocks.
--------------------- ------------------ ------------------------------------------------------------------------
A Portfolio's share price can fall because of weakness in the broad
market, a particular industry, or specific holdings. The market as a whole can
decline for many reasons, including disappointing corporate earnings, adverse
political or economic developments here or abroad, changes in investor
psychology, or heavy institutional selling. The prospects for an industry or a
company may deteriorate. In addition, an assessment by a Portfolio's Adviser of
particular companies may prove incorrect, resulting in losses or poor
performance by those holdings, even in a rising market. A Portfolio could also
miss attractive investment opportunities if its Adviser underweights fixed
income markets or industries where there are significant returns, and could lose
value if the Adviser overweights fixed income markets or industries where there
are significant declines.
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Investment Style Risk.
---------------------------------------- ------------------------------------------------------------------------
--------------------- ------------------ ------------------------------------------------------------------------
SF Equity BlackRock Equity Each is managed
to take advantage of trends in the
domestic stock market that favor
different styles of stock selection
including value or growth stocks; each
emphasizes securities believed to be
undervalued.
--------------------- ------------------ ------------------------------------------------------------------------
Different investment styles tend to shift in and out of favor depending
upon market and economic conditions as well as investor sentiment. A Portfolio
may outperform or underperform other funds that employ a different investment
style. A Portfolio may also employ a combination of styles that impact its risk
characteristics. Examples of different investment styles include growth and
value investing. Growth stocks may be more volatile than other stocks because
they are more sensitive to investor perceptions of the issuing company's growth
of earnings potential. Also, since growth companies usually invest a high
portion of earnings in their business, growth stocks may lack the dividends of
value stocks that can cushion stock prices in a falling market. Growth oriented
funds will typically underperform when value investing is in favor. Value stocks
are those which are undervalued in comparison to their peers due to adverse
business developments or other factors. Value investing carries the risk that
the market will not recognize a security's inherent value for a long time, or
that a stock judged to be undervalued may actually be appropriately priced or
overvalued. Value oriented funds will typically underperform when growth
investing is in favor.
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Market Capitalization Risk.
---------------------------------------- ------------------------------------------------------------------------
--------------------- ------------------ ------------------------------------------------------------------------
SF Equity BlackRock Equity Each initially
screens for stocks from companies with
market capitalizations of at least $1
billion.
--------------------- ------------------ ------------------------------------------------------------------------
Stocks fall into three broad market capitalization categories--large,
medium and small. Investing primarily in one category carries the risk that due
to current market conditions that category may be out of favor. If valuations of
large capitalization companies appear to be greatly out of proportion to the
valuations of small or medium capitalization companies, investors may migrate to
the stocks of small and mid-sized companies causing a Portfolio that invests in
these companies to increase in value more rapidly than a Portfolio that invests
in larger, fully-valued companies. Larger, more established companies may also
be unable to respond quickly to new competitive challenges such as changes in
technology and consumer tastes. Many larger companies also may not be able to
attain the high growth rate of successful smaller companies, especially during
extended periods of economic expansion. Investing in medium and small
capitalization companies may be subject to special risks associated with
narrower product lines, more limited financial resources, smaller management
groups, and a more limited trading market for their stocks as compared with
larger companies. Securities of smaller capitalization issuers may therefore be
subject to greater price volatility and may decline more significantly in market
downturns than securities of larger companies.
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Credit Risk.
---------------------------------------- ------------------------------------------------------------------------
--------------------- ------------------ ------------------------------------------------------------------------
SF Government BlackRock Each may select debt securities from categories including residential
Government and commercial mortgage-backed securities such as CMOs and
non-mortgage asset-backed securities.
--------------------- ------------------ ------------------------------------------------------------------------
The value of debt securities is directly affected by an issuer's
ability to pay principal and interest on time. If your Portfolio invests in debt
securities, the value of your investment may be adversely affected when an
issuer fails to pay an obligation on a timely basis. A Portfolio may also be
subject to credit risk to the extent it engages in transactions, such as
securities loans, repurchase agreements or certain derivatives, which involve a
promise by a third party to honor an obligation to the Portfolio. Such third
party may be unwilling or unable to honor its financial obligations.
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Mortgage-Related Security
Risk.
---------------------------------------- ------------------------------------------------------------------------
--------------------- ------------------ ------------------------------------------------------------------------
SF Government BlackRock Each may invest in residential and
Government commercial mortgage-backed securities such as
CMOs and GNMA certificates.
--------------------- ------------------ ------------------------------------------------------------------------
Like other debt securities, changes in interest rates generally affect
the value of a mortgage-backed security. Additionally, some mortgage-backed
securities may be structured so that they may be particularly sensitive to
interest rates.
Investments in mortgage-related securities are also subject to special
risks of prepayment. Prepayment risk occurs when the issuer of a security can
prepay the principal prior to the security's maturity. Securities subject to
prepayment risk, including the CMOs and other mortgage-related securities that
the Portfolio can buy, generally offer less potential for gains when prevailing
interest rates decline, and have greater potential for loss when interest rates
rise. The impact of prepayments on the price of a security may be difficult to
predict and may increase the volatility of the price. In addition, early
repayment of mortgages underlying these securities may expose the Portfolio to a
lower rate of return when it reinvests the principal. Further, the Portfolio may
buy mortgage-related securities at a premium. Accelerated prepayments on those
securities could cause the Portfolio to lose a portion of its principal
investment represented by the premium the Portfolio paid.
If interest rates rise rapidly, prepayments may occur at slower rates
than expected, which could have the effect of lengthening the expected maturity
of a short- or medium-term security. That could cause its value to fluctuate
more widely in response to changes in interest rates. In turn, this could cause
the value of the Portfolio's shares to fluctuate more.
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Asset-Backed Security Risk.
---------------------------------------- ------------------------------------------------------------------------
--------------------- ------------------ ------------------------------------------------------------------------
SF Government BlackRock Each may invest in non-mortgage asset-backed securities.
Government
--------------------- ------------------ ------------------------------------------------------------------------
</TABLE>
Non-mortgage asset-backed securities are not issued or guaranteed by
the U.S. government or its agencies or government-sponsored entities. In the
event of a failure of these securities to pay interest or repay principal, the
assets backing these securities such as automobiles or credit card receivables
may be insufficient to support the payments on the securities.
Are there any other risks of investing in each Portfolio?
As of the fiscal year ended July 31, 2000, the portfolio turnover rate
for SF Government was 159%. Annual turnover rate of 100% or more is considered
high and results in greater brokerage and other transaction costs which are
borne by the Portfolio and its shareholders. It is not anticipated that the
portfolio turnover rate for SF Equity Portfolio will exceed 100%.
INFORMATION ABOUT THE REORGANIZATIONS
Reasons for the Reorganizations
The purpose of the Reorganizations is to reorganize the SF Portfolios
into separate series of a Delaware business trust. The Reorganizations are part
of an overall restructuring designed to provide the enhanced flexibility
afforded by a Delaware business trust in comparison to the SF Portfolios'
previous form of organization, operating efficiencies which will result from
maintaining a single trust of investment portfolios to be offered in connection
with the Insurance Company's insurance products and to employee benefit plans,
and consistency across the entire group of those investment portfolios. To
accomplish the restructuring, the holders of beneficial interests in shares of
other portfolios of Security First Trust, as well as shareholders of various
portfolios of another investment company in the MetLife family of funds, are
also being asked to approve reorganizations of those portfolios into portfolios
of Met Investors Series Trust.
At a special meeting held on November 2, 2000, all of the Trustees of
Security First Trust, including the Disinterested Trustees, considered and
approved each Reorganization; they determined that the respective Reorganization
was in the best interests of shareholders of SF Equity and SF Government, as
applicable, and that the interests of existing shareholders of the SF Portfolios
will not be diluted as a result of the transactions contemplated by the
respective Reorganization.
Security First Trust is organized as a Massachusetts business trust and
Met Investors Series Trust is organized as a Delaware business trust. The
principal reason for reorganizing the SF Portfolios as series of a Delaware
business trust is the availability of certain advantages of Delaware law with
respect to business trusts. The Delaware Business Trust Act (the "Delaware Act")
has been specifically drafted to accommodate the unique governance needs of
investment companies and provides that its policy is to give maximum freedom of
contract to the trust instrument of a Delaware business trust.
Under the Delaware Act, a shareholder of a Delaware business trust is
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in Massachusetts. As a result,
Delaware law is generally considered to afford more protection against potential
shareholder liability than is afforded to shareholders of Massachusetts business
trusts. See "Comparative Information on Shareholders' Rights - Shareholder
Liability". Similarly, Delaware law provides that, should a Delaware trust issue
multiple series of shares, each series will not be liable for the debts of
another series, another potential though remote risk in the case of other
business trusts, including those, such as Security First Trust, that are
organized under Massachusetts law.
Delaware has obtained a favorable national reputation for its business
laws and business environment. The Delaware courts, which may be called upon to
interpret the Delaware Act, are among the nation's most highly respected and
have an expertise in corporate matters which in part grew out of the fact that
Delaware legal issues are concentrated in the Court of Chancery where there are
no juries and where judges issue written opinions explaining their decisions.
Accordingly, there is a well established body of precedent which may be relevant
in deciding issues pertaining to a Delaware business trust.
There are other advantages that may be afforded by a Delaware business
trust. Under Delaware law, the Met Portfolios will have the flexibility to
respond to future business contingencies. For example, the Trustees of Met
Investors Series Trust will have the power to incorporate the Trust, to merge or
consolidate it with another entity, to cause each series to become a separate
trust, and to change the Trust's domicile without a shareholder vote. This
flexibility could help to assure that Met Investors Series Trust operates under
the most advanced form of organization and could reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
Before approving the Plans, the Trustees evaluated extensive
information provided by the management of Security First Trust and Met Investors
Series Trust and reviewed various factors about the Portfolios and the proposed
Reorganizations. The Trustees considered among other things:
o the advantages which apply to operating each Portfolio as a
series of a Delaware business trust as compared to operating
each Portfolio as a series of a Massachusetts business trust;
o the terms and conditions of each Reorganization;
o the fact that the Reorganizations would not result in the dilution of
shareholders' interests;
o the effect of the Reorganizations on the Contract Owners and
the value of their Contracts, and the anticipated availability
of a broader array of investment choices to Contract Owners of
portfolios in the Met Investors Series Trust;
o the expense ratios, fees and expenses of the SF Portfolios and the anticipated
expense ratios, fees and expenses of the respective Met Portfolios;
o the fact that each SF Portfolio and the corresponding Met
Portfolio have identical investment objectives and
substantially identical principal investment strategies;
o the fact that Met Investors Advisory Corp. (formerly known as
Security First Investment Management Corporation) is the
Manager for the Met Portfolios and the investment adviser to
the SF Portfolios and would manage the Portfolios in
essentially the same manner;
o the fact that the Reorganizations will provide continuity of
money management for shareholders because the sub-adviser for
the SF Portfolios will be the sub-adviser of the Met
Portfolios and the same individuals will continue as portfolio
managers of the Met Portfolios;
o the fact that MetLife or an affiliate of MetLife will bear the
expenses incurred by the SF Portfolios and the Met Portfolios
in connection with the Reorganizations;
o the benefits to shareholders, including operating
efficiencies, to be achieved from participating in the
restructuring of the investment portfolios to be offered in
connection with the Insurance Company's insurance products and
to employee benefit plans;
o the fact that each Met Portfolio will assume the identified liabilities of the
respective SF Portfolio;
o the fact that each Reorganization is expected to be tax free for federal
income tax purposes; and
o alternatives available to shareholders of the SF Portfolios, including the
ability to redeem their shares.
During their consideration of the Reorganizations, the Trustees met
with Trust counsel regarding the legal issues involved.
After consideration of the factors noted above, together with other
factors and information considered to be relevant, and recognizing that there
can be no assurance that any operating efficiencies or other benefits will in
fact be realized, the Trustees of Security First Trust concluded that the
proposed Reorganizations would be in the best interests of the respective SF
Portfolio and its shareholders. Consequently, they approved the Plans and
directed that the Plans be submitted to shareholders of the SF Portfolios for
approval.
The Trustees of Met Investors Series Trust have also approved the Plans
on behalf of the respective Met Portfolios.
Agreements and Plans of Reorganization
The following summary is qualified in its entirety by reference to the
Plans (the form of which is attached as Exhibit A to this Prospectus/Proxy
Statement).
Each Plan provides that all of the assets of the respective SF
Portfolio will be acquired by the corresponding Met Portfolio in exchange for
Class A shares of the Met Portfolio and the assumption by the Met Portfolio of
the identified liabilities of the SF Portfolio on or about February 5, 2001 or
such other date as may be agreed upon by the parties (the "Closing Date"). Prior
to the Closing Date, each SF Portfolio will endeavor to discharge all of its
known liabilities and obligations. A Met Portfolio will not assume any
liabilities or obligations of the respective SF Portfolio other than those
reflected in an unaudited statement of assets and liabilities of the SF
Portfolio prepared as of the close of regular trading on the New York Stock
Exchange ("NYSE"), normally 4:00 p.m. Eastern Time, on the business day
immediately prior to the Closing Date (the "Valuation Time").
The number of full and fractional Class A shares of the Met Portfolio
to be received by the shareholders of the corresponding SF Portfolio will be
determined by multiplying the number of outstanding full and fractional shares
of the SF Portfolio by a factor which shall be computed by dividing the net
asset value per share of the SF Portfolio by the net asset value per share of
the Class A shares of the Met Portfolio. These computations will take place as
of the Valuation Time. The net asset value per share will be determined by
dividing assets, less liabilities, in each case attributable to the respective
class, by the total number of outstanding shares.
Investors Bank & Trust Company, the custodian for the Met Portfolios,
will compute the value of each SF Portfolio's respective portfolio of
securities. The method of valuation employed will be consistent with the
procedures set forth in the "Additional Information" section below relating to
the Met Portfolios, Rule 22c-1 under the 1940 Act, and with the interpretations
of that Rule by the SEC's Division of Investment Management.
As soon after the Closing Date as conveniently practicable, each SF
Portfolio will liquidate and distribute pro rata to shareholders of record as of
the close of business on the Closing Date the full and fractional shares of
voting stock of the corresponding Met Portfolio received by the SF Portfolio.
The liquidation and distribution will be accomplished by the establishment of
accounts in the names of the SF Portfolio's shareholders on the corresponding
Met Portfolio's share records of its transfer agent. Each account will represent
the respective pro rata number of full and fractional shares of voting stock of
the Met Portfolio due to the SF Portfolio's shareholders. All issued and
outstanding shares of each SF Portfolio will be canceled. The shares of voting
stock of each Met Portfolio to be issued will have no preemptive or conversion
rights and no share certificates will be issued. After these distributions and
the winding up of its affairs, each SF Portfolio will be terminated.
The consummation of each Reorganization is subject to the conditions
set forth in the respective Plan, including approval by the SF Portfolio's
shareholders, accuracy of various representations and warranties and receipt of
opinions of counsel, including opinions with respect to those matters referred
to in "Federal Income Tax Consequences" below. Notwithstanding approval of an SF
Portfolio's shareholders, a Plan may be terminated (a) by the mutual agreement
of the SF Portfolio and the corresponding Met Portfolio; or (b) at or prior to
the Closing Date by either party (1) because of a breach by the other party of
any representation, warranty, or agreement contained in the Plan to be performed
at or prior to the Closing Date if not cured within 30 days, or (2) because a
condition to the obligation of the terminating party has not been met and it
reasonably appears that it cannot be met.
Whether or not a Reorganization is consummated, MetLife or an affiliate
of MetLife will pay the expenses incurred by an SF Portfolio and the
corresponding Met Portfolio in connection with that Reorganization (including
the cost of any proxy-soliciting agent). No portion of the expenses will be
borne directly or indirectly by the SF Portfolio, the corresponding Met
Portfolio or their shareholders.
If an SF Portfolio's shareholders do not approve the respective
Reorganization, the Trustees will consider other possible courses of action
which may be in the best interests of shareholders.
Federal Income Tax Consequences
Each Reorganization is intended to qualify for federal income tax
purposes as a tax free reorganization under section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Met Investors Series Trust
believes that the Contract Owners will have no taxable income as a consequence
of a Reorganization. As a condition to the closing of a Reorganization, the Met
Portfolio, the SF Portfolio and the Record Holder will receive an opinion from
the law firm of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued thereunder,
current administrative rules, pronouncements and court decisions, for federal
income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of the SF Portfolio solely in
exchange for shares of voting stock ("voting stock") of the
corresponding Met Portfolio and the assumption by the Met
Portfolio of the identified liabilities of the SF Portfolio
followed by the distribution of the Met Portfolio's voting stock
to the Record Holder of the SF Portfolio in dissolution and
liquidation of the SF Portfolio, will constitute a
"reorganization" within the meaning of section 368(a)(1)(F) of
the Code, and the Met Portfolio and the SF Portfolio will each
be a "party to a reorganization" within the meaning of section
368(b) of the Code;
(2) No gain or loss will be recognized by the Met Portfolio upon the
receipt of the assets of the SF Portfolio solely in exchange for
the voting stock of the Met Portfolio and the assumption by the
Met Portfolio of the identified liabilities of the SF Portfolio;
(3) No gain or loss will be recognized by the SF Portfolio on the
transfer of its assets to the Met Portfolio in exchange for the
Met Portfolio's voting stock and the assumption by the Met
Portfolio of the identified liabilities of the SF Portfolio or
upon the distribution (whether actual or constructive) of the
Met Portfolio's voting stock to the SF Portfolio's Record Holder
in exchange for its shares of the SF Portfolio;
(4) No gain or loss will be recognized by the SF Portfolio's Record
Holder upon the exchange of its shares of the SF Portfolio for
voting stock of the Met Portfolio in liquidation of the SF
Portfolio;
(5) The aggregate tax basis of the voting stock of the Met Portfolio
received by each Record Holder of the SF Portfolio pursuant to
the Reorganization will be the same as the aggregate tax basis
of the shares of the SF Portfolio held by such Record Holder
immediately prior to the Reorganization, and the holding period
of the voting stock of the Met Portfolio received by each Record
Holder of the SF Portfolio will include the period during which
the shares of the SF Portfolio exchanged therefor were held by
such Record Holder (provided that the shares of the SF Portfolio
were held as a capital asset on the date of the Reorganization);
and
(6) The tax basis of the assets of the SF Portfolio acquired by the
Met Portfolio will be the same as the tax basis of such assets
to the SF Portfolio immediately prior to the Reorganization, and
the holding period of such assets in the hands of the Met
Portfolio will include the period during which the assets were
held by the SF Portfolio.
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If a Reorganization is consummated but does not qualify as a tax
free reorganization under the Code, the Record Holder of the respective SF
Portfolio would recognize a taxable gain or loss equal to the difference between
its tax basis in its Portfolio shares and the fair market value of the shares of
the Met Portfolio it received.
Pro-forma Capitalization
The following tables set forth the capitalization of the SF Portfolios
as of June 30, 2000 and the capitalization of the corresponding Met Portfolios
on a pro forma basis as of that date, giving effect to the proposed acquisitions
of assets at net asset value. As newly created series of Met Investors Series
Trust, each Met Portfolio, immediately preceding the Closing Date, will have
nominal assets and liabilities. The pro forma data reflects an exchange ratio of
1.00 Class A share of each Met Portfolio issued for each share of the respective
SF Portfolio. It is anticipated that as of the Closing Date, no Class B shares
of the Met Portfolios will be outstanding.
Capitalization of SF Equity
and BlackRock Equity (Pro Forma)
----------------------- ------------------------- ---------------------------
SF Equity BlackRock Equity (Class
A) (After Reorganization)
Total Net Assets $59,805,420 $59,805,420
Net Asset Value Per $8.99 $8.99
Share
Shares Outstanding 6,655,507 6,655,507
----------------------- ------------------------- ---------------------------
Capitalization of SF Government
and BlackRock Government (Pro Forma)
----------------------- ------------------------- ---------------------------
SF Government BlackRock Government
(Class A) (After
Reorganization)
Total Net Assets $32,487,985 $32,487,985
Net Asset Value Per $5.05 $5.05
Share
Shares Outstanding 6,431,293 6,431,293
----------------------- ------------------------- ---------------------------
Distribution of Shares
All portfolios of Security First Trust sell shares only to the separate
accounts of life insurance companies (including the Insurance Company) as a
funding vehicle for the Contracts offered by those insurance companies, and to
qualified pension and retirement plans. Each SF Portfolio offers only one class
of shares. Expenses of the Trust are passed through to the Insurance Company's
separate accounts and are ultimately borne by Contract Owners. In addition,
other fees and expenses are assessed by the Insurance Company at the separate
account level. (The Security First Contracts Prospectus describes all fees and
charges relating to a Contract.)
Like Security First Trust, Met Investors Series Trust does not sell its
shares directly to the public. The Trust continuously sells shares of each Met
Portfolio only to Insurance Company separate accounts and to qualified pension
and employee profit-sharing plans. It may also offer shares to other separate
accounts of other insurers if approved by the Board of Trustees of the Trust.
MetLife Distributors, Inc. ("MDI"), an indirect wholly-owned subsidiary of
MetLife, serves as the distributor for Met Investors Series Trust's shares. MDI
distributes each Met Portfolio's shares directly and through broker-dealers,
banks, or other financial intermediaries. Each Met Portfolio currently offers
two classes of shares: Class A and Class B. (Class B is not part of the
Reorganizations.) Each class has a separate distribution arrangement and bears
its own distribution expenses, if any.
In the proposed Reorganizations, shareholders of each SF Portfolio will
receive Class A shares of the corresponding Met Portfolio. Class A shares are
sold at net asset value without any initial or deferred sales charges and are
not subject to distribution-related or shareholder servicing-related fees. No
Rule 12b-1 plan has been adopted for the Class A shares of the Met Portfolios.
Class A shares are only available to certain classes of investors, such as
shareholders who receive shares of a Met Portfolio in the Reorganizations, and
for additional purchases under a shareholder's existing Contract. In connection
with each Reorganization, no sales charges are imposed. Certain sales or other
charges are imposed by the Contracts for which the Met Portfolios serve as
investment vehicles. More detailed descriptions of the Class A shares and the
distribution arrangements applicable to this class of shares are contained in
the "Additional Information" section below relating to the Met Portfolios.
Purchase and Redemption Procedures
The Security First Contracts Prospectus for your Contract describes the
procedures for investing your purchase payments or premiums in shares of the SF
Portfolios. No fee is charged by an SF Portfolio for selling (redeeming) shares.
The Contracts Prospectus describes whether the Insurance Company charges any
fees for redeeming your interest in a Contract. The SF Portfolios buy or sell
shares at net asset value per share of each Portfolio for orders received on a
given day, and the Insurance Company uses this value to calculate the value of
your interest in your Contract.
MDI places orders for the purchase or redemption of shares of each Met
Portfolio based on, among other things, the amount of net Contract premiums or
purchase payments transferred to the separate accounts, transfers to or from a
separate account investment division and benefit payments to be effected on a
given date pursuant to the terms of the Contracts. Orders are effected at the
net asset value per share for each Portfolio determined on that same date,
without the imposition of any sales commission or redemption charge.
Exchange Privileges
The Security First Contracts Prospectus indicates whether the Insurance
Company charges any fees for moving your assets from one investment option to
another. No fees for exchanges are charged by Security First Trust or Met
Investors Series Trust.
Dividend Policy
The SF Portfolios and the Met Portfolios have the same distribution
policy. Each SF Portfolio and each Met Portfolio declares and distributes its
dividends from net investment income to the Insurance Company separate accounts
at least once a year and not to you, the Contract Owner. These distributions are
in the form of additional shares of stock and not cash. The result is that a
Portfolio's investment performance, including the effect of dividends, is
reflected in the cash value of the Contracts. All net realized long- or
short-term capital gains of each Portfolio are also declared and distributed
once a year and reinvested in the Portfolio. Dividends and distributions paid on
an SF Portfolio are automatically reinvested in additional shares of the
Portfolio, unless a shareholder elects to have dividends and/or distributions
paid in cash.
The SF Portfolios have each qualified and intend to continue to
qualify, and the Met Portfolios expect to qualify in their initial year, to be
treated as regulated investment companies under the Code. To remain qualified as
a regulated investment company, a Portfolio must distribute 90% of its taxable
and tax-exempt income and diversify its holdings as required by the 1940 Act and
the Code. While so qualified, so long as each Portfolio distributes all of its
net investment company taxable and tax-exempt income and any net realized gains
to the Record Holder, it is expected that a Portfolio will not be required to
pay any federal income taxes on the amounts distributed to the Record Holder.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
As a Delaware business trust, the operations of Met Investors Series
Trust will be governed by its Agreement and Declaration of Trust and By-Laws,
and applicable Delaware law, rather than by the Declaration of Trust and By-Laws
of Security First Trust and Massachusetts law. The Agreement and Declaration of
Trust and the Declaration of Trust are each referred to in this Prospectus/Proxy
Statement as a "Declaration of Trust." As discussed below, certain of the
differences between Security First Trust and Met Investors Series Trust derive
from provisions of Met Investors Series Trust's Declaration of Trust and
By-Laws. Shareholders entitled to instruct the Insurance Company to vote at the
Meeting may obtain a copy of Met Investors Series Trust's Declaration of Trust
and By-Laws, without charge, upon written request to Met Investors Series Trust
at the address and telephone number set forth on the cover of this
Prospectus/Proxy Statement.
Form of Organization
As noted above, Security First Trust is organized as a Massachusetts
business trust, and Met Investors Series Trust is organized as a Delaware
business trust. Both Security First Trust and Met Investors Series Trust are
open-end management investment companies registered with the SEC under the 1940
Act, and each is organized as a "series company" as that term is used in Rule
18f-2 under the 1940 Act. The series of Security First Trust consist of the SF
Portfolios and other mutual funds of various asset classes; the series of Met
Investors Series Trust consist of the Met Portfolios and other mutual funds of
various asset classes. Security First Trust and Met Investors Series Trust
currently offer shares of their portfolios to insurance company separate
accounts to serve as an investment vehicle for variable annuity contracts and
variable life insurance policies issued by the Insurance Company and to
qualified pension and retirement plans. Each Trust is governed by its
Declaration of Trust, By-Laws, and a Board of Trustees, and by applicable
Massachusetts or Delaware and federal law.
The Board of Trustees of Met Investors Series Trust is currently
comprised of Jack R. Borsting, who serves as a Trustee of Security First Trust,
and seven other individuals who do not serve as Trustees of Security First
Trust. Accordingly, most of the Trustees who have ultimate responsibility for
the oversight and management of the Met Portfolios are different. Information
with respect to the current Trustees of Met Investors Series Trust, including
compensation received, is set forth in the Statement of Additional Information
dated December 15, 2000 which relates to this Prospectus/Proxy Statement and the
Reorganizations.
Capitalization
The beneficial interests in Security First Trust are represented by an
unlimited number of transferable shares of beneficial interest, without par
value, and may be divided into various series. The beneficial interests in Met
Investors Series Trust are represented by an unlimited number of transferable
shares of beneficial interest, $.001 par value per share, of one or more series.
The Declaration of Trust of each of Security First Trust and Met Investors
Series Trust permits the Trustees to allocate shares into one or more series,
and classes thereof, with rights determined by the Trustees, all without
shareholder approval. Fractional shares may be issued by each SF Portfolio and
by each Met Portfolio.
Shares of each SF Portfolio are offered in only one class and represent
an equal proportionate interest in the Portfolio. Shares of each Met Portfolio
are currently offered in Class A and Class B (Class B is not part of the
Reorganizations). Shares of the classes of each Met Portfolio represent an equal
pro rata interest in the Portfolio and generally have identical voting,
dividend, liquidation and other rights, other than the payment of distribution
fees. Shareholders of each SF Portfolio and each Met Portfolio are entitled to
receive dividends and other amounts as determined by the Trustees. Shareholders
of each SF Portfolio and each Met Portfolio vote separately, by Portfolio, as to
matters, such as changes in fundamental investment restrictions, that affect
only their particular Portfolio. Shareholders of each Met Portfolio vote by
class as to matters, such as approval of or amendments to Rule 12b-1
distribution plans, that affect only their particular class.
Shareholder Liability
Shareholders of Security First Trust as shareholders of a Massachusetts
business trust may, under certain circumstances, be held personally liable under
the applicable state law for the obligations of Security First Trust. However,
the Declaration of Trust of Security First Trust contains an express disclaimer
of shareholder liability and states that notice of such disclaimer may be given
in each agreement entered into or executed by Security First Trust or the
Trustees of the Trust. The Declaration of Trust also provides for shareholder
indemnification out of the assets of the Trust.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists under Massachusetts law. As a
result, Delaware law is generally considered to afford additional protection
against potential shareholder liability.
To the extent that Met Investors Series Trust or a shareholder is
subject to the jurisdiction of courts in other states, it is possible that a
court may not apply Delaware law and may thereby subject shareholders of Met
Investors Series Trust to liability. To guard against this risk, the Declaration
of Trust of Met Investors Series Trust (a) provides that any written obligation
of the Trust may contain a statement that such obligation may only be enforced
against the assets of the Trust or the particular series in question and the
obligation is not binding upon the shareholders of the Trust; however, the
omission of such a disclaimer will not operate to create personal liability for
any shareholder; and (b) provides for indemnification out of Trust property of
any shareholder held personally liable for the obligations of the Trust.
Accordingly, the risk of a shareholder of Met Investors Series Trust incurring
financial loss beyond that shareholder's investment because of shareholder
liability is limited to circumstances in which: (1) the court refuses to apply
Delaware law; (2) no contractual limitation of liability was in effect; and (3)
the Trust itself is unable to meet its obligations. In light of Delaware law,
the nature of the Trust's business, and the nature of its assets, the risk of
personal liability to a shareholder of Met Investors Series Trust is remote.
Shareholder Meetings and Voting Rights
Neither Security First Trust on behalf of each SF Portfolio nor Met
Investors Series Trust on behalf of each Met Portfolio is required to hold
annual meetings of shareholders. However, a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee must be called when
requested in writing by the holders of at least 10% of the outstanding shares of
either Trust. Under the By-Laws of Security First Trust, a special meeting of
shareholders of the Trust may also be called in writing by shareholders holding
at least 51% of the outstanding shares of the Trust. In addition, each Trust is
required to call a meeting of shareholders for the purpose of electing Trustees
if, at any time, less than a majority of the Trustees then holding office were
elected by shareholders. Neither Trust currently intends to hold regular
shareholder meetings. Cumulative voting is not permitted in the election of
Trustees of either Trust.
The By-Laws of Security First Trust provide that the holders entitled
to cast a majority of the votes at any shareholders' meeting constitute a quorum
for consideration of a matter at a shareholders' meeting. Except when a larger
quorum is required by applicable law or the applicable governing documents, with
respect to Met Investors Series Trust, 33 1/3% of the shares issued and
outstanding constitutes a quorum for consideration of a matter at a
shareholders' meeting but any lesser number is sufficient for adjourned
sessions. Approval of a matter by the shareholders of Security First Trust
requires the affirmative vote of a majority of the votes cast at a meeting duly
called and at which a quorum is present, subject to applicable law or the
Declaration of Trust. For Met Investors Series Trust, when a quorum is present
at a meeting, a majority (greater than 50%) of the shares voted is sufficient to
act on a matter and a plurality of the shares voted is required to elect a
Trustee (unless otherwise specifically required by the applicable governing
documents or other law, including the 1940 Act). A Trustee of Security First
Trust may be removed by a vote or a written declaration of two-thirds of the
shares outstanding and entitled to vote, or for cause by a vote of two-thirds of
the remaining Trustees. A Trustee of Met Investors Series Trust may be removed
at a meeting of shareholders by a vote of two-thirds of the outstanding shares
of the Trust, or with or without cause by the vote of two-thirds of the number
of Trustees prior to removal.
Under the Declaration of Trust of each Trust, each whole share of
beneficial interest of a Portfolio is entitled to one vote, and each fractional
share is entitled to a proportionate vote. Each $100 of the account value of a
variable life insurance policy allocated to a Met Portfolio is entitled to one
vote and fractional votes are counted.
The Declaration of Trust of Security First Trust requires shareholder
approval to (1) change the Trust to a corporation or other organization, (2)
terminate the Trust, or (3) merge the Trust into another entity, or sell, lease
or exchange the assets of a Portfolio; the Trustees may abolish a series or
class only if no shares of that series or class are outstanding. The Trustees of
Security First Trust may, however, combine series or classes of shares with
other series or classes of shares without shareholder approval, provided that in
a combination of series the relative net asset value of the affected shares is
preserved. The Declaration of Trust of Met Investors Series Trust provides that
unless otherwise required by applicable law (including the 1940 Act), the Board
of Trustees may, without obtaining a shareholder vote: (1) reorganize the Trust
as a corporation or other entity, (2) merge the Trust into another entity, or
merge, consolidate or transfer the assets and liabilities of a Portfolio or
class of shares to another entity, and (3) combine the assets and liabilities
held with respect to two or more series or classes into assets and liabilities
held with respect to a single series or class. The Trustees of Met Investors
Series Trust may also terminate the Trust, a Portfolio, or a class of shares
upon written notice to the shareholders.
Under the 1940 Act, absent exemptive relief from the SEC, all
investment advisory contracts of either Security First Trust or Met Investors
Series Trust must be approved by shareholders. As further described in
"Additional Information - The Adviser", Met Investors Series Trust and the
Manager have filed an application with the SEC seeking an order, which among
other things, would permit the Manager to retain or terminate an unaffiliated
Adviser to a Portfolio without shareholder approval. No assurances can be given
that the Trust and the Manager will receive the requested order.
Liquidation
Upon liquidation of Security First Trust or a Portfolio, after paying
all liabilities, the Trustees of the Trust may distribute the remaining Trust
property or the property of any liquidated Portfolio among the shareholders of
the Trust or Portfolio according to their respective rights. In the event of the
liquidation of Met Investors Series Trust, a Met Portfolio, or a class of
shares, the shareholders are entitled to receive, when and as declared by the
Trustees, the excess of the assets belonging to the Trust, the Portfolio or
attributable to the class over the liabilities belonging to the Trust, the
Portfolio or attributable to the class. In either case, the assets so
distributable to shareholders of the Portfolio will be distributed among the
shareholders in proportion to the number of shares of a class of the Portfolio
held by them on the date of distribution.
Liability and Indemnification of Trustees
Under the Declaration of Trust of Met Investors Series Trust, a Trustee
is liable to any person in connection with the assets or affairs of the Trust or
any Portfolio only for such Trustee's own willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office of Trustee or the discharge of such Trustee's functions. As provided in
the Declaration of Trust, each Trustee of the Trust is entitled to be
indemnified against all liabilities against him or her, including the costs of
litigation, unless it is determined that the Trustee (1) did not act in good
faith in the reasonable belief that such Trustee's action was in or not opposed
to the best interests of the Trust; (2) had acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of such Trustee's duties; and (3)
in a criminal proceeding, had reasonable cause to believe that such Trustee's
conduct was unlawful (collectively, "disabling conduct"). A determination that
the Trustee did not engage in disabling conduct and is, therefore, entitled to
indemnification may be based upon the outcome of a court action or
administrative proceeding or by (a) a vote of a majority of a quorum of those
Trustees who are neither "interested persons" within the meaning of the 1940 Act
nor parties to the proceeding or (b) an independent legal counsel in a written
opinion. A Portfolio may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Portfolio if his or her
conduct is later determined to preclude indemnification and certain other
conditions are met. The Declaration of Trust and By-Laws of Security First Trust
contain similar provisions.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust of Met Investors Series Trust and
Security First Trust, their By-Laws and Delaware or Massachusetts law and is not
a complete description of those documents or law. Shareholders should refer to
the provisions of such Declarations of Trust, By-Laws and Delaware or
Massachusetts law directly for more complete information.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is being sent to shareholders of SF
Equity and SF Government in connection with a solicitation of voting
instructions by the Trustees of Security First Trust, to be used at the Special
Meeting of Shareholders (the "Meeting) to be held at 10:30 a.m. Pacific Time,
January 26, 2001, at the offices of Met Investors Series Trust, 610 Newport
Center Drive, Suite 1350, Newport Beach, California 92660, and at any
adjournments thereof. This Prospectus/Proxy Statement, along with a Notice of
the Meeting and a voting instructions form, is first being mailed to
shareholders of the SF Portfolios on or about December 15, 2000.
The Board of Trustees of Security First Trust has fixed the close of
business on November 27, 2000 as the record date (the "Record Date") for
determining the shareholders of the SF Portfolios entitled to receive notice of
the Meeting and to give voting instructions, and for determining the number of
shares for which such instructions may be given, with respect to the Meeting or
any adjournment thereof. The Insurance Company, through its separate account,
owns all the shares of each SF Portfolio and is the shareholder of record of
each such Portfolio at the close of business on the Record Date. The Insurance
Company is entitled to be present and vote at the Meeting with respect to such
shares of an SF Portfolio. The Insurance Company has undertaken to vote its
shares of an SF Portfolio for the Contract Owners of that Portfolio in
accordance with voting instructions received on a timely basis from those
Contract Owners. In connection with the solicitation of such voting
instructions, the Insurance Company will furnish a copy of this Prospectus/Proxy
Statement to Contract Owners.
The number of shares as to which voting instructions may be given under
a Contract is determined by the number of full and fractional shares of each SF
Portfolio held in a separate account with respect to that particular Contract.
In voting for a Reorganization, each full share is entitled to one vote and any
fractional share is entitled to a fractional vote.
The close of business on January 19, 2001 is the last day on which
voting instructions for the Meeting will be accepted by the Insurance Company.
Voting instructions may be revoked by executing and delivering later-dated
signed voting instructions to your Insurance Company at any time prior to the
close of business on January 19, 2001, or by attending the Meeting in person and
instructing the Insurance Company how to vote your shares. Unless revoked, all
valid voting instructions will be voted in accordance with the specifications
thereon or, in the absence of such specifications, FOR approval of the Plan and
the Reorganization contemplated thereby.
If you wish to participate in the Meeting, you may submit the voting
instructions form included with this Prospectus/Proxy Statement, transmit your
voting instructions by fax or by the Internet or attend in person and provide
your voting instructions to the Insurance Company. (Guidelines on providing
voting instructions are immediately after the Notice of Special Meeting.)
If the enclosed voting instructions form is properly executed and
returned in time to be voted at the Meeting, the shares of beneficial interest
represented by the voting instructions form will be voted in accordance with the
instructions marked on the returned voting instructions form.
o Unless instructions to the contrary are marked on the voting
instructions form, it will be voted FOR a proposed Reorganization
and FOR any other matters deemed appropriate.
o Voting instructions forms which are properly executed and returned
but are not marked with voting instructions will be voted FOR a
proposed Reorganization and FOR any other matters deemed
appropriate.
Interests in Contracts for which no timely voting instructions are
received will be voted in the same proportion as the Insurance Company votes
shares for which it has received voting instructions from other Contract Owners.
The Insurance Company will also vote any shares in its general account which are
not attributable to Contracts in the same proportion as it votes shares held in
all of the Insurance Company's registered separate accounts, in the aggregate.
Shares which represent interests in a particular SF Portfolio vote
separately on the Reorganization and those matters pertaining only to that
Portfolio. Approval of a Reorganization will require the affirmative vote of a
majority of the votes of SF Equity or SF Government, as applicable, cast at a
shareholders' meeting duly called and at which a quorum is present (the presence
in person or by proxy of holders entitled to cast a majority of the votes at any
shareholders' meeting). As of the Record Date, the sole shareholder of record of
Security First Trust was the Insurance Company. Since the Insurance Company is
the legal owner of the shares, attendance by the Insurance Company at the
Meeting will constitute a quorum under the Declaration of Trust of Security
First Trust.
Voting instructions solicitations will be made primarily by mail, but
beginning on or about January 3, 2001 voting instructions solicitations may also
be made by telephone, through the Internet or personal solicitations conducted
by officers and employees of Met Investors Advisory Corp. (formerly known as
Security First Investment Management Corporation), the investment adviser of
Security First Trust and the Manager of Met Investors Series Trust, its
affiliates or other representatives of the SF Portfolios (who will not be paid
for their soliciting activities). In addition, voting instructions solicitations
may be made by ALAMO Direct, the SF Portfolios' proxy solicitor. The estimated
cost of the voting instructions solicitation is approximately $__________. The
costs of solicitation and the expenses incurred in connection with preparing
this Prospectus/Proxy Statement and its enclosures will be paid by MetLife or an
affiliate of MetLife. Neither Security First Trust nor the Contract Owners will
bear any costs associated with the Meeting, this proxy solicitation or any
adjourned session.
If shareholders of an SF Portfolio do not vote to approve the
applicable Reorganization, the Trustees of Security First Trust will consider
other possible courses of action in the best interests of shareholders. If
sufficient votes to approve a Reorganization are not received, the persons named
as proxies on a proxy form sent to the Record Holder may propose one or more
adjournments of the Meeting to permit further solicitation of voting
instructions. In determining whether to adjourn the Meeting, the following
factors may be considered: the percentage of votes actually cast, the percentage
of negative votes actually cast, the nature of any further solicitation and the
information to be provided to shareholders with respect to the reasons for the
solicitation. Any adjournment will require an affirmative vote of a majority of
those shares represented at the Meeting in person or by proxy. The persons named
as proxies will vote upon such adjournment after consideration of all
circumstances which may bear upon a decision to adjourn the Meeting.
A shareholder who objects to a proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of Security
First Trust to demand payment for, or an appraisal of, his or her shares.
However, shareholders should be aware that each Reorganization as proposed is
not expected to result in recognition of gain or loss to the Record Holder or
Contract Owners for federal income tax purposes. In addition, if a
Reorganization is consummated, the rights of shareholders to transfer their
account balances among investment options available under the Contracts or to
make withdrawals under the Contracts will not be affected.
Security First Trust does not hold annual shareholder meetings. If a
Reorganization is not approved, shareholders wishing to submit proposals to be
considered for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of Security First
Trust at the address set forth on the cover of this Prospectus/Proxy Statement
so that they will be received by the Trust in a reasonable period of time prior
to that meeting.
The votes of the shareholders of the Met Portfolios are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganizations.
Shareholder Information
The Record Holder of each SF Portfolio at the close of business on
November 27, 2000 (the Record Date) will be entitled to be present and vote at
the Meeting with respect to shares of the applicable SF Portfolio owned as of
the Record Date. As of the Record Date, the total number of shares of each SF
Portfolio outstanding and entitled to vote was as follows:
----------------------------------- ----------------------
Number of Shares
SF Equity 6,386,160
=========
----------------------------------- -----------------------
----------------------------------- -----------------------
Number of Shares
SF Government 6,145,006
=========
----------------------------------- ------------------------
As of November 27, 2000, the officers and Trustees of Security First
Trust and of Met Investors Series Trust beneficially owned as a group less than
1% of the outstanding shares of each SF Portfolio and each Met Portfolio,
respectively.
Control Persons and Principal Holders of Securities
On November 27, 2000 to the knowledge of the Trustees and
management of Security First Trust, Security First Life Separate Account A owned
of record 100% of the shares of SF Equity and 100% of the shares of SF
Government.
The Insurance Company has advised Security First Trust that as of
November 27, 2000 there were no persons owning Contracts which would entitle
them to instruct the Insurance Company with respect to more than 5% of the
voting securities of the Trust.
As of the date of this Prospectus/Proxy Statement Security First Life
Insurance Company owned 100% of the outstanding shares of Met Investors Series
Trust and as a result may be deemed to be a control person with respect to the
Trust.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report of Security First Trust relating to SF Equity and SF
Government, for the year ended as of July 31, 2000, and the financial statements
and financial highlights for the periods indicated therein, has been
incorporated by reference herein and in the Registration Statement in reliance
upon the report of Deloitte & Touche LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of BlackRock
Equity and BlackRock Government will be passed upon by Sullivan & Worcester LLP,
Washington, D.C.
ADDITIONAL INFORMATION
Security First Trust is, and Met Investors Series Trust will be,
subject to the informational requirements of the Securities Exchange Act of 1934
and the 1940 Act, and in accordance therewith file reports and other information
including proxy material and charter documents with the SEC. Met Investors
Series Trust has filed a registration statement with the SEC which will also be
subject to the SEC's informational requirements when it becomes effective. These
items can be inspected and copied at the Public Reference Facilities maintained
by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices located at Northwest Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of such materials can also be obtained at prescribed
rates from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549.
The following additional information supplements information about
BlackRock Equity and BlackRock Government contained elsewhere in the
Prospectus/Proxy Statement.
Principal Investment Strategies
Each Met Portfolio in this Prospectus/Proxy Statement is a mutual fund:
a pooled investment that is professionally managed and that gives you the
opportunity to participate in financial markets. Each Portfolio strives to reach
its stated investment objective, which can be changed without shareholder
approval. As with all mutual funds, there is no guarantee that a Portfolio will
achieve its investment objective.
The Adviser may sell a portfolio security when the value of the
investment reaches or exceeds its estimated fair value, to take advantage of
more attractive fixed income yield opportunities, when the issuer's investment
fundamentals begin to deteriorate, when the Portfolio must meet redemptions, or
for other investment reasons.
BlackRock Equity
Under normal circumstances, the Portfolio invests at least 65% of its
assets in common stocks. The Adviser uses the S&P 500 Index as a benchmark and
seeks to invest in stocks and market sectors in similar proportion to that
index. The Adviser seeks to own securities in all sectors, but can overweight or
underweight securities within sectors as it identifies market opportunities.
The Portfolio is managed in a way that takes advantage of trends in the
domestic stock market that favor different styles of stock selection including
value or growth stocks issued by all different sizes of companies (small, medium
and large). The Adviser initially screens for "value" and "growth" stocks from
the universe of companies with market capitalization above $1 billion. "Value"
stocks are, in the Adviser's opinion, considered undervalued or worth more than
their current price. "Growth" stocks have higher earnings that will, in the
Adviser's opinion, lead to growth in stock prices. Whether screening growth or
value stocks, the Adviser is seeking companies that are currently undervalued.
The Adviser uses fundamental analysis to examine each company for financial
strength before deciding to purchase the stock.
The Adviser generally will sell a stock when it reaches a target price,
which is when the Adviser believes it is fully valued or when, in the Adviser's
opinion, conditions change such that the risk of continuing to hold the stock is
unacceptable when compared to its growth potential.
The Portfolio may also invest up to 20% of its total assets in U.S.
government securities, including U.S. Treasury and agency obligations.
BlackRock Government
The Portfolio normally invests at least 80% of its total assets in debt
securities and at least 65% of its total assets in U.S. government securities
which are securities that are primary obligations of or guaranteed by the U.S.
government and its agencies. These securities include direct obligations of the
U.S. Treasury, such as Treasury bills, notes, and bonds. Securities purchased by
the Portfolio are rated in the highest rating category (AAA by Standard & Poor's
Ratings Services ("S&P") or Aaa by Moody's Investors Service, Inc. ("Moody's"))
at the time of purchase or are determined by the Adviser to be of comparable
quality.
The Adviser evaluates categories of the government/agency market and
individual debt securities within these categories. The Adviser selects debt
securities from several categories including: U.S. Treasuries and agency
securities, residential and commercial mortgage-backed securities (including
collateralized mortgage obligations and GNMA certificates) and asset-backed
securities. Securities are purchased for the Portfolio when the Adviser
determines that they have the potential for above-average current income.
The Portfolio's current average weighted maturity for its fixed income
securities is 5.65 years. The Adviser will normally attempt to structure the
Portfolio's investment securities to have comparable duration to its benchmark,
the Lehman Brothers Intermediate Government Bond Index. Currently, the
benchmark's duration is 5.67 years. Duration, which measures price sensitivity
to interest rate changes, is not necessarily equal to average maturity. While
average maturity measures the average final payable dates of debt instruments,
average duration measures how long the debt securities can be expected to be
held, regardless of the technical maturity date.
Additional Investment Strategies
In addition to the principal investment strategies discussed above, a
Met Portfolio, as indicated, may at times invest a portion of its assets in the
investment strategies and may engage in certain investment techniques as
described below. The Statement of Additional Information relating to this
Prospectus/Proxy Statement provides a more detailed discussion of certain of
these and other securities and indicates if a Portfolio is subject to any
limitations with respect to a particular investment strategy. These strategies
and techniques may involve risks. Although a Met Portfolio that is not
identified below in connection with a particular strategy or technique generally
has the ability to engage in such a transaction, the Adviser currently intends
to invest little, if any, of the Portfolio's assets in that strategy or
technique. (Please note that some of these strategies may be a principal
investment strategy for a particular Portfolio and consequently are also
described above.)
The Portfolios are not limited by this discussion and may invest in
other types of securities not precluded by the policies discussed elsewhere in
this Prospectus/Proxy Statement.
Convertible Securities. (BlackRock Equity)
----------------------
Convertible securities are preferred stocks or bonds that pay a fixed
dividend or interest payment and are convertible into common stock at a
specified price or conversion ratio.
Traditionally, convertible securities have paid dividends or interest
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. These securities
are also subject to market risk, interest rate risk and credit risk.
Depositary Receipts. (BlackRock Equity)
-------------------
Depositary receipts are receipts for shares of a foreign-based
corporation that entitle the holder to dividends and capital gains on the
underlying security. Receipts include those issued by domestic banks (American
Depositary Receipts), foreign banks (Global or European Depositary Receipts),
and broker-dealers (depositary shares).
These instruments are subject to market risk and foreign investment
risk.
Foreign Investment Risk. Investments in foreign securities involve
risks relating to political, social and economic developments abroad, as
well as risks resulting from the differences between the regulations to
which U.S. and foreign issuers and markets are subject.
These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or social
instability.
Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against foreign
governments.
Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be less
public information about their operations.
Foreign markets may be less liquid and more volatile than U.S. markets.
Foreign securities often trade in currencies other than the U.S.
dollar, and the Portfolio may directly hold foreign currencies and purchase and
sell foreign currencies. Changes in currency exchange rates will affect the
Portfolio's net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of foreign securities. An increase in the
strength of the U.S. dollar relative to these other currencies may cause the
value of the Portfolio to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may intervene in the currency
markets, causing a decline in value or liquidity of the Portfolio's foreign
currency or securities holdings.
Costs of buying, selling and holding foreign securities, including
brokerage, tax and custody costs, may be higher than those involved in domestic
transactions.
Derivatives. (BlackRock Equity and BlackRock Government)
-----------
Derivatives are used to limit risk in a Portfolio or to enhance
investment return, and have a return tied to a formula based upon an interest
rate, index, price of a security, or other measurement. Derivatives include
options, futures, forward contracts and related products.
Options are the right, but not the obligation, to buy or sell a
specified amount of securities or other assets on or before a fixed date at a
predetermined price.
Futures are contracts that obligate the buyer to receive and the seller
to deliver an instrument or money at a specified price on a specified date.
Forward contracts are contracts to purchase or sell a specified amount
of a financial instrument for an agreed upon price at a specified time.
Derivatives may be used to hedge against an opposite position that a
Portfolio holds. Any loss generated by the derivatives should be offset by gains
in the hedged investment. While hedging can reduce or eliminate losses, it can
also reduce or eliminate gains or result in losses or missed opportunities. In
addition, derivatives that are used for hedging the Portfolio in specific
securities may not fully offset the underlying positions. The counterparty to a
derivatives contract also could default. Derivatives that involve leverage could
magnify losses.
Derivatives may also be used to maintain a Portfolio's exposure to the
market, manage cash flows or to attempt to increase income. Using derivatives
for purposes other than hedging is speculative and involves greater risks. In
many foreign countries, futures and options markets do not exist or are not
sufficiently developed to be effectively used by a Portfolio that invests in
foreign securities.
Dollar Roll Transactions. (BlackRock Government)
------------------------
Dollar roll transactions are comprised of the sale by the Portfolio of
mortgage-based or other fixed income securities, together with a commitment to
purchase similar, but not identical, securities at a future date. In addition,
the Portfolio is paid a fee as consideration for entering into the commitment to
purchase. Dollar rolls may be renewed after cash settlement and initially may
involve only a firm commitment agreement by the Portfolio to buy a security.
Dollar roll transactions are treated as borrowings for purposes of the 1940 Act,
and the aggregate of such transactions and all other borrowings of the Portfolio
(including reverse repurchase agreements) will be subject to the requirement
that the Portfolio maintain asset coverage of 300% for all borrowings.
If the broker-dealer to whom the Portfolio sells the security becomes
insolvent, the Portfolio's right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll; the security that the Portfolio is required to repurchase may be
worth less than the security that the Portfolio originally held; and the return
earned by the Portfolio with the proceeds of a dollar roll may not exceed
transaction costs.
Forward Commitments, When-Issued and Delayed Delivery Securities. (BlackRock
Government)
Forward commitments, when-issued and delayed delivery securities
generally involve the purchase of a security with payment and delivery at some
time in the future - i.e., beyond normal settlement. The Portfolio does not earn
interest on such securities until settlement and bears the risk of market value
fluctuations in between the purchase and settlement dates. New issues of stocks
and bonds, private placements and U.S. government securities may be sold in this
manner.
High Quality Short-term Debt Obligations including Bankers' Acceptances,
Commercial Paper, Certificates of Deposit and Eurodollar Obligations issued or
guaranteed by Bank Holding Companies in the U.S., their Subsidiaries and Foreign
Branches or of the World Bank; Variable Amount Master Demand Notes and Variable
Rate Notes issued by U.S. and Foreign Corporations. (BlackRock Equity and
BlackRock Government)
Commercial paper is a short-term debt obligation with a maturity
ranging from one to 270 days issued by banks, corporations, and other borrowers
to investors seeking to invest idle cash.
Eurodollar obligations are dollar-denominated securities issued outside the
U.S. by foreign corporations and financial institutions and by foreign branches
of U.S. corporations and financial institutions.
Variable amount master demand notes differ from ordinary commercial
paper in that they are issued pursuant to a written agreement between the issuer
and the holder, their amounts may be increased from time to time by the holder
(subject to an agreed maximum) or decreased by the holder or the issuer, they
are payable on demand, the rate of interest payable on them varies with an
agreed formula and they are typically not rated by a rating agency. Transfer of
such notes is usually restricted by the issuer, and there is no secondary
trading market for them. Any variable amount master demand note purchased by a
Portfolio will be regarded as an illiquid security.
These instruments are subject to credit risk, interest rate risk and
foreign investment risk.
Illiquid and Restricted Securities. (BlackRock Government)
----------------------------------
The Portfolio may invest a portion of its assets in restricted and
illiquid securities, which are investments that the Portfolio cannot easily
resell within seven days at current value or that have contractual or legal
restrictions on resale.
If the Portfolio buys illiquid securities it may be unable to quickly
resell them or may be able to sell them only at a price below current value or
could have difficulty valuing these holdings precisely.
Interest Rate Transactions. (BlackRock Government)
--------------------------
Interest rate transactions are hedging transactions such as interest
rate swaps and the purchase or sale of interest rate caps and floors. They are
used by the Portfolio in an attempt to protect the value of its investments from
interest rate fluctuations. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor. The Adviser to the Portfolio enters into these
transactions on behalf of the Portfolio primarily to preserve a return or spread
on a particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio will not sell interest rate caps or floors that it
does not own.
There is the risk that the Adviser may incorrectly predict the
direction of interest rates resulting in losses to the Portfolio.
Investment Grade Debt Securities. (BlackRock Equity)
--------------------------------
Investment grade debt securities are securities rated in one of the
four highest rating categories by S&P, Moody's or other nationally recognized
rating agency. These securities are subject to interest rate risk and credit
risk. Securities rated in the fourth investment category by a nationally
recognized rating agency (e.g. BBB by S&P and Baa by Moody's) may have
speculative characteristics.
Investments in Other Investment Companies including Passive Foreign Investment
Companies. (BlackRock Government)
When the Portfolio invests in another investment company, it must bear
the management and other fees of the investment company, in addition to its own
expenses. As a result, the Portfolio may be exposed to duplicate expenses which
could lower its value. Investments in passive foreign investment companies also
are subject to foreign investment risk.
Passive foreign investment companies are any foreign corporations which
generate certain amounts of passive income or hold certain amounts of assets for
the production of passive income. Passive income includes dividends, royalties,
rent, and annuities.
Repurchase Agreements. (BlackRock Equity and BlackRock Government)
---------------------
Repurchase agreements involve the purchase of a security by a Portfolio
and a simultaneous agreement by the seller (generally a bank or dealer) to
repurchase the security from the Portfolio at a specified date or upon demand.
This technique offers a method of earning income on idle cash.
Repurchase agreements involve credit risk, i.e. the risk that the
seller will fail to repurchase the security, as agreed. In that case, the
Portfolio will bear the risk of market value fluctuations until the security can
be sold and may encounter delays and incur costs in liquidating the security.
Short Sales. (BlackRock Government)
-----------
Short sales are sales of securities that the seller does not own. The
seller must borrow the securities to make delivery to the buyer. A short sale
may be uncollateralized or against-the-box. A short sale is "against-the-box" if
at all times when the short position is open, the seller owns an equal amount of
the securities sold short or securities convertible into, or exchanged without
further consideration for, securities of the same issue as the securities sold
short.
The price of securities purchased to replace borrowed securities sold
short may be greater than proceeds received in the short sale resulting in a
loss to the Portfolio.
Zero-coupon Bonds. (BlackRock Government)
-----------------
Zero-coupon bonds are bonds that provide for no current interest
payment and are sold at a discount. These investments pay no interest in cash to
their holder during their life and usually trade at a deep discount from their
face or par value. These investments may experience greater volatility in market
value due to changes in interest rates than debt obligations which make regular
payments of interest. The Portfolio will accrue income on such investments for
tax accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations.
These securities are subject to credit risk and interest rate risk.
Downgrades in Fixed Income Debt Securities
Unless required by applicable law, the Portfolios are not required to
sell or dispose of any debt security that either loses its rating or has its
rating reduced after a Portfolio purchases the security.
Management
Met Investors Series Trust's Board of Trustees is responsible for
managing the business affairs of the Trust. The Trustees meet periodically to
review the affairs of the Trust and to establish certain guidelines which the
Manager and the Adviser are expected to follow in implementing the investment
policies and objectives of the Trust. The Trustees also review the management of
the Portfolios' assets by the Adviser. Information about the Trustees and
executive officers of the Trust is contained in the Statement of Additional
Information relating to this Prospectus/Proxy Statement.
The Adviser
Met Investors Series Trust and the Manager have filed an application
requesting an exemptive order from the SEC that will permit the Manager, subject
to certain conditions, and without the approval of shareholders to: (a) employ a
new unaffiliated investment adviser for a Portfolio pursuant to the terms of a
new investment advisory agreement, in each case either as a replacement for the
existing Adviser or as an additional investment adviser; (b) change the terms of
any investment advisory agreement; and (c) continue the employment of the
existing Adviser on the same advisory contract terms where a contract has been
assigned because of a change in control of the Adviser. In such circumstances,
shareholders would receive notice of such action, including the information
concerning the Adviser that normally is provided in a proxy statement. The
exemptive order would also permit disclosure of fees paid to multiple
unaffiliated investment advisers of a Portfolio on an aggregate basis only.
There is no assurance that the SEC will grant the Met Investors Series Trust's
and the Manager's application. If the SEC grants the exemptive application, the
requested order will become effective without the need for further shareholder
approval.
The Manager pays the Adviser a fee based on the Portfolio's average
daily net assets. No Portfolio is responsible for the fees paid to the Adviser.
Taxes
Each Met Portfolio expects to qualify and to continue to qualify as a
regulated investment company under Subchapter M of the Code. As qualified, a
Portfolio is not subject to federal income tax on that part of its taxable
income that it distributes to the Record Holder. Taxable income consists
generally of net investment income, and any capital gains. It is each
Portfolio's intention to distribute all such income and gains.
Shares of each Portfolio are currently offered only to the separate
accounts of the Insurance Company and to qualified pension and retirement plans.
Separate accounts are insurance company separate accounts that fund the policies
and the annuity contracts. Under the Code, an insurance company pays no tax with
respect to income of a qualifying separate account when the income is properly
allocable to the value of eligible variable annuity or variable life insurance
contracts. For a discussion of the taxation of life insurance companies and the
separate accounts, as well as the tax treatment of the policies and annuity
contracts and the holders thereof, see the discussion of federal income tax
considerations included in the respective prospectuses for the Contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on the assets underlying a Contract. Each
Portfolio intends to maintain diversification which will allow each Contract to
satisfy these requirements. These requirements are in addition to the
diversification requirements imposed on each Portfolio by Subchapter M and the
1940 Act. Technically, the section 817(h) requirements provide that, with
limited exceptions, as of the end of each calendar quarter or within thirty days
thereafter no more than 55% of the assets underlying a Contract may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. For this purpose, an investment in a Portfolio is treated not as a
single investment but as an investment in each asset owned by the Portfolio, so
long as shares of the Portfolio are owned only by separate accounts of insurance
companies, by qualified pension and retirement plans, and by a limited class of
other investors. The Portfolios are and will be so owned. Thus so long as each
Portfolio meets the section 817(h) diversification tests, each Contract will
also meet those tests.
The foregoing is only a summary of some of the important federal income
tax considerations generally affecting a Portfolio and its shareholders; see the
Statement of Additional Information relating to this Prospectus/Proxy Statement
for a more detailed discussion. Shareholders are urged to consult their tax
advisers.
Report to Policyholders
The fiscal year of each Portfolio ends on December 31 of each year. Met
Investors Series Trust will send its shareholders, at least semi-annually,
reports which show the Portfolios' composition and other information. An annual
report, with audited information, will be sent to shareholders each year.
Sales and Purchases of Shares
Met Investors Series Trust does not sell its shares directly to the
public. Met Investors Series Trust continuously sells shares of each Portfolio
only to the separate accounts of the Insurance Company and to qualified pension
and profit-sharing plans. It could also offer shares to other separate accounts
of other insurers if approved by the Board of Trustees.
Purchase and Redemption of Shares
MDI is the principal underwriter and distributor of the Contracts. MDI
places orders for the purchase or redemption of shares of each Portfolio based
on, among other things, the amount of net Contract premiums or purchase payments
transferred to the separate accounts, transfers to or from a separate account
investment division and benefit payments to be effected on a given date pursuant
to the terms of the Contracts. Such orders are effected, without sales charge,
at the net asset value per share for each Portfolio determined on that same
date.
Shares are sold and redeemed at their net asset value without the
imposition of any sales commission or redemption charge. Class A shares are not
subject to a Rule 12b-1 fee. (However, certain sales or other charges may apply
to the Contracts, as described in the respective Contract prospectuses.)
Right to Restrict Transfers
Neither Met Investors Series Trust nor the Contracts are designed for
professional market timing organizations, other entities, or individuals using
programmed, large and/or frequent transfers. The Insurance Company, in
coordination with the Trust's Manager, the Adviser, and the Trust's other
investment advisers, reserves the right to temporarily or permanently refuse
exchange requests if, in its judgment, a Portfolio would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincides with a "market timing" strategy may be disruptive to a
Portfolio and therefore may be refused. Investors should consult their Contract
prospectus for information on other specific limitations on the transfer
privilege.
Valuation of Shares
Each Met Portfolio's net asset value per share is ordinarily determined
once daily, as of the close of the regular session of business on the New York
Stock Exchange (NYSE) (usually at 4:00 p.m., Eastern Time), on each day the NSYE
is open.
Net asset value of a Met Portfolio share is computed by dividing the
value of the net assets of the Portfolio by the total number of shares
outstanding in the Portfolio. Share prices for any transaction are those next
calculated after receipt of an order.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolios are valued at market value. If market values
are not readily available, securities are valued at fair value as determined by
the Valuation Committee of Met Investors Series Trust's Board of Trustees.
Money market instruments maturing in 60 days or less are valued on the
amortized cost basis.
OTHER BUSINESS
The Trustees of Security First Trust do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of voting
instructions will vote thereon in accordance with their judgment.
THE TRUSTEES OF SECURITY FIRST TRUST RECOMMEND APPROVAL OF EACH
PLAN AND ANY UNMARKED VOTING INSTRUCTIONS WITHOUT
INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF SUCH PLAN.
December 15, 2000
<PAGE>
Exhibit A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 8th day of December, 2000, by and between Met Investors Series Trust, a
Delaware business trust with its principal place of business at 610 Newport
Center Drive, Suite 1350, Newport Beach, California 92660 (the "Trust"), with
respect to its
Portfolio series (the "Acquiring Fund"), and Security First Trust, a
Massachusetts business trust with its principal place of business at 11365 West
Olympic Boulevard, Los Angeles, California 90064 ("Security First"), with
respect to its Series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(F) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial
interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of the identified liabilities of the Selling Fund by the Acquiring
Fund on the terms and conditions hereinafter set forth are in the best interests
of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Security First have determined that the
Selling Fund should exchange all of its assets and the identified liabilities
for Acquiring Fund Shares and that the interests of the existing shareholders of
the Selling Fund will not be diluted as a result of the transactions
contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, computed in the manner and as of the
time and date set forth in paragraphs 2.2 and 2.3; and (ii) to assume the
identified liabilities of the Selling Fund, as set forth in paragraph 1.3. Such
transactions shall take place on the Closing Date provided for in paragraph 3.1.
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses. The
Selling Fund reserves the right to sell any of such securities, but will not,
without the prior written approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable period of time (not
less than 30 days) prior to the Closing Date, furnish the Acquiring Fund with a
list of its portfolio securities and other investments. In the event that the
Selling Fund holds any investments that the Acquiring Fund may not hold, the
Selling Fund, if requested by the Acquiring Fund, will dispose of such
securities prior to the Closing Date. In addition, if it is determined that the
Selling Fund and the Acquiring Fund portfolios, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the Acquiring
Fund with respect to such investments, the Selling Fund if requested by the
Acquiring Fund will dispose of a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, nothing herein will require the Selling Fund to
dispose of any investments or securities if, in the reasonable judgment of the
Selling Fund, such disposition would adversely affect the tax-free nature of the
Reorganization or would violate the Selling Fund's fiduciary duty to its
shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the Prospectus/Proxy
Statement on Form N-14 which has been distributed to shareholders of the Selling
Fund as described in paragraph 4.1(o).
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the Selling
Fund is and shall remain the responsibility of the Selling Fund up to and
including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly following
the Closing Date and the making of all distributions pursuant to paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Agreement and Declaration of Trust
and the Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Selling Fund's
assets shall be determined by multiplying the outstanding shares of the Selling
Fund by the ratio computed by dividing the net asset value per share of the
Selling Fund by the net asset value per share of the Acquiring Fund determined
in accordance with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
Investors Bank & Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The closing of the Reorganization (the "Closing")
shall take place on or about February 5, 2001 or such other date as the parties
may agree to in writing (the "Closing Date"). All acts taking place at the
Closing shall be deemed to take place simultaneously immediately prior to the
opening of business on the Closing Date unless otherwise provided. The Closing
shall be held as of 9:00 a.m. Eastern time at the offices of the Trust, or at
such other time and/or place as the parties may agree.
3.2 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.3 TRANSFER AGENT'S CERTIFICATE. The Bank of New York, as transfer
agent for the Selling Fund at the Closing Date, shall deliver at the Closing a
certificate of an authorized officer stating that its records contain the names
and addresses of the Selling Fund Shareholders and the number and percentage
ownership of outstanding shares owned by each such shareholder immediately prior
to the Closing. The Acquiring Fund shall issue and deliver or cause Investors
Bank & Trust Company, its transfer agent, to issue and deliver a confirmation
evidencing the Acquiring Fund Shares to be credited on the Closing Date to the
Secretary of Security First or provide evidence satisfactory to the Selling Fund
that such Acquiring Fund Shares have been credited to the Selling Fund's account
on the books of the Acquiring Fund. At the Closing, each party shall deliver to
the other such bills of sale, checks, assignments, share certificates, if any,
receipts and other documents as such other party or its counsel may reasonably
request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund represents and
warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
business trust duly organized, validly existing, and in good standing under the
laws of the Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectus and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Security First's Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected in the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The audited financial statements of the Selling Fund at
July 31, 2000 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since July 31, 2000 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company, has distributed in each such year
all net investment income and realized capital gains and has met the
diversification requirements of Section 817 (h) of the Code and the rules
thereunder.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund. All of the issued and outstanding
shares of the Selling Fund will, at the time of the Closing Date, be held by the
persons and in the amounts set forth in the records of the transfer agent as
provided in paragraph 3.3. The Selling Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund's shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information furnished by the Selling Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations thereunder applicable thereto.
(o) The Selling Fund has provided the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus, which
included the proxy statement of the Selling Fund (the "Prospectus/Proxy
Statement"), all of which was included in a Registration Statement on Form N-14
of the Acquiring Fund (the "Registration Statement"), in compliance with the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") and
the 1940 Act in connection with the meeting of the shareholders of the Selling
Fund to approve this Agreement and the transactions contemplated hereby. The
Prospectus/Proxy Statement included in the Registration Statement (other than
information therein that relates to the Acquiring Fund) does not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Fund represents
and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) At the Closing Date, the current prospectus and statement
of additional information of the Acquiring Fund will conform in all material
respects to the applicable requirements of the 1933 Act and the 1940 Act and the
rules and regulations of the Commission thereunder and will not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Agreement and Declaration of Trust or By-Laws or of any material agreement,
indenture, instrument, contract, lease, or other undertaking to which the
Acquiring Fund is a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material amount,
contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(l) The information furnished by the Acquiring Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations applicable thereto.
(m) The Prospectus/Proxy Statement included in the
Registration Statement (only insofar as it relates to the Acquiring Fund) does
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL BY SHAREHOLDERS. Security First will call a meeting of the
shareholders of the Selling Fund to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring Fund
in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by Deloitte &
Touche LLP and certified by Security First's President, Vice President or
Treasurer.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President, in form and substance reasonably satisfactory to the Selling Fund and
dated as of the Closing Date, to such effect and as to such other matters as the
Selling Fund shall reasonably request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Agreement and Declaration of Trust or By-Laws or any
provision of any material agreement, indenture, instrument, contract, lease or
other undertaking (in each case known to such counsel) to which the Acquiring
Fund is a party or by which it or any of its properties may be bound or to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Acquiring Fund is a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring
Fund at which the contents of the Prospectus/Proxy Statement and
related matters were discussed and, although they are not passing upon
and do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Prospectus/Proxy Statement
(except to the extent indicated in paragraph (g) of their above
opinion), on the basis of the foregoing (relying as to materiality to a
large extent upon the opinions of the Trust's officers and other
representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus/Proxy Statement
as of its date, as of the date of the meeting of the shareholders of
the Selling Fund, and as of the Closing Date, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein regarding the Acquiring Fund or
necessary, in the light of the circumstances under which they were
made, to make the statements therein regarding the Acquiring Fund not
misleading. Such opinion may state that such counsel does not express
any opinion or belief as to the financial statements or any financial
or statistical data, or as to the information relating to the Selling
Fund, contained in the Prospectus/Proxy Statement or the Registration
Statement, and that such opinion is solely for the benefit of Security
First and the Selling Fund.
Such opinion shall contain such assumptions and limitations as shall be
in the opinion of Sullivan & Worcester LLP appropriate to render the opinions
expressed therein.
In this paragraph 6.2, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Security First's
President or Vice President, in form and substance satisfactory to the Acquiring
Fund and dated as of the Closing Date, to such effect and as to such other
matters as the Acquiring Fund shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Security First.
7.3 The Acquiring Fund shall have received on the Closing Date an opinion
of Richard C. Pearson, Esq., President of Security First, in a form satisfactory
to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Security First's Declaration of Trust or By-laws, or to the
knowledge of such counsel, any provision of any material agreement, indenture,
instrument, contract, lease or other undertaking to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) Only insofar as they relate to the Selling Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and government
proceedings and material contracts, if any, are accurate and fairly present the
information required to be shown.
(g) To the knowledge of such counsel, there are no legal or
governmental proceedings, only insofar as they relate to the Selling Fund
existing on or before the effective date of the Registration Statement or the
Closing Date, required to be described in the Registration Statement or to be
filed as exhibits to the Registration Statement which are not described or filed
as required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business
other than as previously disclosed in the Prospectus/Proxy Statement.
(i) Assuming that a consideration therefor of not less than
the net asset value thereof has been paid, and assuming that such shares were
issued in accordance with the terms of the Selling Fund's registration
statement, or any amendment thereto, in effect at the time of such issuance, all
issued and outstanding shares of the Selling Fund are legally issued and fully
paid and non-assessable.
Such counsel shall also state that he has participated in conferences
with officers and other representatives of the Selling Fund at which the
contents of the Prospectus/Proxy Statement and related matters were discussed
and, although he is not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Prospectus/Proxy Statement (except to the extent indicated in paragraph (f) of
his above opinion), on the basis of the foregoing (relying as to materiality to
a large extent upon the opinions of Security First's officers and other
representatives of the Selling Fund), no facts have come to his attention that
lead him to believe that the Prospectus/Proxy Statement as of its date, as of
the date of the meeting of the shareholders of the Selling Fund, and as of the
Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Selling Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Selling Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to
information relating to the Acquiring Fund, contained in the Prospectus/Proxy
Statement or Registration Statement, and that such opinion is solely for the
benefit of the Trust and the Acquiring Fund.
Such opinion shall contain such other assumptions and limitations as
shall be in the opinion of Richard C. Pearson, Esq. appropriate to render the
opinions expressed therein and shall indicate, with respect to matters of
Massachusetts law that as Mr. Pearson is not admitted to the bar of
Massachusetts, such opinions are based either upon the review of published
statutes, cases and rules and regulations of the Commonwealth of Massachusetts
or upon an opinion of Massachusetts counsel.
In this paragraph 7.3, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Security First's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund or
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued and, to the best knowledge of the parties
hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act.
8.5 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP addressed to the Acquiring Fund and the Selling Fund substantially
to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets solely in
exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund
of the identified liabilities of the Selling Fund followed by the distribution
of the Acquiring Fund Shares to the Selling Fund Shareholders in dissolution and
liquidation of the Selling Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(F) of the Code, and the Acquiring Fund and the
Selling Fund will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the identified
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.5.
8.6 The Acquiring Fund shall have received from Deloitte & Touche LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus/Proxy Statement has been
obtained from and is consistent with the accounting records of the Selling Fund;
and
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the pro forma expense ratios appearing in the Registration
Statement and Prospectus/Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by the Selling Fund's
management and were found to be mathematically correct.
In addition, unless waived by the Acquiring Fund, the Acquiring Fund
shall have received from Deloitte & Touche LLP a letter addressed to the
Acquiring Fund dated on the Closing Date, in form and substance satisfactory to
the Acquiring Fund, to the effect that on the basis of limited procedures agreed
upon by the Acquiring Fund (but not an examination in accordance with generally
accepted auditing standards), the net asset value per share of the Selling Fund
as of the Valuation Date was computed and the valuation of the portfolio was
consistent with the valuation practices of the Acquiring Fund.
8.7 The Selling Fund shall have received from Deloitte & Touche LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus/Proxy Statement has been obtained
from and is consistent with the accounting records of the Acquiring Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the pro forma
expense ratios appearing in the Registration Statement and Prospectus/Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund, whether incurred before or after the date of this Agreement,
will be borne by Metropolitan Life Insurance Company or one of its affiliates.
Such expenses include, without limitation, (a) expenses incurred in connection
with the entering into and the carrying out of the provisions of this Agreement;
(b) expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus/Proxy
Statement to such shareholders; (d) postage; (e) printing; (f) accounting fees;
(g) legal fees; and (h) solicitation costs of the transaction. Notwithstanding
the foregoing, the Acquiring Fund shall pay its own federal and state
registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty, or agreement
contained herein to be performed at or prior to the Closing Date, if not cured
within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Security First, the respective
Trustees, or officers, to the other party or its Trustees, or officers, but each
shall bear the expenses incurred by it incidental to the preparation and
carrying out of this Agreement as provided in paragraph 9.1.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of shareholders of the Selling Fund pursuant to paragraph 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Acquiring Fund Shares to be issued to the Selling
Fund Shareholders under this Agreement to the detriment of such Shareholders
without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 With respect to both Security First and the Trust, the names used
herein refer respectively to the trust created and, as the case may be, the
Trustees, as trustees but not individually or personally, acting from time to
time under organizational documents filed in Massachusetts, in the case of
Security First, and Delaware, in the case of the Trust, which are hereby
referred to and are also on file at the principal offices of Security First or,
as the case may be, the Trust. The obligations of Security First or of the Trust
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents of Security First or the Trust, as the case may be,
are made not individually, but in such capacities, and are not binding upon any
of the Trustees, shareholders or representatives of Security First or, as the
case may be, the Trust personally, but bind only the trust property, and all
persons dealing with the Selling Fund or the Acquiring Fund must look solely to
the trust property belonging to the Selling Fund or, as the case may be, the
Acquiring Fund for the enforcement of any claims against the Selling Fund or, as
the case may be, the Acquiring Fund.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
SECURITY FIRST TRUST ON BEHALF OF
SERIES
By:
Name: Richard C. Pearson
Title: President
MET INVESTORS SERIES TRUST ON BEHALF OF
PORTFOLIO
By:
Name: Elizabeth M. Forget
Title: President
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of Assets of
BLACKROCK EQUITY SERIES
and
BLACKROCK U.S. GOVERNMENT INCOME SERIES
series of
SECURITY FIRST TRUST
11365 West Olympic Boulevard
Los Angeles, California 90064
(800) 283-4536
By and In Exchange For Shares of
BLACKROCK EQUITY PORTFOLIO
and
BLACKROCK U.S. GOVERNMENT INCOME PORTFOLIO
series of
MET INVESTORS SERIES TRUST
610 Newport Center Drive
Suite 1350
Newport Beach, California 92660
(800) 848-3854
This Statement of Additional Information, dated December 15, 2000,
relating specifically to the proposed transfer of the assets and liabilities of
BlackRock Equity Series and BlackRock U.S. Government Income Series (each an "SF
Portfolio" and together the "SF Portfolios"), series of Security First Trust, to
BlackRock Equity Portfolio and BlackRock U.S. Government Income Portfolio,
respectively (each a "Met Portfolio" and together the "Met Portfolios"), series
of Met Investors Series Trust, in exchange for Class A shares of beneficial
interest, $.001 par value per share, of the corresponding Met Portfolio (to be
issued to holders of shares of an SF Portfolio), consists of the information set
forth below pertaining to the Met Portfolios and the following described
documents, each of which is attached hereto and incorporated by reference
herein:
(1) The Statement of Additional Information of the SF Portfolios
dated November 30, 2000; and
(2) Annual Report of the SF Portfolios for the year ended July 31,
2000.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of the Met Portfolios and the SF Portfolios dated December 15, 2000. A
copy of the Prospectus/Proxy Statement may be obtained without charge by calling
or writing to the Met Portfolios or the SF Portfolios at the telephone numbers
or addresses set forth above.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Portfolios in the Prospectus.
Asset-Backed Securities (BlackRock Equity and BlackRock U.S. Government Income
Portfolios)
Asset-backed securities include interests in pools of receivables, such
as motor vehicle installment purchase obligations and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets.
Asset-backed securities are not issued or guaranteed by the U.S.
government or its agencies or government-sponsored entities; however, the
payment of principal and interest on such obligations may be guaranteed up to
certain amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities. In addition, such securities generally will have
remaining estimated lives at the time of purchase of five years or less. Due to
the possibility that prepayments (on automobile loans and other collateral) will
alter the cash flow on asset-backed securities, is not possible to determine in
advance the actual final maturity date or average life. Faster prepayment will
shorten the average life and shorter prepayments will lengthen it.
The purchase of asset-backed securities raises considerations peculiar
to the financing of the instruments underlying such securities. For example,
most organizations that issue asset-backed securities relating to motor vehicle
installment purchase obligations perfect their interests in their respective
obligations only by filing a financing statement and by having the servicer of
the obligations, which is usually the originator, take custody thereof. In such
circumstances, if the servicer were to sell the same obligations to another
party, in violation of its duty not to do so, there is a risk that such party
could acquire an interest in the obligations superior to that of holders of the
asset-backed securities. Also, although most such obligations grant a security
interest in the motor vehicle being financed, in most states the security
interest in a motor vehicle must be noted on the certificate of title to perfect
such security interest against competing claims of other parties. Due to the
large number of vehicles involved, however, the certificate of title to each
vehicle financed, pursuant to the obligations underlying the asset-backed
securities, usually is not amended to reflect the assignment of the seller's
security interest for the benefit of the holders of the asset-backed securities.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on those securities. In
addition, various state and federal laws give the motor vehicle owner the right
to assert against the holder of the owner's obligation certain defenses such
owner would have against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the related asset-backed securities. Insofar
as credit card receivables are concerned, credit card holders are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such holders the right to set off certain amounts against balances
owed on the credit card, thereby reducing the amounts paid on such receivables.
In addition, unlike most other asset-backed securities, credit card receivables
are unsecured obligations of the card holder.
Convertible Securities (BlackRock Equity Portfolio)
----------------------
The Portfolio may invest in convertible securities of domestic and,
subject to the Portfolio's investment strategy, foreign issuers. The convertible
securities in which the Portfolio may invest include any debt securities or
preferred stock which may be converted into common stock or which carry the
right to purchase common stock. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of
time.
Convertible securities may be converted at either a stated price or
stated rate into underlying shares of common stock. Although to a lesser extent
than with fixed-income securities, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
Convertible securities are investments that provide for a stable stream
of income with generally higher yields than common stocks. There can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
Subsequent to purchase by the Portfolio, convertible securities may
cease to be rated or a rating may be reduced below the minimum required for
purchase to that Portfolio. Neither event will require the sale of such
securities, although the Portfolio's investment adviser will consider will
consider such event in its determination of whether the Portfolio should
continue to hold the securities.
Depositary Receipts (BlackRock Equity Portfolio)
-------------------
The Portfolio may purchase foreign securities in the form of American
Depositary Receipts, European Depositary Receipts, Global Depositary Receipts or
other securities convertible into securities of corporations in which the
Portfolio is permitted to invest pursuant to its investment objectives and
policies. These securities may not necessarily be denominated in the same
currency into which they may be converted. Depositary receipts are receipts
typically issued by a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation. Because
American Depositary Receipts are listed on a U.S. securities exchange, the
Portfolio's investment adviser does not treat them as foreign securities.
However, like other depositary receipts, American Depositary Receipts are
subject to many of the risks of foreign securities such as changes in exchange
rates and more limited information about foreign issuers.
Dollar Roll Transactions (BlackRock U.S. Government Income Portfolio)
------------------------
The Portfolio may enter into "dollar roll" transactions, which consist
of the sale by the Portfolio to a bank or broker-dealer (the "counterparty") of
Government National Mortgage Association certificates, other mortgage-backed
securities or other fixed income securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The
Portfolio receives a fee from the counterparty as consideration for entering
into the commitment to purchase. Dollar rolls may be renewed over a period of
several months with a different repurchase price and a cash settlement made at
each renewal without physical delivery of securities. Moreover, the transaction
may be preceded by a firm commitment agreement pursuant to which the Portfolio
agrees to buy a security on a future date.
The Portfolio will not use such transactions for leveraging purposes
and, accordingly, will segregate cash, U.S. government securities or other
liquid assets in an amount sufficient to meet its purchase obligations under the
transactions. The Portfolio will also maintain asset coverage of at least 300%
for all outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the Investment Company Act of
1940, as amended ("1940 Act") as borrowings of the Portfolio because they
involve the sale of a security coupled with an agreement to repurchase. Like all
borrowings, a dollar roll involves costs to the Portfolio. For example, while
the Portfolio receives a fee as consideration for agreeing to repurchase the
security, the Portfolio forgoes the right to receive all principal and interest
payments while the counterparty holds the security. These payments to the
counterparty may exceed the fee received by the Portfolio, thereby effectively
charging the Portfolio interest on its borrowing. Further, although the
Portfolio can estimate the amount of expected principal prepayment over the term
of the dollar roll, a variation in the actual amount of prepayment could
increase or decrease the cost of the Portfolio's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Portfolio's right to
purchase from the counterparty might be restricted. Additionally, the value of
such securities may change adversely before the Portfolio is able to purchase
them. Similarly, the Portfolio may be required to purchase securities in
connection with a dollar roll at a higher price than may otherwise be available
on the open market. Since, as noted above, the counterparty is required to
deliver a similar, but not identical, security to the Portfolio, the security
that the Portfolio is required to buy under the dollar roll may be worth less
than an identical security. Finally, there can be no assurance that the
Portfolio's use of the cash that it receives from a dollar roll will provide a
return that exceeds borrowing costs.
Eurodollar and Yankee Dollar Obligations (BlackRock Equity and BlackRock U.S.
Government Income Portfolios)
Eurodollar bank obligations are U.S. dollar-denominated certificates of
deposit and time deposits issued outside the U.S. capital markets by foreign
branches of U.S. banks and by foreign banks. Yankee dollar bank obligations are
U.S. dollar-denominated obligations issued in the U.S. capital markets by
foreign banks.
Eurodollar and Yankee dollar obligations are subject to the same risks
that pertain to domestic issues, notably credit risk. Additionally, Eurodollar
(and to a limited extent, Yankee dollar) obligations are subject to certain
sovereign risks. One such risk is the possibility that a sovereign country might
prevent capital, in the form of dollars, from flowing across its borders. Other
risks include adverse political and economic developments; the extent and
quality of government regulation of financial markets and institutions; the
imposition of foreign withholding taxes; and the expropriation or
nationalization of foreign issuers.
Floaters (BlackRock U.S. Government Income Portfolio)
---------
The Portfolio may invest in floaters, which are fixed income securities
with a floating or variable rate of interest, i.e., the rate of interest varies
with changes in specified market rates or indices, such as the prime rate, or at
specified intervals. Certain floaters may carry a demand feature that permits
the holder to tender them back to the issuer of the underlying instrument, or to
a third party, at par value prior to maturity. When the demand feature of
certain floaters represents an obligation of a foreign entity, the demand
feature will be subject to certain risks discussed under "Foreign Securities."
Foreign Securities (BlackRock Equity Portfolio)
------------------
The Portfolio may invest in foreign equity and debt securities or U.S.
securities traded in foreign markets. In addition to securities issued by
foreign companies, permissible investments may also consist of obligations of
foreign branches of U.S. banks and of foreign banks, including European
certificates of deposit, European time deposits, Canadian time deposits, Yankee
certificates of deposit, Eurodollar bonds and Yankee bonds. The Portfolio may
also invest in Canadian commercial paper and Europaper. These instruments may
subject the Portfolio to additional investment risks from those related to
investments in obligations of U.S. issuers. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements than those applicable to domestic branches of U.S. banks.
Foreign investments involve certain risks that are not present in
domestic securities. For example, foreign securities may be subject to currency
risks or to foreign government taxes which reduce their attractiveness. There
may be less information publicly available about a foreign issuer than about a
U.S. issuer, and a foreign issuer is not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those in the U.S. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. The prices of such securities may be more volatile than those
of domestic securities. With respect to certain foreign countries, there is a
possibility of expropriation of assets or nationalization, imposition of
withholding taxes on dividend or interest payments, difficulty in obtaining and
enforcing judgments against foreign entities or diplomatic developments which
could affect investment in these countries. Losses and other expenses may be
incurred in converting between various currencies in connection with purchases
and sales of foreign securities.
Foreign stock markets are generally not as developed or efficient as,
and may be more volatile than, those in the U.S. While growing in volume, they
usually have substantially less volume than U.S. markets and a Portfolio's
investment securities may be less liquid and subject to more rapid and erratic
price movements than securities of comparable U.S. companies. Equity securities
may trade at price/earnings multiples higher than comparable U.S. securities and
such levels may not be sustainable. There is generally less government
supervision and regulation of foreign stock exchanges, brokers, banks and listed
companies abroad than in the U.S. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets. Such
differences may include delays beyond periods customary in the U.S. and
practices, such as delivery of securities prior to receipt of payment, which
increase the likelihood of a "failed settlement", which can result in losses to
a Portfolio.
The value of foreign investments and the investment income derived from
them may also be affected unfavorable by changes in currency exchange control
regulations. Although the Portfolios will invest only in securities denominated
in foreign currencies that are fully exchangeable into U.S. dollars without
legal restriction at the time of investment, there can be no assurance that
currency controls will not be imposed subsequently. In addition, the value of
foreign fixed income investments may fluctuate in response to changes in U.S.
and foreign interest rates.
Foreign brokerage commissions, custodial expenses and other fees are
also generally higher than for securities traded in the U.S. Consequently, the
overall expense ratios of international or global funds are usually somewhat
higher than those of typical domestic stock funds.
Fluctuations in exchange rates may also affect the earning power and
asset value of the foreign entity issuing a security, even one denominated in
U.S. dollars. Dividend and interest payments will be repatriated based on the
exchange rate at the time of disbursement, and restrictions on capital flows may
be imposed.
The debt obligations of foreign governments and entities may or may not
be supported by the full faith and credit of the foreign government. The
Portfolio may buy securities issued by certain "supra-national" entities, which
include entities designated or supported by governments to promote economic
reconstruction or development, international banking organizations and related
government agencies. Examples are the International Bank for Reconstruction and
Development (commonly called the "World Bank"), the Asian Development Bank and
the Inter-American Development Bank.
The governmental members of these supranational entities are
"stockholders" that typically make capital contributions and may be committed to
make additional capital contributions if the entity is unable to repay its
borrowings. A supra-national entity's lending activities may be limited to a
percentage of its total capital, reserves and net income. There can be no
assurance that the constituent foreign governments will continue to be able or
willing to honor their capitalization commitments for those entities.
The BlackRock Equity Portfolio does not expect that more than 5% of its
total assets will be invested in foreign securities.
Emerging Market Securities. Investments in emerging market country
securities involve special risks. Political and economic structures in many of
such countries may be undergoing significant evolution and rapid development,
and such countries may lack the social, political and economic stability
characteristic of more developed countries. Certain of such countries may have
in the past failed to recognize private property rights and have at times
nationalized or expropriated the assets of private companies. As a result, the
risks described above, including the risks of nationalization or expropriation
of assets, may be heightened. In addition, unanticipated political or social
developments may affect the values of a Portfolio's investments in those
countries and the availability to a Portfolio of additional investments in those
countries. The small size and inexperience of the securities markets in certain
of such countries and the limited volume of trading in securities in those
countries may make a Portfolio's investments in such countries illiquid and more
volatile than investment in more developed countries, and a Portfolio may be
required to establish special custodial or other arrangements before making
certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
Transaction costs in emerging markets may be higher than in the U.S.
and other developed securities markets. As legal systems in emerging markets
develop, foreign investors may be adversely affected by new or amended laws and
regulations or may not be able to obtain swift and equitable enforcement of
existing law.
The Portfolio may make investments denominated in emerging markets
currencies. Some countries in emerging markets also may have managed currencies,
which are not free floating against the U.S. dollar. In addition, emerging
markets are subject to the risk of restrictions upon the free conversion of
their currencies into other currencies. Any devaluations relative to the U.S.
dollar in the currencies in which the Portfolio's securities are quoted would
reduce the Portfolio's net asset value.
Certain emerging markets limit, or require governmental approval prior
to, investments by foreign persons. Repatriation of investment income and
capital from certain emerging markets is subject to certain governmental
consents. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect the operation of a Portfolio.
Forward Commitments, When-Issued and Delayed Delivery Securities (BlackRock
Equity and BlackRock U.S. Government Income Portfolios)
A Portfolio may purchase securities on a when-issued or delayed
delivery basis and may purchase or sell securities on a forward commitment
basis. Settlement of such transactions normally occurs within a month or more
after the purchase or sale commitment is made.
A Portfolio may purchase securities under such conditions only with the
intention of actually acquiring them, but may enter into a separate agreement to
sell the securities before the settlement date. Since the value of securities
purchased may fluctuate prior to settlement, the Portfolio may be required to
pay more at settlement than the security is worth. In addition, the purchaser is
not entitled to any of the interest earned prior to settlement.
Upon making a commitment to purchase a security on a when-issued,
delayed delivery or forward commitment basis the Portfolio will hold liquid
assets in a segregated account at the Portfolio's custodian bank worth at least
the equivalent of the amount due. The liquid assets will be monitored on a daily
basis and adjusted as necessary to maintain the necessary value.
Purchases made under such conditions may involve the risk that yields
secured at the time of commitment may be lower than otherwise available by the
time settlement takes place, causing an unrealized loss to the Portfolio. In
addition, when the Portfolio engages in such purchases, it relies on the other
party to consummate the sale. If the other party fails to perform its
obligations, the Portfolio may miss the opportunity to obtain a security at a
favorable price or yield. Although a Portfolio will generally enter into forward
commitments to purchase securities with the intention of actually acquiring the
security for its portfolio (or for delivery pursuant to options contracts it has
entered into), the Portfolio may dispose of a security prior to settlement if
its investment adviser deems it advisable to do so. The Portfolio may realize
short-term gains or losses in connection with such sales.
High Yield/High Risk Debt Securities (BlackRock Equity Portfolio)
------------------------------------
Certain lower rated securities purchased by a Portfolio, such as those
rated Ba or B by Moody's Investors Service, Inc. ("Moody's") or BB or B by
Standard & Poor's Ratings Services ("Standard & Poor's") (commonly known as junk
bonds), may be subject to certain risks with respect to the issuing entity's
ability to make scheduled payments of principal and interest and to greater
market fluctuations. While generally providing greater income than investments
in higher quality securities, lower quality fixed income securities involve
greater risk of loss of principal and income, including the possibility of
default or bankruptcy of the issuers of such securities, and have greater price
volatility, especially during periods of economic uncertainty or change. These
lower quality fixed income securities tend to be affected by economic changes
and short-term corporate and industry developments to a greater extent than
higher quality securities, which react primarily to fluctuations in the general
level of interest rates. To the extent that the Portfolio invests in such lower
quality securities, the achievement of its investment objective may be more
dependent on the investment adviser's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately a Portfolio's portfolio
securities for purposes of determining the Portfolio's net asset value.
In determining suitability of investment in a particular unrated
security, the investment adviser takes into consideration asset and debt service
coverage, the purpose of the financing, history of the issuer, existence of
other rated securities of the issuer, and other relevant conditions, such as
comparability to other issuers.
Hybrid Instruments (BlackRock Equity Portfolio)
------------------
Although there are no percentage limitations on the amount of assets
that may be invested in hybrid instruments, the investment adviser to the
Portfolio does not anticipate that such investments will exceed 5% of the
Portfolio's total assets. Hybrid instruments have recently been developed and
combine the elements of futures contracts or options with those of debt,
preferred equity or a depository instrument. Often these hybrid instruments are
indexed to the price of a commodity, 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 or securities index 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. Hybrid instruments may bear interest or pay dividends at below market
(or even relatively nominal) rates. Under certain conditions, the redemption
value of such an instrument could be zero. Hybrid instruments can have volatile
prices and limited liquidity and their use by a Portfolio may not be successful.
Illiquid Securities (BlackRock Equity and BlackRock U.S. Government Income
Portfolios)
Each Portfolio may invest up to 15% of its net assets in illiquid
securities and other securities which are not readily marketable, including
non-negotiable time deposits, certain restricted securities not deemed by the
Trust's Board of Trustees to be liquid and repurchase agreements with maturities
longer than seven days. Securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, which have been determined to be liquid, will
not be considered by the Portfolios' investment advisers to be illiquid or not
readily marketable and, therefore, are not subject to the aforementioned 15%
limit. The inability of a Portfolio to dispose of illiquid or not readily
marketable investments readily or at a reasonable price could impair the
Portfolio's ability to raise cash for redemptions or other purposes. The
liquidity of securities purchased by a Portfolio which are eligible for resale
pursuant to Rule 144A will be monitored by the Portfolios' investment advisers
on an ongoing basis, subject to the oversight of the Trustees. In the event that
such a security is deemed to be no longer liquid, a Portfolio's holdings will be
reviewed to determine what action, if any, is required to ensure that the
retention of such security does not result in a Portfolio having more than 15%
of its assets invested in illiquid or not readily marketable securities.
Interest Rate Transactions (BlackRock U.S. Government Income and BlackRock
Equity Portfolios)
Among the strategic transactions into which the Portfolios may enter
are interest rate swaps and the purchase or sale of related caps and floors. A
Portfolio expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. A Portfolio intends to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser, to the extent that a specific index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such cap. The purchase of a
floor entitles the purchaser to receive payments on a notional principal amount
from the party selling such floor to the extent that a specified index falls
below a predetermined interest rate or amount.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these swaps, caps
and floors are entered into for good faith hedging purposes, the investment
advisers to the Portfolios and the Trust believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. A Portfolio will not enter
into any swap, cap and floor transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least "A" by Standard & Poor's or
Moody's or has an equivalent rating from another nationally recognized
statistical rating organization ("NRSRO") or is determined to be of equivalent
credit quality by the investment adviser. For a description of the NRSROs and
their ratings, see the Appendix. If there is a default by the counterparty, a
Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
With respect to swaps, a Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps and floors require
segregation of assets with a value equal to the Portfolio's net obligations, if
any.
Investment Grade Corporate Debt Securities (BlackRock Equity Portfolio)
------------------------------------------
Debt securities are rated by NRSROs. Securities rated BBB by Standard &
Poor's or Baa by Moody's are considered investment grade securities, but are
somewhat riskier than higher rated investment grade obligations because they are
regarded as having only an adequate capacity to pay principal and interest, and
are considered to lack outstanding investment characteristics and may be
speculative. See the Appendix to this Statement of Additional Information for a
description of the various securities ratings.
Money Market Securities (BlackRock Equity and BlackRock U.S. Government Income
Portfolios)
Money market securities in which the Portfolios may invest include U.S.
government securities, U.S. dollar denominated instruments (such as bankers'
acceptances, commercial paper, domestic or Yankee certificates of deposit and
Eurodollar obligations) issued or guaranteed by bank holding companies in the
U.S., their subsidiaries and their foreign branches. These bank obligations may
be general obligations of the parent bank holding company or may be limited to
the issuing entity by the terms of the specific obligation or by government
regulation.
Other money market securities in which a Portfolio may invest also
include certain variable and floating rate instruments and participations in
corporate loans to corporations in whose commercial paper or other short-term
obligations a Portfolio may invest. Because the bank issuing the participations
does not guarantee them in any way, they are subject to the credit risks
generally associated with the underlying corporate borrower. To the extent that
a Portfolio may be regarded as a creditor of the issuing bank (rather than of
the underlying corporate borrower under the terms of the loan participation),
the Portfolio may also be subject to credit risks associated with the issuing
bank. The secondary market, if any, for these loan participations is extremely
limited and any such participations purchased by a Portfolio will be regarded as
illiquid.
A Portfolio may also invest in bonds and notes with remaining
maturities of thirteen months or less, variable rate notes and variable amount
master demand notes. A variable amount master demand note differs from ordinary
commercial paper in that it is issued pursuant to a written agreement between
the issuer and the holder, its amount may be increased from time to time by the
holder (subject to an agreed maximum) or decreased by the holder or the issuer,
it is payable on demand, the rate of interest payable on it varies with an
agreed formula and it is typically not rated by a rating agency. Transfer of
such notes is usually restricted by the issuer, and there is no secondary
trading market for them. Any variable amount master demand note purchased by a
Portfolio will be regarded as an illiquid security.
Generally, the Portfolios will invest only in high quality money market
instruments, i.e., securities which have been assigned the highest quality
ratings by NRSROs such as "A-1" by Standard & Poor's or "Prime-1" by Moody's, or
if not rated, determined to be of comparable quality by the Portfolio's
investment adviser.
Mortgage-Backed Securities (BlackRock U.S. Government Income and BlackRock
Equity Portfolios)
A mortgage-backed security may be an obligation of the issuer backed by
a mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Certain Portfolios may invest in collateralized mortgage obligations
("CMOs") and stripped mortgage-backed securities that represent a participation
in, or are secured by, mortgage loans. Some mortgage-backed securities, such as
CMOs, make payments of both principal and interest at a variety of intervals;
others make semi-annual interest payments at a predetermined rate and repay
principal at maturity (like a typical bond). Mortgage-backed securities are
based on different types of mortgages including those on commercial real estate
or residential properties.
CMOs may be issued by a U.S. government agency or instrumentality or by
a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by the
U.S. government or its agencies or instrumentalities, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
the U.S. government, its agencies or instrumentalities or any other person or
entity. Prepayments could cause early retirement of CMOs. CMOs are designed to
reduce the risk of prepayment for investors by issuing multiple classes of
securities (or "tranches"), each having different maturities, interest rates and
payment schedules, and with the principal and interest on the underlying
mortgages allocated among the several classes in various ways. Payment of
interest or principal on some classes or series of CMOs may be subject to
contingencies or some classes or series may bear some or all of the risk of
default on the underlying mortgages. CMOs of different classes or series are
generally retired in sequence as the underlying mortgage loans in the mortgage
pool are repaid. If enough mortgages are repaid ahead of schedule, the classes
or series of a CMO with the earliest maturities generally will be retired prior
to their maturities. Thus, the early retirement of particular classes or series
of a CMO held by a Portfolio would have the same effect as the prepayment of
mortgages underlying other mortgage-backed securities. Conversely, slower than
anticipated prepayments can extend the effective maturities of CMOs subjecting
them to a greater risk of decline in market value in response to rising interest
rates than traditional debt securities, and, therefore, potentially increasing
the volatility of a Portfolio that invests in CMOs.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities have yield and maturity
characteristics corresponding to the underlying assets. Unlike traditional debt
securities, which may pay a fixed rate of interest until maturity, when the
entire principal amount comes due, payments on certain mortgage-backed
securities include both interest and a partial repayment of principal. Besides
the scheduled repayment of principal, repayments of principal may result from
the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage
loans.
Mortgage-backed securities are subject to prepayment risk. Prepayment,
which occurs when unscheduled or early payments are made on the underlying
mortgages, may shorten the effective maturities of these securities and may
lower their returns. If property owners make unscheduled prepayments of their
mortgage loans, these prepayments will result in early payment of the applicable
mortgage-related securities. In that event, the Portfolios, may be unable to
invest the proceeds from the early payment of the mortgage-related securities in
an investment that provides as high a yield as the mortgage-related securities.
Consequently, early payment associated with mortgage-related securities may
cause these securities to experience significantly greater price and yield
volatility than that experienced by traditional fixed income securities. The
occurrence of mortgage prepayments is affected by factors including the level of
interest rates, general economic conditions, the location and age of the
mortgage and other social and demographic conditions. During periods of falling
interest rates, the rate of mortgage prepayments tends to increase, thereby
tending to decrease the life of mortgage-related securities. During periods of
rising interest rates, the rate of mortgage prepayments usually decreases,
thereby tending to increase the life of mortgage-related securities. If the life
of a mortgage-related security is inaccurately predicted, a Portfolio may not be
able to realize the rate of return it expected.
Mortgage-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. Prepayments may cause losses on securities purchased at a
premium. At times, some of the mortgage-backed securities in which a Portfolio
may invest will have higher than market interest rates and, therefore, will be
purchased at a premium above their par value. Unscheduled prepayments, which are
made at par, will cause a Portfolio to experience a loss equal to any
unamortized premium.
Stripped mortgage-backed securities are created when a U.S. government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The securities may be issued by agencies or instrumentalities of the
U.S. government and private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing. Stripped
mortgage-backed securities are usually structured with two classes that receive
different portions of the interest and principal distributions on a pool of
mortgage loans. The holder of the "principal-only" security ("PO") receives the
principal payments made by the underlying mortgage-backed security while the
holder of the "interest-only" security ("IO") receives interest payments from
the same underlying security. The Portfolios may invest in both the IO class and
the PO class. The prices of stripped mortgage-backed securities may be
particularly affected by changes in interest rates. The yield to maturity on an
IO class of stripped mortgage-backed securities is extremely sensitive not only
to changes in prevailing interest rates but also to the rate of the principal
payments (including prepayments) on the underlying assets. As interest rates
fall, prepayment rates tend to increase, which tends to reduce prices of IOs and
increase prices of POs. Rising interest rates can have the opposite effect.
Prepayments may also result in losses on stripped mortgage-backed
securities. A rapid rate of principal prepayments may have a measurable adverse
effect on a Portfolio's yield to maturity to the extent it invests in IOs. If
the assets underlying the IO experience greater than anticipated prepayments of
principal, a Portfolio may fail to recoup fully its initial investments in these
securities. Conversely, POs tend to increase in value if prepayments are greater
than anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolios' ability to buy and sell those securities at any
particular time.
Options and Futures Strategies (BlackRock Equity and BlackRock U.S. Government
Income Portfolios)
A Portfolio may seek to increase the current return on its investments
by writing covered call or covered put options. In addition, a Portfolio may at
times seek to hedge against either a decline in the value of its portfolio
securities or an increase in the price of securities which its investment
adviser plans to purchase through the writing and purchase of options including
options on stock indices and the purchase and sale of futures contracts and
related options. A Portfolio may utilize options or futures contracts and
related options for other than hedging purposes to the extent that the aggregate
initial margins and premiums do not exceed 5% of the Portfolio's net asset
value; provided, however, in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. Expenses and losses incurred as a result of such hedging strategies
will reduce a Portfolio's current return.
The ability of a Portfolio to engage in the options and futures
strategies described below will depend on the availability of liquid markets in
such instruments. Markets in options and futures with respect to stock indices
and U.S. government securities are relatively new and still developing. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore no assurance can be given that a
Portfolio will be able to utilize these instruments effectively for the purposes
stated below.
Writing Covered Options on Securities. A Portfolio may write covered
call options and covered put options on optionable securities of the types in
which it is permitted to invest from time to time as its investment adviser
determines is appropriate in seeking to attain the Portfolio's investment
objective. Call options written by a Portfolio give the holder the right to buy
the underlying security from the Portfolio at a stated exercise price; put
options give the holder the right to sell the underlying security to the
Portfolio at a stated price.
A Portfolio may only write call options on a covered basis or for
cross-hedging purposes and will only write covered put options. A put option
would be considered "covered" if the Portfolio owns 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. A call option is covered if the Portfolio owns or has
the right to acquire the underlying securities subject to the call option (or
comparable securities satisfying the cover requirements of securities exchanges)
at all times during the option period. A call option is for cross-hedging
purposes if it is not covered, but is designed to provide a hedge against
another security which the Portfolio owns or has the right to acquire. In the
case of a call written for cross-hedging purposes or a put option, the Portfolio
will maintain in a segregated account at the Fund's custodian bank liquid assets
with a value equal to or greater than the Portfolio's obligation under the
option. A Portfolio may also write combinations of covered puts and covered
calls on the same underlying security.
A Portfolio will receive a premium from writing an option, which
increases the Portfolio's return in the event the option expires unexercised or
is terminated 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 Portfolio
will limit 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 Portfolio will assume the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
price, resulting in a potential capital loss if the purchase price exceeds the
market price plus the amount of the premium received.
A Portfolio may terminate an option which 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. The Portfolio 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.
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 repurchase of a call option may be offset in whole or in part by
unrealized appreciation of the underlying security owned by the Portfolio.
Purchasing Put and Call Options on Securities. A Portfolio may purchase
put options to protect its portfolio holdings in an underlying security against
a decline in market value. This protection is provided during the life of the
put option since the Portfolio, as holder of the put, is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's market price. 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. By using put options in this manner, any profit which the Portfolio might
otherwise have realized on the underlying security will be reduced by the
premium paid for the put option and by transaction costs.
A Portfolio may also purchase a call option to hedge against an
increase in price of a security that it intends to purchase. This protection is
provided during the life of the call option since the Portfolio, as holder of
the call, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. For the
purchase of a call option to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
and transaction costs. By using call options in this manner, any profit which
the Portfolio might have realized had it bought the underlying security at the
time it purchased the call option will be reduced by the premium paid for the
call option and by transaction costs.
No Portfolio intends to purchase put or call options if, as a result of
any such transaction, the aggregate cost of options held by the Portfolio at the
time of such transaction would exceed 5% of its total assets
Purchase and Sale of Options and Futures on Stock Indices. A Portfolio
may purchase and sell options on stock indices and stock index futures contracts
either as a hedge against movements in the equity markets or for other
investment purposes.
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 times 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. Currently options traded include the Standard & Poor's 500
Composite Stock Price Index, the NYSE Composite Index, the AMEX Market Value
Index, the NASDAQ 100 Index, the Nikkei 225 Stock Average Index, the Financial
Times Stock Exchange 100 Index and other standard broadly based stock market
indices. Options are also traded in certain industry or market segment indices
such as the Pharmaceutical Index.
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 dollar
amount times 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.
If a Portfolio's investment adviser expects general stock market prices
to rise, it might purchase a call option on a stock index or a futures contract
on that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy for the Portfolio. If in fact the stock
index does rise, the price of the particular equity securities intended to be
purchased may also increase, but that increase would be offset in part by the
increase in the value of the Portfolio's index option or futures contract
resulting from the increase in the index. If, on the other hand, the Portfolio's
investment adviser expects general stock market prices to decline, it might
purchase a put option or sell a futures contract on the index. If that index
does in fact decline, the value of some or all of the equity securities held by
the Portfolio may also be expected to decline, but that decrease would be offset
in part by the increase in the value of the Portfolio's position in such put
option or futures contract.
Purchase and Sale of Interest Rate Futures. A Portfolio may purchase
and sell interest rate futures contracts on fixed income securities or indices
of such securities, including municipal indices and any other indices of fixed
income securities that may become available for trading either for the purpose
of hedging its portfolio securities against the adverse effects of anticipated
movements in interest rates or for other investment purposes.
A Portfolio may sell interest rate futures contracts in anticipation of
an increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the securities held by a Portfolio will fall, thus
reducing the net asset value of the Portfolio. This interest rate risk can be
reduced without employing futures as a hedge by selling such securities and
either reinvesting the proceeds in securities with shorter maturities or by
holding assets in cash. However, this strategy entails increased transaction
costs in the form of dealer spreads and brokerage commissions and would
typically reduce the Portfolio's average yield as a result of the shortening of
maturities.
The sale of interest rate futures contracts provides a means of hedging
against rising interest rates. As rates increase, the value of a Portfolio's
short position in the futures contracts will also tend to increase thus
offsetting all or a portion of the depreciation in the market value of the
Portfolio's investments that are being hedged. While the Portfolio will incur
commission expenses in selling and closing out futures positions (which is done
by taking an opposite position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
A Portfolio may purchase interest rate futures contracts in
anticipation of a decline in interest rates when it is not fully invested. As
such purchases are made, it is expected that an equivalent amount of futures
contracts will be closed out.
A Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and the underlying financial instrument. Futures exchanges and trading in the
U.S. are regulated under the Commodity Exchange Act by the 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.
Options on Futures Contracts. A Portfolio may purchase and write call
and put options on stock index and interest rate futures contracts. A Portfolio
may use such options on futures contracts in connection with its hedging
strategies in lieu of purchasing and writing options directly on the underlying
securities or stock indices or purchasing or selling the underlying futures. For
example, a Portfolio may purchase put options or write call options on stock
index futures or interest rate futures, rather than selling futures contracts,
in anticipation of a decline in general stock market prices or rise in interest
rates, respectively, or purchase call options or write put options on stock
index or interest rate futures, rather than purchasing such futures, to hedge
against possible increases in the price of equity securities or debt securities,
respectively, which the Portfolio intends to purchase.
In connection with transactions in stock index options, stock index
futures, interest rate futures and related options on such futures, a Portfolio
will be required to deposit as "initial margin" an amount of cash and short-term
U.S. government securities. The current initial margin requirements per contract
is range from approximately 2% to 10% of the contract amount. Thereafter,
subsequent payments (referred to as "variation margin") are made to and from the
broker to reflect changes in the value of the futures contract. Brokers may
establish deposit requirements higher than exchange minimums.
Limitations. A Portfolio will not purchase or sell futures contracts or
options on futures contracts or stock indices for non-hedging purposes if, as a
result, the sum of the initial margin deposits on its existing futures contracts
and related options positions and premiums paid for options on futures contracts
or stock indices would exceed 5% of the net assets of the Portfolio. In
addition, the BlackRock Equity Portfolio will not maintain open positions in
futures contracts it has sold or call options it has written on futures
contracts if, in the aggregate, the value of the open positions
(marked-to-market) exceeds the current market value of its securities portfolio
plus or minus the unrealized gain or loss on those open positions, adjusted for
the correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Portfolio will take
prompt action to close out a sufficient number of open contracts to bring its
open futures and options positions within this limitation.
Risks of Options and Futures Strategies. The effective use of options
and futures strategies depends, among other things, on a Portfolio's ability to
terminate options and futures positions at times when its investment adviser
deems it desirable to do so. Although a Portfolio will not enter into an option
or futures position unless its investment adviser believes that a liquid market
exists for such option or future, there can be no assurance that a Portfolio
will be able to effect closing transactions at any particular time or at an
acceptable price. The investment advisers generally expect that options and
futures transactions for the Portfolios will be conducted on recognized
exchanges. In certain instances, however, a Portfolio may purchase and sell
options in the over-the-counter market. The staff of the Securities and Exchange
Commission considers over-the-counter options to be illiquid. A Portfolio's
ability to terminate option positions established in the over-the-counter market
may be more limited than in the case of exchange traded options and may also
involve the risk that securities dealers participating in such transactions
would fail to meet their obligations to the Portfolio.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of the securities that are the subject of the hedge. The successful use of
these strategies also depends on the ability of a Portfolio's investment adviser
to forecast correctly interest rate movements and general stock market price
movements. This risk increases as the composition of the securities held by the
Portfolio diverges from the composition of the relevant option or futures
contract.
Other Investment Companies (Black Rock U.S. Government Income Portfolio)
--------------------------
In connection with its investments in accordance with the various
investment disciplines, the Portfolio may invest up to 10% of its total assets
in shares of other investment companies investing exclusively in securities in
which it may otherwise invest. Because of restrictions on direct investment by
U.S. entities in certain countries, other investment companies may provide the
most practical or only way for the Portfolio to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the 1940 Act. The Portfolio also may incur tax liability to
the extent it invests in the stock of a foreign issuer that is a "passive
foreign investment company" regardless of whether such "passive foreign
investment company" makes distributions to the Portfolio.
The Portfolio does not intend to invest in other investment companies
unless, in the investment adviser's judgment, the potential benefits exceed
associated costs. As a shareholder in an investment company, the Portfolio bears
its ratable share of that investment company's expenses, including advisory and
administration fees.
Portfolio Turnover
While it is impossible to predict portfolio turnover rates, the
investment adviser to the BlackRock U.S. Government Income Portfolio anticipates
that portfolio turnover may exceed 200% per year, exclusive of dollar roll
transactions. The portfolio turnover rate for BlackRock Equity Portfolio is not
anticipated to exceed 100% per year. Higher portfolio turnover rates usually
generate additional brokerage commissions and expenses.
Preferred Stocks (BlackRock Equity Portfolio)
----------------
The Portfolio may purchase preferred stock. Preferred stock, unlike
common stock, has a stated dividend rate payable from the corporation's
earnings. Preferred stock dividends may be cumulative or non-cumulative,
participating, or auction rate. "Cumulative" dividend provisions require all or
a portion of prior unpaid dividends to be paid.
If interest rates rise, the fixed dividend on preferred stocks may be
less attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, which can be a negative feature when interest
rates decline. Preferred stock also generally has a preference over common stock
on the distribution of a corporation's assets in the event of liquidation of the
corporation. Preferred stock may be "participating" stock, which means that it
may be entitled to a dividend exceeding the stated dividend in certain cases.
The rights of preferred stock on distribution of a corporation's assets in the
event of a liquidation are generally subordinate to the rights associated with a
corporation's debt securities.
Repurchase Agreements (BlackRock Equity and BlackRock U.S. Government Income
Portfolios)
Each of the Portfolios may enter into repurchase agreements with a
bank, broker-dealer, or other financial institution, but no Portfolio may invest
more than 15% of its net assets in illiquid securities, including repurchase
agreements having maturities of greater than seven days. A Portfolio may enter
into repurchase agreements, provided the Fund's custodian always has possession
of securities serving as collateral whose market value at least equals the
amount of the repurchase obligation. To minimize the risk of loss a Portfolio
will enter into repurchase agreements only with financial institutions which are
considered by its investment adviser to be creditworthy. If an institution
enters an insolvency proceeding, the resulting delay in liquidation of the
securities serving as collateral could cause a Portfolio some loss, as well as
legal expense, if the value of the securities declines prior to liquidation.
Reverse Repurchase Agreements (BlackRock U.S. Government Income Portfolio)
-----------------------------
The Portfolio may enter into reverse repurchase agreements with
brokers, dealers, domestic and foreign banks or other financial institutions. In
a reverse repurchase agreement, the Portfolio sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by the Portfolio. The Portfolio's investment of the proceeds
of a reverse repurchase agreement is the speculative factor known as leverage.
Leverage may cause any gains or losses of the Portfolio to be magnified. The
Portfolio may enter into a reverse repurchase agreement only if the interest
income from investment of the proceeds is greater than the interest expense of
the transaction and the proceeds are invested for a period no longer than the
term of the agreement. At the time a Portfolio enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an approved
custodian containing cash or other liquid securities having a value not less
than the repurchase price (including accrued interest). If interest rates rise
during a reverse repurchase agreement, it may adversely affect the Portfolio's
net asset value. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act.
The assets contained in the segregated account will be marked-to-market
daily and additional assets will be placed in such account on any day in which
the assets fall below the repurchase price (plus accrued interest). A
Portfolio's liquidity and ability to manage its assets might be affected when it
sets aside cash or portfolio securities to cover such commitments. Reverse
repurchase agreements involve the risk that the market value of the securities
retained in lieu of sale may decline below the price of the securities a
Portfolio has sold but is obligated to repurchase. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce a Portfolio's obligation to repurchase the
securities, and a Portfolio's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
Rights and Warrants (BlackRock Equity Portfolio)
-------------------
The Portfolio may purchase rights and warrants. Warrants basically are
options to purchase equity securities at specific prices valid for a specific
period of time. Their prices do not necessarily move parallel to the prices of
the underlying securities. Rights are similar to warrants, but normally have a
short duration and are distributed directly by the issuer to its shareholders.
Rights and warrants have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer. These investments carry the
risk that they may be worthless to the Portfolio at the time it may exercise its
rights, due to the fact that the underlying securities have a market value less
than the exercise price.
Securities Loans (BlackRock Equity and BlackRock U.S. Government Income
Portfolios)
All securities loans will be made pursuant to agreements requiring the
loans to be continuously secured by collateral in cash or high grade debt
obligations at least equal at all times to the market value of the loaned
securities. The borrower pays to the Portfolios an amount equal to any dividends
or interest received on loaned securities. The Portfolios retain all or a
portion of the interest received on investment of cash collateral or receive a
fee from the borrower. Lending portfolio securities involves risks of delay in
recovery of the loaned securities or in some cases loss of rights in the
collateral should the borrower fail financially.
Securities loans are made to broker-dealers or institutional investors
or other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the loaned securities marked-to-market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under a Portfolio's securities lending
program. While the securities are being loaned, a Portfolio will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. A Portfolio has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period for purchases and sales of
such securities in such foreign markets. A Portfolio will generally not have the
right to vote securities while they are being loaned, but its Manager or
investment adviser will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms deemed by a
Portfolio's investment adviser to be of good standing and will not be made
unless, in the judgment of the investment adviser, the consideration to be
earned from such loans would justify the risk.
Short Sales (BlackRock Equity and BlackRock U.S. Government Income Portfolios)
------------
A Portfolio may enter into a "short sale" of securities in
circumstances in which, at the time the short position is open, the Portfolio
owns an equal amount of the securities sold short or owns preferred stocks or
debt securities, convertible or exchangeable without payment of further
consideration, into an equal number of securities sold short. This kind of short
sale, which is referred to as one "against the box," may be entered into by each
Portfolio to, for example, lock in a sale price for a security the Portfolio
does not wish to sell immediately.
U.S. Government Securities (BlackRock Equity and BlackRock U.S. Government
Income Portfolios)
Securities issued or guaranteed as to principal and interest by the
U.S. government or its agencies and government-sponsored entities include U.S.
Treasury obligations, consisting of bills, notes and bonds, which principally
differ in their interest rates, maturities and times of issuance, and
obligations issued or guaranteed by agencies and government-sponsored entities
which are supported by (i) the full faith and credit of the U.S. Treasury (such
as securities of the Government National Mortgage Association), (ii) the limited
authority of the issuer to borrow from the U.S. Treasury (such as securities of
the Student Loan Marketing Association) or (iii) the authority of the U.S.
government to purchase certain obligations of the issuer (such as securities of
the Federal National Mortgage Association). No assurance can be given that the
U.S. government will provide financial support to U.S. government agencies or
government-sponsored entities as described in clauses (ii) or (iii) above in the
future, other than as set forth above, since it is not obligated to do so by
law.
INVESTMENT RESTRICTIONS
Fundamental Policies
The following investment restrictions are fundamental policies, which
may not be changed without the approval of a majority of the outstanding shares
of the Portfolio. As provided in the 1940 Act, a vote of a majority of the
outstanding shares necessary to amend a fundamental policy means the affirmative
vote of the lesser of (1) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the outstanding shares of the Portfolio are present
or represented by proxy, or (2) more than 50% of the outstanding shares of the
Portfolio.
1. Borrowing
Each Portfolio may not borrow money, except to the extent permitted by
applicable law.
2. Diversification
Each Portfolio may not purchase a security if, as a result, with
respect to 75% of the value of its total assets (i) more than 5% of the value of
the Portfolio's total assets would be invested in the securities of a single
issuer, except securities issued on guaranteed by the U.S. government, its
agencies and instrumentalities, or (ii) more than 10% of the outstanding voting
securities of any issuer would be held by the Portfolio, other than securities
issued by the U.S. government, its agencies and instrumentalities.
3. Concentration
Each Portfolio may not invest more than 25% of the value of its total
assets in any one industry, provided that this limitation does not apply to
obligations issued or guaranteed as to interest and principal by the U.S.
government, its agencies and instrumentalities, and repurchase agreements
secured by such obligations.
4. Underwriting
Each Portfolio may not underwrite securities issued by other persons,
except to the extent that in connection with the disposition of its portfolio
investments it may be deemed to be an underwriter under federal securities laws.
5. Real Estate
Each Portfolio may not purchase or sell real estate, although a
Portfolio may purchase securities of issuers which deal in real estate,
securities which are secured by interests in real estate and securities
representing interests in real estate; provided, however, that the Portfolio may
hold and sell real estate acquired as a result of the ownership of securities.
6. Commodities
Each Portfolio may not purchase or sell physical commodities, except
that it may (i) enter into futures contracts and options thereon in accordance
with applicable law and (ii) purchase or sell physical commodities if acquired
as a result of ownership of securities or other instruments. No Portfolio will
consider stock index futures contracts, currency contracts, hybrid investments,
swaps or other similar instruments to be commodities.
7. Loans
Each Portfolio may not make loans, except through the purchase of debt
obligations and the entry into repurchase agreements or through lending of its
portfolio securities. Any loans of portfolio securities will be made according
to guidelines established by the Securities and Exchange Commission and the
Trust's Board of Trustees.
8. Senior Securities
Each Portfolio may not issue any senior security (as defined in the
1940 Act) except in compliance with applicable law.
Non-Fundamental Policies
The following investment restrictions apply to each Portfolio, except
as noted. These restrictions may be changed for any Portfolio by the Trust's
Board of Trustees without a vote of that Portfolio's shareholders.
Each Portfolio may not:
(1) Purchase securities on margin, except that each Portfolio may:
(a) make use of any short-term credit necessary for clearance
of purchases and sales of portfolio securities and (b) make
initial or variation margin deposits in connection with
futures contracts, options, currencies, or other permissible
investments;
(2) Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness,
except as may be necessary in connection with permissible
borrowings or investments; and then such mortgaging, pledging
or hypothecating may not exceed 33 1/3 % of the respective
total assets of each Portfolio. The deposit of underlying
securities and other assets in escrow and collateral
arrangements with respect to margin accounts for futures
contracts, options, currencies or other permissible
investments are not deemed to be mortgages, pledges, or
hypothecations for these purposes;
(3) Purchase participations or other direct interests in or enter
into leases with respect to oil, gas, or other mineral
explorations or development programs, except that the
Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development
activities or hold mineral leases acquired as a result of its
ownership of securities;
(4) Invest in companies for the purpose of exercising management or
control.
The BlackRock Equity Portfolio will not invest more than 5% of the
Portfolio's net assets in warrants, including those acquired in units or
attached to other securities. For purposes of the policy, warrants will be
valued at the lower of cost or market, except that warrants acquired by the
Portfolio in units with or attached to securities may be deemed to be without
value.
With respect to borrowing, each Portfolio may borrow from banks and
enter into reverse repurchase agreements in an amount up to 33 1/3% of its total
assets, taken at market value. Each Portfolio may also borrow up to an
additional 5% of its total assets from banks or others. A Portfolio may borrow
only as a temporary measure for extraordinary or emergency purposes such as the
redemption of Portfolio shares. A Portfolio may purchase additional securities
so long as borrowings do not exceed 5% of its total assets.
With respect to loans of portfolio securities, as a matter of operating
policy, each Portfolio will limit the aggregate of such loans to 33 1/3% of the
value of the Portfolio's total assets.
With respect to when-issued and delayed delivery securities, it is the
policy of all Portfolios permitted to invest in such securities, to not enter
into when-issued commitments exceeding in the aggregate 15% of the market value
of the Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments.
With respect to swaps, a Portfolio will not enter into any swap, cap,
floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poor's or Moody's or has
an equivalent equity rating from an NRSRO or is determined to be of equivalent
credit quality of the Portfolio's investment adviser.
PERFORMANCE INFORMATION
Total return and yield will be computed as described below.
Total Return
Each Portfolio's "average annual total return" figures described and
shown in the Prospectus are computed according to a formula prescribed by the
Securities and Exchange Commission. The formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1000 payment made at the
beginning of the 1, 5, or 10 years (or other) periods at the end of the 1, 5, or
10 years (or other) periods (or fractional portion thereof).
The calculations of total return assume the reinvestment of all
dividends and capital gain distributions on the reinvestment dates during the
period and the deduction of all recurring expenses that were charged to
shareholders' accounts. The total return figures do not reflect charges and
deductions which are, or may be, imposed under the Contracts.
The performance of each Portfolio will vary from time to time in
response to fluctuations in market conditions, interest rates, the composition
of the Portfolio's investments and expenses. Consequently, a Portfolio's
performance figures are historical and should not be considered representative
of the performance of the Portfolio for any future period.
Yield
From time to time, the Trust may quote the BlackRock U.S. Government
Income Portfolio's yield and effective yield in advertisements or in reports or
other communications to shareholders. Yield quotations are expressed in
annualized terms and may be quoted on a compounded basis.
The 30-day yield for the Trust's other fixed income Portfolios will be
calculated according to a formula prescribed by the Securities and Exchange
Commission. The formula can be expressed as follows:
YIELD = 2[(a-b+1)6-1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the net asset value per share on the last day of the
period
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by the Portfolio at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Yield information is useful in reviewing a Portfolio's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Portfolios'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a
Portfolio from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of the Portfolio's
investments, thereby reducing the current yield of the Portfolio. In periods of
rising interest rates, the opposite can be expected to occur.
Non-Standardized Performance
In addition to the performance information described above, the Trust
may provide total return information with respect to the Portfolios for
designated periods, such as for the most recent six months or most recent twelve
months. This total return information is computed as described under "Total
Return" above except that no annualization is made.
PORTFOLIO TRANSACTIONS
Subject to the supervision and control of the Manager and the Trustees
of the Trust, each Portfolio's Adviser is responsible for decisions to buy and
sell securities for its account and for the placement of its portfolio business
and the negotiation of commissions, if any, paid on such transactions. Brokerage
commissions are paid on transactions in equity securities traded on a securities
exchange and on options, futures contracts and options thereon. Fixed income
securities and certain equity securities in which the Portfolios invest are
traded in the over-the-counter market. These securities are generally traded on
a net basis with dealers acting as principal for their own account without a
stated commission, although prices of such securities usually include a profit
to the dealer. In over-the-counter transactions, orders are placed directly with
a principal market maker unless a better price and execution can be obtained by
using a broker. In underwritten offerings, securities are usually purchased at a
fixed price which includes an amount of compensation to the underwriter
generally referred to as the underwriter's concession or discount. Certain money
market securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid. U.S. government securities are generally
purchased from underwriters or dealers, although certain newly-issued U.S.
government securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality. Each Portfolio's Adviser is responsible
for effecting its portfolio transactions and will do so in a manner deemed fair
and reasonable to the Portfolio and not according to any formula. The primary
consideration in all portfolio transactions will be prompt execution of orders
in an efficient manner at a favorable price. In selecting broker-dealers and
negotiating commissions, an Adviser considers the firm's reliability, the
quality of its execution services on a continuing basis and its financial
condition. When more than one firm is believed to meet these criteria,
preference may be given to brokers that provide the Portfolios or their Advisers
with brokerage and research services within the meaning of Section 28(e) of the
Securities Exchange Act of 1934. Each Portfolio's investment adviser is of the
opinion that, because this material must be analyzed and reviewed, its receipt
and use does not tend to reduce expenses but may benefit the Portfolio by
supplementing the Adviser's research.
An Adviser, subject to seeking the most favorable price and best
execution and in compliance with the Conduct Rules of the National Association
of Securities Dealers, Inc., may consider sales of shares of the Trust as a
factor in the selection of broker-dealers. The Trust may direct the Manager to
cause the Adviser to effect securities transactions through broker-dealers in a
manner that would help to generate resources to (i) pay the cost of certain
expenses which the Trust is required to pay or for which the Trust is required
to arrange payment pursuant to the management agreement with the Manager ("Trust
Expenses"); or (ii) finance activities that are primarily intended to result in
the sale of Trust shares. At the discretion of the Board of Trustees, such
resources may be used to pay or cause the payment of Trust Expenses or may be
used to finance activities that are primarily intended to result in the sale of
Trust shares.
An Adviser may effect portfolio transactions for other investment
companies and advisory accounts. Research services furnished by broker-dealers
through which a Portfolio effects its securities transactions may be used by the
Portfolio's Adviser in servicing all of its accounts; not all such services may
be used in connection with the Portfolio. In the opinion of each Adviser, it is
not possible to measure separately the benefits from research services to each
of its accounts, including a Portfolio. Whenever concurrent decisions are made
to purchase or sell securities by a Portfolio and another account, the
Portfolio's Adviser will attempt to allocate equitably portfolio transactions
among the Portfolio and other accounts. In making such allocations between the
Portfolio and other accounts, the main factors to be considered are the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Portfolio and the other
accounts. In some cases this procedure could have an adverse effect on a
Portfolio. In the opinion of each Adviser, however, the results of such
procedures will, on the whole, be in the best interest of each of the accounts.
The following table shows the amounts of brokerage commissions paid by
each Portfolio's predecessor fund during the fiscal years ended July 31, 2000,
July 31, 1999 and July 31, 1998.
Brokerage Commissions Paid
Portfolio 2000 1999 1998
--------- ---- ---- ----
BlackRock Equity $97,806 $28,759 $109,018
BlackRock U.S. Government Income 0 0 0
MANAGEMENT OF THE TRUST
The Trust is supervised by a Board of Trustees that is responsible for
representing the interests of shareholders. The Trustees meet periodically
throughout the year to oversee the Portfolios' activities, reviewing, among
other things, each Portfolio's performance and its contractual arrangements with
various service providers.
Trustees and Officers
The Trustees and executive officers of the Trust, their ages and their
principal occupations during the past five years are set forth below. Unless
otherwise indicated, the business address of each is 610 Newport Center Drive,
Suite 1350, Newport Beach, California 92660.
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name, Age and Address Held with Registrant During Past 5 Years
--------------------- -------------------- -------------------
<S> <C> <C>
Elizabeth M. Forget* (34) President and Trustee Since July 2000, President of Met
========================== =====================
Investors Advisory Corp.; from June 1996
to July 2000, President and Director of
Marketing and Product Development of
Equitable Distributors, Inc.; from
September 1993 to June 1996, a Vice
President of Bankers Trust Company
Stephen M. Alderman (41) Trustee Partner in the law firm of Garfield and
========================= ======= =======================================
Merel, Ltd.
Jack R. Borsting (71) Trustee Since 1995, Executive Director, Center
====================== ======= ======================================
for Telecommunications Management,
==================================
University of Southern California;
==================================
Director, Northrup Grumman Corp., Plato
=======================================
Learning, Inc. and Whitman Education Group
==========================================
Gregory P. Brakovich* (48) Trustee Since April 2000, Co-Chief Executive
=========================== ======= ====================================
Officer of Security First Group, Inc.,
======================================
MetLife Distributors, Inc. and Met
==================================
Investors Advisory Corp.; from April 1996
=========================================
to April 2000, Co-Chief Executive Officer
=========================================
and President of Equitable Distributors,
========================================
Inc. and Senior Vice President of the
=====================================
Equitable Life Assurance Society of the
=======================================
United States; from February 1995 to
====================================
April 1996, Managing Director, Bankers
======================================
Trust Company
=============
Theodore A. Myers (70) Trustee Since 1993, Financial Consultant; Trustee
======================= ======= =========================================
of various Van Kampen American Capital
closed-end funds
Tod A. Parrott (63) Trustee Since June 1996, Managing Partner,
==================== ======= ==================================
Rockaway Partners Ltd. (financial
=================================
consultants); from 1990 to May 1996,
====================================
Executive Vice President of Pasadena
====================================
Capital Corporation; Director, U.S. Stock
=========================================
Transfer Co.
============
Dawn M. Vroegop (34) Trustee Since September 1999, Managing Director,
===================== ======= ========================================
Dresner RCM Global Investors; from July
=======================================
1994 to July 1999, Director, Schroder
=====================================
Capital Management International
================================
Roger T. Wickers (65) Trustee Since 1995, retired; from 1980 to 1995,
====================== ======= =======================================
Senior Vice President and General
=================================
Counsel, Keystone Group Inc. and the
====================================
Keystone Group of Mutual Funds; from 1995
=========================================
to 1998, Chairman of the Board of
=================================
Directors of two American International
=======================================
Group mutual funds
==================
Richard C. Pearson (57) Vice President and Since November 2000, Vice President,
======================== =================== ====================================
Secretary General Counsel and Secretary of Met
========= ====================================
Investors Advisory Corp.; since prior to
1995, President of Security First Group,
Inc. and officer of its subsidiaries
Mark Reynolds (50) Vice President, Chief Since November 2000, Vice President and
=============== =================================
Financial Officer and Chief Financial Officer of Met Investors
Treasurer Advisory Corp; since June 2000, President
====================
of Cova Financial Services Life Insurance
Company; from July 1996 to June 2000,
Executive Vice President and Chief
Financial Officer of Cova Financial
Services Life Insurance Company; from
December 1993 to June 1996, Vice
President, Treasurer and Controller of
First Variable Life Insurance Company and
from August 1993 to June 1996, Vice
President and Director of First Variable
Capital Services, Inc.
</TABLE>
* "Interested person" of the Trust (as that term is defined in the 1940 Act).
Committees of the Board
The Trust has a standing Audit Committee consisting of all of the
Trustees who are not "interested persons" of the Trust (as that term is defined
in the 1940 Act) ("Disinterested Trustees"). The Audit Committee's function is
to recommend to the Board independent accountants to conduct the annual audit of
the Trust's financial statements; review with the independent accountants the
outline, scope and results of the annual audit; and review the performance and
fees charged by the independent accountants for professional services. In
addition, the Audit Committee meets with the independent accountants and
representatives of management to review accounting activities and areas of
financial reporting and control.
The Trust has a Nominating and Compensation Committee consisting of all
the Disinterested Trustees. The Nominating and Compensation Committee's function
is to nominate and evaluate independent trustee candidates and review the
compensation arrangement for each of the Trustees.
The Trust has a Valuation Committee consisting of Elizabeth M. Forget,
James A. Shepherdson, Mark Reynolds, and such other officers of the Trust and
the Manager, as well as such officers of any Adviser to any Portfolio as are
deemed necessary by Ms. Forget, Mr. Shepherdson or Mr. Reynolds from time to
time, each of whom shall serve at the pleasure of the Board of Trustees as
members of the Valuation Committee. This committee determines the value of any
of the Trust's securities and assets for which market quotations are not readily
available or for which valuation cannot otherwise be provided.
Compensation of the Trustees
Each Trustee, who is not an employee of the Manager or any of its
affiliates, currently receives from the Trust an annual fee of $20,000 plus (i)
an additional fee of $2,000 for each regularly scheduled Board meeting attended,
(ii) $2,000 for each special Board meeting attended, (iii) $1,000 for each
special committee meeting attended, and (iv) $500 for each telephone meeting
attended, plus reimbursement for expenses in attending in-person meetings.
A deferred compensation plan for the benefit of the Trustees has been
adopted by the Trust. Under the deferred compensation plan, each Trustee may
defer payment of all or part of the fees payable for such Trustee's services.
Each Trustee may defer payment of such fees until his or her retirement as a
Trustee or until the earlier attainment of a specified age. Fees deferred under
the deferred compensation plan, together with accrued interest thereon, will be
disbursed to a participating Trustee in monthly installments over a five to 20
year period elected by such Trustee.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his duties. The Trust, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
As of the date of this Statement of Additional Information, the
officers and Trustees of the Trust as a group owned less than 1% of the
outstanding shares of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
The Manager
The Trust is managed by Met Investors Advisory Corp. (the "Manager")
(formerly known as Security First Investment Management Corporation) which,
subject to the supervision and direction of the Trustees of the Trust, has
overall responsibility for the general management and administration of the
Trust. Security First Group, Inc., an affiliate of Metropolitan Life Insurance
Company, owns all of the outstanding common shares of the Manager and MetLife
Distributors, Inc.
The Trust and Manager have entered into a Management Agreement dated
December 8, 2000 ("Management Agreement"), which was initially approved by the
Board of Trustees on December 7, 2000 and by Security First Life Insurance
Company, as initial shareholder of the Trust, on December 8, 2000. Subject
always to the supervision and direction of the Trustees of the Trust, under the
Management Agreement the Manager will have (i) overall supervisory
responsibility for the general management and investment of each Portfolio's
assets; (ii) full discretion to select new or additional Advisers for each
Portfolio; (iii) full discretion to enter into and materially modify investment
advisory agreements with Advisers; (iv) full discretion to terminate and replace
any Adviser; and (v) full investment discretion to make all determinations with
respect to the investment of a Portfolio's assets not then managed by an
Adviser. In connection with the Manager's responsibilities under the Management
Agreement, the Manager will assess each Portfolio's investment focus and will
seek to implement decisions with respect to the allocation and reallocation of
each Portfolio's assets among one or more current or additional Advisers from
time to time, as the Manager deems appropriate, to enable each Portfolio to
achieve its investment goals. In addition, the Manager will monitor compliance
of each Adviser with the investment objectives, policies and restrictions of any
Portfolio or Portfolios (or portions of any Portfolio) under the management of
such Adviser, and review and report to the Trustees of the Trust on the
performance of each Adviser. The Manager will furnish, or cause the appropriate
Adviser(s) to furnish, to the Trust such statistical information, with respect
to the investments that a Portfolio (or portions of any Portfolio) may hold or
contemplate purchasing, as the Trust may reasonably request. On the Manager's
own initiative, the Manager will apprise, or cause the appropriate Adviser(s) to
apprise, the Trust of important developments materially affecting each Portfolio
(or any portion of a Portfolio that they advise) and will furnish the Trust,
from time to time, with such information as may be appropriate for this purpose.
Further, the Manager agrees to furnish, or cause the appropriate Adviser(s) to
furnish, to the Trustees of the Trust such periodic and special reports as the
Trustees of the Trust may reasonably request. In addition, the Manager has
agreed to cause the appropriate Adviser(s) to furnish to third-party data
reporting services all currently available standardized performance information
and other customary data.
Under the Management Agreement, the Manager also is required to furnish
to the Trust, at its own expense and without remuneration from or other cost to
the Trust, the following:
o Office space, all necessary office facilities and equipment.
o Necessary executive and other personnel, including personnel for the
performance of clerical and other office functions, other than those
functions:
o related to and to be performed under the Trust's contract or contracts
for administration, custodial, accounting, bookkeeping, transfer and
dividend disbursing agency or similar services by the entity selected
to perform such services; or
o related to the investment advisory services to be provided by any
Adviser pursuant to an investment advisory agreement with the Manager
("Advisory Agreement").
o Information and services, other than services of outside counsel or
independent accountants or investment advisory services to be provided by
any Adviser under an Advisory Agreement, required in connection with the
preparation of all registration statements, prospectuses and statements of
additional information, any supplements thereto, annual, semi-annual, and
periodic reports to Trust shareholders, regulatory authorities, or others,
and all notices and proxy solicitation materials, furnished to shareholders
or regulatory authorities, and all tax returns.
As compensation for these services the Trust pays the Manager a monthly
fee at the following annual rates of each Portfolio's average daily net assets:
BlackRock Equity Portfolio - 0.65%, and BlackRock U.S. Government Income
Portfolio - 0.55%. From the management fees, the Manager pays the expenses of
providing investment advisory services to the Portfolios, including the fees of
the Adviser of each Portfolio.
In addition to the management fees, the Trust pays all expenses not
assumed by the Manager, including, without limitation, charges for the services
and expenses of the independent accountants and legal counsel retained by the
Trust, for itself and its Disinterested Trustees, accounting and auditing
services, interest, taxes, costs of printing and distributing reports to
shareholders, proxy materials and prospectuses, charges of its administrator,
custodian, transfer agent and dividend disbursing agent, registration fees, fees
and expenses of the Trustees who are not affiliated persons of the Manager,
insurance, brokerage costs, litigation, and other extraordinary or nonrecurring
expenses. All general Trust expenses are allocated among and charged to the
assets of the Portfolios of the Trust on a basis that the Trustees deem fair and
equitable, which may be on the basis of relative net assets of each Portfolio or
the nature of the services performed and relative applicability to each
Portfolio. In addition, as discussed below under "Distribution of the Trust's
Shares," the Class B shares of each Portfolio may pay for certain distribution -
related expenses in connection with activities primarily intended to result in
the sale of its shares.
The Management Agreement continues in force for two years from its
commencement date, with respect to each Portfolio, and from year to year
thereafter, but only so long as its continuation as to each Portfolio is
specifically approved at least annually (i) by the Trustees or by the vote of a
majority of the outstanding voting securities of the Portfolio, and (ii) by the
vote of a majority of the Disinterested Trustees, by votes cast in person at a
meeting called for the purpose of voting on such approval. The Management
Agreement provides that it shall terminate automatically if assigned, and that
it may be terminated as to any Portfolio without penalty by the Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Portfolio upon 60 days' prior written notice to the Manager, or by the Manager
upon 90 days' prior written notice to the Trust, or upon such shorter notice as
may be mutually agreed upon.
It is anticipated that the Trust will commence operations on or about
February 5, 2001. The following table shows the fees paid by each of the
Portfolios' predecessors to the Manager or current affiliates of the Manager and
any fee waivers or reimbursements during the fiscal years ended July 31, 2000,
July 31, 1999 and July 31, 1998.
<TABLE>
<CAPTION>
2000
<S> <C> <C> <C>
---------------------------------------------------------
Investment Investment Other Expenses
Management Fee Management Fee Reimbursed
---- ---- ----------
Portfolio Paid Waived
--------- ---- ------
BlackRock Equity $418,720 --- ---
BlackRock U.S. Government Income $178,490 --- ---
1999
---------------------------------------------------------
Investment Investment Other Expenses
Management Fee Management Fee Reimbursed
---- ---- ----------
Portfolio Paid Waived
--------- ---- ------
BlackRock Equity $390,010 --- ---
BlackRock U.S. Government Income $185,159 --- ---
1998
---------------------------------------------------------
Investment Investment Other Expenses
Management Fee Management Fee Reimbursed
---- ---- ----------
Portfolio Paid Waived
--------- ---- ------
BlackRock Equity $437,078 $20,111 ---
BlackRock U.S. Government Income $258,431 $82,952 ---
</TABLE>
The Adviser
Pursuant to an Advisory Agreement with the Manager, each Adviser to a
Portfolio furnishes continuously an investment program for the Portfolio, makes
investment decisions on behalf of the Portfolio, places all orders for the
purchase and sale of investments for the Portfolio's account with brokers or
dealers selected by such Adviser and may perform certain limited related
administrative functions in connection therewith. For its services, the Manager
pays each Adviser a fee based on a percentage of the average daily net assets of
the Portfolios.
Each Advisory Agreement will continue in force for one year from its
commencement date, and from year to year thereafter, but only so long as its
continuation as to a Portfolio is specifically approved at least annually (i) by
the Trustees or by the vote of a majority of the outstanding voting securities
of the Portfolio, and (ii) by the vote of a majority of the Disinterested
Trustees by votes cast in person at a meeting called for the purpose of voting
on such approval. Each Advisory Agreement provides that it shall terminate
automatically if assigned or if the Management Agreement with respect to the
related Portfolio terminates, and that it may be terminated as to a Portfolio
without penalty by the Manager, by the Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Portfolio on not less than
60 days' prior written notice to the Adviser or by the Adviser on not less than
90 days' prior written notice to the Manager, or upon such shorter notice as may
be mutually agreed upon.
Each Advisory Agreement provides that the Adviser shall not be subject
to any liability to the Trust or the Manager for any act or omission in the
course of or connected with rendering services thereunder in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties on the part of the Adviser.
The Trust and the Manager have applied for an exemptive order from the
Securities and Exchange Commission ("Multi-Manager Order"). The Multi-Manager
Order will permit the Manager, subject to approval of the Board of Trustees, to:
(i) select new or additional Advisers for the Trust's Portfolios; (ii) enter
into new investment advisory agreements and materially modify existing
investment advisory agreements; and (iii) terminate and replace the Advisers
without obtaining approval of the relevant Portfolio's shareholders. However,
the Manager may not enter into an investment advisory agreement with an
"affiliated person" of the Manager (as that term is defined in Section 2(a)(3)
of the 1940 Act) ("Affiliated Adviser") unless the investment advisory agreement
with the Affiliated Adviser, including compensation hereunder, is approved by
the affected Portfolio's shareholders, including, in instances in which the
investment advisory agreement pertains to a newly formed Portfolio, the
Portfolio's initial shareholder. Although shareholder approval would not be
required for the termination of Advisory Agreements, shareholders of a Portfolio
would continue to have the right to terminate such agreements for the Portfolio
at any time by a vote of a majority of outstanding voting securities of the
Portfolio. No assurance can be given that the Trust and the Manager will receive
the Multi-Manager Order.
BlackRock Advisors, Inc. is the Adviser to the BlackRock Equity and
BlackRock U.S. Government Income Portfolios.
The following table shows the fees paid to the Adviser by the Manager
or current affiliates of the Manager for the fiscal years ended July 31, 2000,
July 31, 1999 and July 31, 1998.
Advisory Fee Paid
Portfolio 2000 1999 1998
--------- ---- ---- ----
BlackRock Equity $329,031 $306,436 $337,420
BlackRock U.S. Government Income $129,811 $134,661 $125,532
The Administrator
Pursuant to an administration agreement ("Administrative Services
Agreement"), Investors Bank & Trust Company ("Administrator") assists the
Manager in the performance of its administrative services to the Trust and
provides the Trust with other necessary administrative services. In addition,
the Administrator makes available the office space, equipment, personnel and
facilities required to provide such administrative services to the Trust.
The Administrator was organized as a Massachusetts trust company. Its
principal place of business is at 200 Clarendon Street, Boston, Massachusetts
02117. Under the Administrative Services Agreement, the Administrator is
entitled to a fee from the Trust, which is calculated daily and paid monthly, at
an annual rate of 0.06% of the average daily net assets of the Trust. The
Administrative Services Agreement shall remain in effect until July 1, 2001 and
shall thereafter continue in effect for successive periods of one year, unless
terminated by any party upon not less than ninety (90) days' prior written
notice to the other party.
The Distributor
The Trust has distribution agreements with MetLife Distributors, Inc.
("MDI" or the "Distributor") in which MDI serves as the Distributor for the
Trust's Class A shares and Class B shares. MDI is an indirect wholly-owned
subsidiary of Security First Group, Inc., which is an indirect wholly-owned
subsidiary of Metropolitan Life Insurance Company. MDI's address is 610 Newport
Center Drive, Suite 1350, Newport Beach, California 92660.
The Trust's distribution agreements with respect to the Class A and
Class B shares ("Distribution Agreements") were approved by the Board of
Trustees at a Board meeting held on December 7, 2000. The Distribution
Agreements will remain in effect from year to year provided each Distribution
Agreement's continuance is approved annually by (i) a majority of the Trustees
who are not parties to such agreement or "interested persons" (as defined in the
1940 Act) of the Trust or a Portfolio and, if applicable, who have no direct or
indirect financial interest in the operation of the Class B Distribution Plan or
any such related agreement and (ii) either by vote of a majority of the Trustees
or a majority of the outstanding voting securities (as defined in the 1940 Act)
of the Trust.
The Distributor or its affiliates for the Class A shares will pay for
printing and distributing prospectuses or reports prepared for their use in
connection with the offering of the Class A shares to prospective contract
owners and preparing, printing and mailing any other literature or advertising
in connection with the offering of the Class A shares to prospective contract
owners.
Pursuant to the Class B Distribution Plan, the Trust compensates the
Distributor from assets attributable to the Class B and shares for services
rendered and expenses borne in connection with activities primarily intended to
result in the sale of the Trust's Class B shares. It is anticipated that a
portion of the amounts received by the Distributor will be used to defray
various costs incurred or paid by the Distributor in connection with the
printing and mailing of Trust prospectuses, statements of additional information
and any supplements thereto and shareholder reports, and holding seminars and
sales meetings with wholesale and retail sales personnel designed to promote the
distribution of Class B shares. The Distributor may also use a portion of the
amounts received to provide compensation to financial intermediaries and
third-party broker-dealers for their services in connection with the
distribution of the Class B shares.
The Class B Distribution Plan provides that the Trust, on behalf of
each Portfolio, may pay annually up to 0.50% of the average daily net assets of
a Portfolio attributable to its Class B shares in respect to activities
primarily intended to result in the sale of Class B shares. However, under the
Distribution Agreement, payments to the Distributor for activities pursuant to
the Class B Distribution Plan are limited to payments at an annual rate equal to
0.25% of average daily net assets of a Portfolio attributable to its Class B
shares. Under terms of the Class B Distribution Plan and the Distribution
Agreement, each Portfolio is authorized to make payments monthly to the
Distributor that may be used to pay or reimburse entities providing distribution
and shareholder servicing with respect to the Class B shares for such entities'
fees or expenses incurred or paid in that regard.
The Class B Distribution Plan is of a type known as a "compensation"
plan because payments are made for services rendered to the Trust with respect
to Class B shares regardless of the level of expenditures by the Distributor.
The Trustees will, however, take into account such expenditures for purposes of
reviewing operations under the Class B Distribution Plans and in connection with
their annual consideration of the Class B Distribution Plan's renewal. The
Distributor has indicated that it expects its expenditures to include, without
limitation: (a) the printing and mailing of Trust prospectuses, statements of
additional information, any supplements thereto and shareholder reports for
prospective Contract owners with respect to the Class B shares of the Trust; (b)
those relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the Class B shares of the Trust; (c) holding seminars and
sales meetings designed to promote the distribution of Class B shares of the
Trust; (d) obtaining information and providing explanations to wholesale and
retail distributors of contracts regarding Trust investment objectives and
policies and other information about the Trust and its Portfolios, including the
performance of the Portfolios; (3) training sales personnel regarding the Class
B shares of the Trust; and (f) financing any other activity that the Distributor
determines is primarily intended to result in the sale of Class B shares.
The Distributor for each class of shares will pay all fees and expenses
in connection with its qualification and registration as a broker or dealer
under federal and state laws. In the capacity of agent, the Distributor
currently offers shares of each Portfolio on a continuous basis to the separate
accounts of insurance companies offering the Contracts in all states in which
the Portfolio or the Trust may from time to time be registered or where
permitted by applicable law. The Distribution Agreement provides that the
Distributor shall accept orders for shares at net asset value without a sales
commission or sale load being charged. The Distributor has made no firm
commitment to acquire shares of any Portfolio.
On December 7, 2000, the Board of Trustees of the Trust, including the
Disinterested Trustees, unanimously approved the Class B Distribution Plan.
The Class B Distribution Plan and any Rule 12b-1 related agreement that
is entered into by the Trust or the Distributor of the Class B shares in
connection with the Class B Distribution Plan will continue in effect for a
period of more than one year only so long as continuance is specifically
approved at least annually by vote of a majority of the Trust's Board of
Trustees, and of a majority of the Disinterested Trustees, cast in person at a
meeting called for the purpose of voting on the Class B Distribution Plan or any
Rule 12b-1 related agreement, as applicable. In addition, the Class B
Distribution Plan and any Rule 12b-1 related agreement may be terminated as to
Class B shares of the Portfolio or by vote of a majority of the Disinterested
Trustees. The Class B Distribution Plan also provides that it may not be amended
to increase materially the amount (up to 0.50%, of average daily net assets
annually) that may be spent for distribution of Class B shares of any Portfolio
without the approval of Class B shareholders of that Portfolio.
Code of Ethics
The Trust, its Manager, its Distributor, and each of its Advisers have
adopted Codes of Ethics pursuant to Rule 17j-1 under the 1940 Act. Each of these
Codes of Ethics permits the personnel of their respective organizations to
invest in securities for their own accounts. A copy of each of the Codes of
Ethics is on public file with, and is available from the Securities and Exchange
Commission.
Custodian
Investors Bank & Trust Company, located at 200 Clarendon Street,
Boston, Massachusetts 02117, serves as the custodian of the Trust. Under the
custody agreement, IBT holds the Portfolios' securities and keeps all necessary
records and documents.
Transfer Agent
IBT also serves as transfer agent for the Trust.
Legal Matters
Certain legal matters are passed on for the Trust by Sullivan & Worcester
LLP, 1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
Independent Auditors
Deloitte & Touche LLP, located at 200 Berkeley Street, Boston,
Massachusetts 02116, serves as the Trust's independent auditors.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges or postpone the date of
payment on shares of the Portfolios for more than seven days during any period
(1) when the New York Stock Exchange is closed or trading on the Exchange is
restricted as determined by the Securities and Exchange Commission, (2) when an
emergency exists, as defined by the Securities and Exchange Commission, which
makes it not reasonably practicable for a Portfolio to dispose of securities
owned by it or fairly to determine the value of its assets, or (3) as the
Securities and Exchange Commission may otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio securities
at the time of redemption.
NET ASSET VALUE
The net asset value per share of each Portfolio is determined as of the
close of regular trading of the New York Stock Exchange (currently 4:00 p.m.,
New York City time), each day the Exchange is open for trading. Currently, the
Exchange is closed on: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Portfolio securities for which the primary market is on a
domestic or foreign exchange or which are traded over-the-counter and quoted on
the NASDAQ System will be valued at the last sale price on the day of valuation
or, if there was no sale that day, at the last reported bid price, using prices
as of the close of trading. Portfolio securities not quoted on the NASDAQ System
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed to be over-the-counter, will
be valued at the most recently quoted bid price provided by the principal market
makers.
In the case of any securities which are not actively traded, reliable
market quotations may not be considered to be readily available. These
investments are stated at fair value as determined under the direction of the
Trustees. Such fair value is expected to be determined by utilizing information
furnished by a pricing service which determines valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale,
their fair value will be determined following procedures approved by the
Trustees. The fair value of such securities is generally determined as the
amount which the Portfolio could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Portfolio in connection with
such disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities and any available analysts' reports
regarding the issuer.
Notwithstanding the foregoing, short-term debt securities with
maturities of 60 days or less will be valued at amortized cost.
Foreign securities traded outside the United States are generally
valued as of the time their trading is complete, which is usually different from
the close of the New York Stock Exchange. Occasionally, events affecting the
value of such securities may occur between such times and the close of the New
York Stock Exchange that will not be reflected in the computation of the
Portfolio's net asset value. If events materially affecting the value of such
securities occur during such period, these securities will be valued at their
fair value according to procedures decided upon in good faith by the Trust's
Board of Trustees. All securities and other assets of a Portfolio initially
expressed in foreign currencies will be converted to U.S. dollar values at the
mean of the bid and offer prices of such currencies against U.S. dollars last
quoted on a valuation date by any recognized dealer.
The Manager and Advisers may, from time to time, under the general
supervision of the Board of Trustees or the Valuation Committee, utilize the
services of one or more pricing services available in valuating the assets of
the Trust. The Manager and Advisers will continuously monitor the performance of
these services.
FEDERAL INCOME TAXES
Each Portfolio intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). By so
qualifying, a Portfolio will not be subject to federal income taxes to the
extent that its net investment income and net realized capital gains are
distributed.
In order to so qualify, a Portfolio must, among other things, (1)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stocks or securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
and (2) diversify its holdings so that, at the end of each quarter of the
Portfolio's taxable year, (a) at least 50% of the market value of the
Portfolio's assets is represented by cash, government securities and other
securities limited in respect of any one issuer to 5% of the value of the
Portfolio's assets and to not more than 10% of the voting securities of such
issuer, and (b) not more than 25% of the value of its assets is invested in
securities of any one issuer (other than government securities).
As a regulated investment company, a Portfolio will not be subject to
federal income tax on net investment income and capital gains (short- and
long-term), if any, that it distributes to its shareholders if at least 90% of
its net investment income and net short-term capital gains for the taxable year
are distributed, but will be subject to tax at regular corporate rates on any
income or gains that are not distributed. In general, dividends will be treated
as paid when actually distributed, except that dividends declared in October,
November or December and made payable to shareholders of record in such a month
will be treated as having been paid by the Portfolio (and received by
shareholders) on December 31, provided the dividend is paid in the following
January. Each Portfolio intends to satisfy the distribution requirement in each
taxable year.
The Portfolios will not be subject to the 4% federal excise tax imposed
on registered investment companies that do not distribute all of their income
and gains each calendar year because such tax does not apply to a registered
investment company whose only shareholders are either tax-exempt person trusts
or segregated asset accounts of life insurance companies held in connection with
variable annuity and/or variable life insurance policies.
The Trust intends to comply with section 817(h) of the Code and the
regulations issued thereunder. As required by regulations under that section,
the only shareholders of the Trust and its Portfolios will be life insurance
company segregated asset accounts (also referred to as separate accounts) that
fund variable life insurance or annuity contracts, tax-exempt pension trusts,
and Security First Life Insurance Company, the initial shareholder of the
Portfolios, and its affiliates. See the prospectus or other material for the
Contracts for additional discussion of the taxation of segregated asset accounts
and of the owner of the particular Contract described therein.
Section 817(h) of the Code and Treasury Department regulations
thereunder impose certain diversification requirements on the segregated asset
accounts investing in the Portfolios of the Trust. These requirements, which are
in addition to the diversification requirements applicable to the Trust under
the 1940 Act and under the regulated investment company provisions of the Code,
may limit the types and amounts of securities in which the Portfolios may
invest. Failure to meet the requirements of section 817(h) could result in
current taxation of the owner of the Contract on the income of the Contract.
The Trust may therefore find it necessary to take action to ensure that
a Contract continues to qualify as a Contract under federal tax laws. The Trust,
for example, may be required to alter the investment objectives of a Portfolio
or substitute the shares of one Portfolio for those of another. No such change
of investment objectives or substitution of securities will take place without
notice to the shareholders of the affected Portfolio and the approval of a
majority of such shareholders and without prior approval of the Securities and
Exchange Commission, to the extent legally required.
In certain foreign countries, interest and dividends are subject to a
tax which is withheld by the issuer. U.S. income tax treaties with certain
countries reduce the rates of these withholding taxes. The Trust intends to
provide the documentation necessary to achieve the lower treaty rate of
withholding whenever applicable or to seek refund of amounts withheld in excess
of the treaty rate.
Portfolios that invest in foreign securities may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of a
Portfolio's expenses (management fees and operating expenses), shareholders will
also indirectly bear similar expenses of such trusts. Capital gains on the sale
of such holdings are considered ordinary income regardless of how long a
Portfolio held its investment. In addition, a Portfolio could be subject to
corporate income tax and an interest charge on certain dividends and capital
gains earned from these investments, regardless of whether such income and gains
are distributed to shareholders. To avoid such tax and interest, a Portfolio's
investment adviser intends to treat these securities as sold on the last day of
its fiscal year and recognize any gains for tax purposes at that time;
deductions for losses are allowable only to the extent of any gains resulting
from these deemed sales for prior taxable years. Such gains will be considered
ordinary income, which a Portfolio will be required to distribute even though it
has not sold the security.
ORGANIZATION AND CAPITALIZATION OF THE TRUST
The Trust is a Delaware business trust organized on July 27, 2000. A
copy of the Trust's Agreement and Declaration of Trust, which is governed by
Delaware law, is available from the Trust without charge.
The Trustees of the Trust have authority to issue an unlimited number
of shares of beneficial interest , par value $.001 per share, of one or more
series. Currently, the Trustees have established and designated fourteen series.
Each series of shares represents the beneficial interest in a separate Portfolio
of assets of the Trust, which is separately managed and has its own investment
objective and policies. The Trustees of the Trust have authority, without the
necessity of a shareholder vote, to establish additional portfolios and series
of shares. The shares outstanding are, and those offered hereby when issued will
be, fully paid and nonassessable by the Trust. The shares have no preemptive,
conversion or subscription rights and are fully transferable.
The Trust currently offers one class of shares on behalf of each
Portfolio and on or about February 5, 2001, will offer two classes of shares.
Class A shares are offered at net asset value and are not subject to
distribution fees imposed pursuant to a distribution plan. Class A shares are
only offered to contract owners and qualified plan participants who previously
allocated premiums to predecessors of the Trust's Portfolios. In addition, Class
A shares will also be offered to additional qualified pension and retirement
plans. Class B shares will be offered at net asset value and are subject to
distribution fees imposed pursuant to the Class' Distribution Plan adopted
pursuant to Rule 12b-1 under the 1940 Act.
The two classes of shares are offered under the Trust's multi-class
distribution system approved by the Trust's Board of Trustees on December 7,
2000, which is designed to allow promotion of insurance products investing in
the Trust through alternative distribution channels. Under the Trust's
multi-class distribution system, shares of each class of a Portfolio represent
an equal pro rata interest in that Portfolio and, generally, will have identical
voting, dividend, liquidation, and other rights, other than the payment of
distribution fees under the Distribution Plan.
Commencing on or about February 5, 2001, the Trust will continuously
offer its shares exclusively to separate accounts of insurance companies in
connection with the Contracts and to qualified pension and retirement plans.
Class A shares are currently being offered only to separate accounts of
affiliates of Security First Group, Inc. (collectively "MetLife") and to
qualified pension and retirement plans. As of the date of this Statement of
Additional Information, MetLife owned 100% of the Trust's outstanding Class A
and Class B shares and, as a result, may be deemed to be a control person with
respect to the Trust. In the future, the Trust may also offer its shares to
qualified pension and retirement plans.
As a "series" type of mutual fund, the Trust issues separate series of
share of beneficial interest with respect to each Portfolio. Each Portfolio
resembles a separate fund issuing a separate class of stock. Because of current
federal securities law requirements, the Trust expects that its shareholders
will offer to owners of the Contracts ("Contract owners") the opportunity to
instruct them as to how shares allocable to their Contracts will be voted with
respect to certain matters, such as approval of investment advisory agreements.
The Trust may in the future offer its shares to separate accounts of
other insurance companies. The Trust does not currently foresee any
disadvantages to Contract owners arising from offering the Trust's shares to
separate accounts of insurance companies that are unaffiliated with each other.
However, it is theoretically possible that, at some time, the interests of
various Contract owners participating in the Trust through their separate
accounts might conflict. In the case of a material irreconcilable conflict, one
or more separate accounts might withdraw their investments in the Trust, which
would possibly force the Trust to sell portfolio securities at disadvantageous
prices. The Trustees of the Trust intend to monitor events for the existence of
any material irreconcilable conflicts between or among such separate accounts
and will take whatever remedial action may be necessary.
The assets received from the sale of shares of a Portfolio, and all
income, earnings, profits and proceeds thereof, subject only to the rights of
creditors, constitute the underlying assets of the Portfolio. The underlying
assets of a Portfolio are required to be segregated on the Trust's books of
account and are to be charged with the expenses with respect to that Portfolio.
Any general expenses of the Fund not readily attributable to a Portfolio will be
allocated by or under the direction of the Trustees in such manner as the
Trustees determine to be fair and equitable, taking into consideration, among
other things, the nature and type of expense and the relative sizes of the
Portfolio and the other Portfolios.
Each share has one vote, with fractional shares voting proportionately.
Shareholders of a Portfolio are not entitled to vote on any matter that requires
a separate vote of the shares of another Portfolio but which does not affect the
Portfolio. The Agreement and Declaration of Trust does not require the Trust to
hold annual meetings of shareholders. Thus, there will ordinarily be no annual
shareholder meetings, unless otherwise required by the 1940 Act. The Trustees of
the Trust may appoint their successors until fewer than a majority of the
Trustees have been elected by shareholders, at which time a meeting of
shareholders will be called to elect Trustees. Under the Agreement and
Declaration of Trust, any Trustee may be removed by vote of the Trustees or vote
of two-thirds of the outstanding shares of the Trust. Holders of 10% or more of
the outstanding shares can require the Trustees to call a meeting of
shareholders for the purpose of voting on the removal of one or more Trustees.
If ten or more shareholders who have been such for at least six months and who
hold in the aggregate shares with a net asset value of at least $25,000 inform
the Trustees that they wish to communicate with other shareholders, the Trustees
either will give such shareholders access to the shareholder lists or will
inform them of the cost involved if the Trust forwards materials to the
shareholders on their behalf. If the Trustees object to mailing such materials,
they must inform the Securities and Exchange Commission and thereafter comply
with the requirements of the 1940 Act.
<PAGE>
APPENDIX
SECURITIES RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
to repay principal for debt in this category than for higher rated categories.
Bonds rated "BB", "B", "CCC" and "CC" are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. "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. The rating "C" is reserved for income bonds on which no interest is
being paid. Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears. The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Moody's Bond Ratings
Bonds which are rated "Aaa" are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. 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. Moody's applies numerical
modifiers 1, 2 and 3 in the Aa and A rating categories. The modifier 1 indicates
that the security ranks at a higher end of the rating category, modifier 2
indicates a mid-range rating and the modifier 3 indicates that the issue ranks
at the lower end of the rating category. 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. 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. 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. 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. 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. 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. 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 Commercial Paper Ratings
"A" is the highest commercial paper rating category utilized by
Standard & Poor's, which uses the numbers "1+", "1", "2" and "3" to denote
relative strength within its "A" classification. Commercial paper issuers rated
"A" by Standard & Poor's have the following characteristics. Liquidity ratios
are better than industry average. Long-term debt rating is "A" or better. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow are in an upward trend. Typically, the issuer is a strong
company in a well-established industry and has superior management. Issues rated
"B" are regarded as having only an adequate capacity for timely payment.
However, such capacity may be damaged by changing conditions or short-term
adversities. The rating "C" is assigned to short-term debt obligations with a
doubtful capacity for repayment. An issue rated "D" is either in default or is
expected to be in default upon maturity.
Moody's Commercial Paper Ratings
"Prime-1" is the highest commercial paper rating assigned by Moody's,
which uses the numbers "1", "2" and "3" to denote relative strength within its
highest classification of Prime. Commercial paper issuers rated Prime by Moody's
have the following characteristics. Their short-term debt obligations carry the
smallest degree of investment risk. Margins of support for current indebtedness
are large or stable with cash flow and asset protection well assured. Current
liquidity provides ample coverage of near-term liabilities and unused
alternative financing arrangements are generally available. While protective
elements may change over the intermediate or longer terms, such changes are most
unlikely to impair the fundamentally strong position of short-term obligations.
Fitch IBCA, Inc. Commercial Paper Ratings. Fitch Investors Service L.P. employs
the rating F-1+ to indicate issues regarded as having the strongest degree of
assurance for timely payment. The rating F-1 reflects an assurance of timely
payment only slightly less in degree than issues rated F-1+, while the rating
F-2 indicates a satisfactory degree of assurance for timely payment, although
the margin of safety is not as great as indicated by the F-1+ and F-1
categories.
Duff & Phelps Inc. Commercial Paper Ratings. Duff & Phelps Inc. employs the
designation of Duff 1 with respect to top grade commercial paper and bank money
instruments. Duff 1+ indicates the highest certainty of timely payment:
short-term liquidity is clearly outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations. Duff 1- indicates high certainty of timely
payment. Duff 2 indicates good certainty of timely payment: liquidity factors
and company fundamentals are sound.
Thomson BankWatch, Inc. ("BankWatch") Commercial Paper Ratings. BankWatch will
assign both short-term debt ratings and issuer ratings to the issuers it rates.
BankWatch will assign a short-term rating ("TBW-1", "TBW-2", "TBW-3", or
"TBW-4") to each class of debt (e.g., commercial paper or non-convertible debt),
having a maturity of one-year or less, issued by a holding company structure or
an entity within the holding company structure that is rated by BankWatch.
Additionally, BankWatch will assign an issuer rating ("A", "A/B", "B", "B/C",
"C", "C/D", "D", "D/E", and "E") to each issuer that it rates.
Various of the NRSROs utilize rankings within rating categories indicated by a +
or -. The Portfolios, in accordance with industry practice, recognize such
rankings within categories as graduations, viewing for example Standard & Poor's
rating of A-1+ and A-1 as being in Standard & Poor's highest rating category.
<PAGE>
SECURITY FIRST TRUST
T. ROWE PRICE GROWTH AND INCOME SERIES
NEUBERGER BERMAN BOND SERIES
BLACKROCK EQUITY SERIES
BLACKROCK U.S. GOVERNMENT INCOME SERIES
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Prospectus of Security First Trust (the "Trust"), dated
November 30, 2000, which may be obtained by writing to Security First Trust,
11365 West Olympic Boulevard, Los Angeles, California 90064, Attention: Customer
Services or by telephoning (310) 312- 6100 or (800) 283-4536.
The date of this Statement of Additional Information is November 30, 2000.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
The Trust................................................................. 3
Investment Policies and Restrictions...................................... 4
Investment Adviser and Other Services..................................... 16
Principal Holders of Securities........................................... 20
Management of the Trust................................................... 21
Brokerage................................................................. 22
Portfolio Turnover........................................................ 23
Pricing and Redemption of Securities Being Offered........................ 24
Taxation.................................................................. 25
Bond Ratings.............................................................. 26
Commercial Paper Ratings ................................................. 27
Custodian................................................................. 27
Independent Auditors...................................................... 28
Federal Registration of Shares............................................ 28
Legal Counsel............................................................. 28
2
<PAGE>
THE TRUST
GENERAL INFORMATION ABOUT THE TRUST
Security First Trust (the "Trust") is registered with the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended
("1940 Act") as a diversified, open-end investment management company. The Trust
was established on February 11, 1987, pursuant to a Declaration of Trust under
the laws of the Commonwealth of Massachusetts as a voluntary association known
as a "Massachusetts business trust." It operates as a "series company" as that
term is used in Rule 18f-2 under the 1940 Act with four series of shares.
The assets received by the Trust from the issue or sale of the shares
of a Series and all income, earnings, profits and proceeds attributable to them,
subject only to the rights of creditors, are specifically allocated to that
Series and are required to be segregated on the books of account of the Trust.
The assets of a Series are also required to be charged with all of the expenses
attributable to that Series. Any general expenses of the Trust not readily
identifiable as belonging to a particular Series shall be allocated by or under
the direction of the Board of Trustees in such manner as the Board determines to
be fair and equitable.
Each share of a Series represents an equal proportionate interest in
that Series with each other share of that Series and is entitled to such
dividends and distributions out of the income belonging to that Series as are
declared by the Board of Trustees. Upon the liquidation of a Series, its
shareholders are entitled to share pro rata in the net assets belonging to that
Series available for distribution.
The Declaration of Trust provides that no annual or regular meetings of
shareholders are required. In addition, after the Trustees were initially
elected by shareholders, the Trustees became a self-perpetuating body. Thus,
there will ordinarily be no shareholder meetings unless otherwise required by
the 1940 Act.
The 1940 Act specifically requires that a shareholder meeting be held
for the purpose of electing Trustees if at any time less than a majority of the
Trustees has been elected by the shareholders of the Trust. The shareholders
also have the power to remove a Trustee by the affirmative vote of the holders
of not less than two-thirds of the shares of the Trust outstanding and entitled
to vote either by a declaration in writing filed with the custodian or by votes
cast in person or by proxy at a meeting called for the purpose of removal. The
Trustees will promptly call such a meeting when requested to do so by the record
holders of not less than 10 percent of the outstanding shares.
Ten or more shareholders who have been shareholders for at least six
months preceding the date of application and who hold in the aggregate either
shares having a net asset value of at least $100,000 or at least 1 percent of
the outstanding shares, whichever is less, may apply in writing to the Trustees
stating that they wish to communicate with other shareholders to obtain
signatures in order to request a meeting to remove a Trustee. This application
must be accompanied by the proposed communication and form of the request that
they wish to transmit. The Trustees will, within five business days after
receipt of such application, either afford to the applicants access to a list of
the names and addresses of all shareholders or inform such applicants as to the
approximate number of shareholders of record and the approximate cost of mailing
to them the proposed communication and form of request.
Shares of each Series vote separately as a class on any matter
submitted to shareholders except as to voting for Trustees and as otherwise
required by the 1940 Act, in which cases the shareholders of all of the Series
vote together as one class. In the event that the Trustees determine that a
matter affects only the interest of one or more Series, then only the
shareholders of the affected Series will be entitled to vote on the matter.
3
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
Certain of the investment policies and restrictions of the Series
described below are fundamental policies that may not be changed without the
approval of at least a majority of the outstanding shares of a Series or of 67%
of the shares of a Series represented at a meeting of shareholders at which the
holders of 50% or more of the outstanding shares of the Series are represented.
Investment policies or restrictions which are not fundamental may be changed
without the approval of shareholders.
T. ROWE PRICE GROWTH AND INCOME SERIES
The following investment policies of the T. Rowe Price Growth and Income
Series are fundamental. While the purchase of equity securities will generally
be limited to seasoned and readily marketable securities of issuers listed on
national securities exchanges, the T. Rowe Price Growth and Income Series may
invest in securities not listed on a national exchange but generally such
securities will have well-established over-the-counter markets. The fixed income
debt instruments in which this Series may invest include: (1) marketable
straight debt securities rated at the time of purchase within the four highest
grades assigned by Moody's (Aaa, Aa, A or Baa) or by Standard & Poor's (AAA, AA,
A or BBB); (2) securities issued or guaranteed by the United States government
or its agencies or instrumentalities; (3) marketable securities issued or
guaranteed by the Dominion of Canada, any Province of Canada, or any
instrumentality or political subdivision thereof; (4) bank obligations such as
certificates of deposit and bankers' acceptances having investment quality and
which in the opinion of the Board of Trustees are comparable with debt
securities which may be purchased by the Series as described in (1) above;
(5)commercial paper; (6) repurchase agreements; and (7) other debt securities
including securities convertible into or carrying warrants to purchase common
stock or other equity interests. The T. Rowe Price Growth and Income Series
reserves the right to hold cash reserves, and it may do so temporarily as the
Board of Trustees deems necessary for defensive or emergency purposes.
INVESTMENT RESTRICTIONS FOR THE T. ROWE PRICE GROWTH AND INCOME SERIES
As matters of fundamental investment policy, the T. Rowe Price Growth
and Income Series may not: (1) purchase any security if, as a result of such
purchase, more than 5% of the value of a Series' total assets would be invested
in the securities of a single issuer, except securities issued or guaranteed by
the United States Government or its agencies or instrumentalities; (2) purchase
any security if, as a result of such purchase, more than 10% of the outstanding
securities of any class of any issuer would be held by a Series (for this
purpose, all indebtedness of any issuer shall be deemed a single class), except
securities issued or guaranteed by the United States Government or any of its
agencies or instrumentalities; (3) purchase any security if, as a result of such
purchase, 25% or more of the value of a Series' total assets would be invested
in the securities of issuers having their principal business activities in the
same industry, except this limitation does not apply to securities issued or
guaranteed by the United States Government or any of its agencies or
instrumentalities, or to certificates of deposit or bankers, acceptances; (4)
purchase any security if, as a result of such purchase, more than 5% of the
value of a Series' total assets would be invested in the securities of issuers
which at the time of purchase had been in operation for less than three years,
except obligations issued or guaranteed by the United States Government or any
of its agencies or instrumentalities (for this purpose, the period of operation
of any issuer shall include the period of operation of any predecessor issuer or
unconditional guarantor of such issuer); (5) purchase securities with legal or
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contractual restrictions on resale ("restricted securities") (excluding
repurchase agreements), except debt securities in private placements within the
limits imposed in restriction (11) below pertaining to loans; (6) purchase or
sell real estate, except that the Series may invest in the securities of
companies whose business involves the purchase or sale of real estate, (7)
purchase securities of other investment companies, except in connection with a
merger, consolidation, acquisition or organization; (8) purchase or sell
commodities or commodity contracts; (9) purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs;
(10) make short sales of securities or purchase securities on margin, except for
such short-term credits as may be necessary for the clearance or purchases of
portfolio securities, (11) make loans, except that the Series may acquire
publicly distributed bonds, debentures, notes and other debt securities and may
enter into repurchase agreements; (12) borrow money, except as a temporary
measure for extraordinary or emergency purposes and then only from banks in
amounts not exceeding the lesser of 10% of a Series' total assets valued at cost
or 5% of its total assets valued at market and only if immediately thereafter
there is an asset coverage of at least 300%; (13) invest in puts, calls,
straddles, spreads, or any combinations thereof: (14) mortgage, pledge or
hypothecate securities, except in connection with the borrowings permitted under
restriction (12) and then only where the market value of the securities
mortgaged, pledged or hypothecated does not exceed 10% of its net assets taken
at market; (15) underwrite securities issued by other persons; (16) purchase any
securities which would cause more than 10% of the value of either of the Series'
total assets at the time of such purchase to be invested in warrants: and (17)
purchase any security if, as a result of such purchase, more than 10% of the
value of the Series' total assets would be invested in foreign securities which
are not publicly traded in the United States.
NEUBERGER BERMAN BOND SERIES
The following investment policies of the Neuberger Berman Bond Series
(the "Bond Series") are not fundamental. Under normal circumstances, the Bond
Series will invest not less than 65% of its total assets in fixed- income debt
instruments, including debt securities issued in private placements. The Series
may also invest in residential and commercial real estate mortgages secured by
first liens and up to 10% of the value of its total assets in common and
preferred stocks. U.S. dollar denominated foreign fixed income debt securities
and Canadian government securities may also be purchased. The Series may enter
into financial futures contracts or options on financial futures contracts for
hedging and non-hedging purposes where such is deemed in the interest of
shareholders. The percentage of the Series' assets which may be invested in
common and preferred stocks, as opposed to investments in fixed-income
instruments, can be expected to vary from time to time in light of changes in
business and market conditions, fiscal and monetary policies and underlying
security values and shall be limited to securities listed on a national
securities exchange or regularly traded on a national or regional basis.
The fixed income debt instruments in which the Bond Series may invest
include: (1) marketable convertible and non-convertible debt securities rated at
the time of purchase within the four highest grades assigned by Moody's (Aaa,
Aa, A or Baa) or by Standard & Poor's (AAA, AA, A or BBB) or comparable unrated
securities; (2) marketable convertible and non-convertible debt securities rated
at the time of purchase within the grades Ba or B assigned by Moody's or grades
BB or B assigned by Standard & Poor's or comparable unrated securities, limited
to a maximum of 20% of the value of the Series total net assets; (3) securities
issued or guaranteed by the United States government or its agencies or
instrumentalities; (4) U.S. dollar denominated marketable foreign securities;
(5) securities issued or guaranteed by the Dominion of Canada, and any Province
of Canada, or any instrumentality or political subdivision thereof; (6) bank
obligations such as certificates of deposit and bankers' acceptances having
investment quality and which in the opinion of the Board of Trustees are
comparable with debt securities which may be purchased by the Series as
described in (1) above; (7) commercial paper; (8) repurchase agreements; (9)
other debt securities including securities convertible into or carrying warrants
to purchase common stock or other equity interests; and (10) mortgage-backed
securities, as well as residential and commercial real estate mortgages secured
by first liens. The Series reserves the right to hold cash reserves, and it may
do so temporarily as management deems necessary for defensive or emergency
purposes.
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INVESTMENT RESTRICTIONS FOR THE BOND SERIES
The Bond Series has certain fundamental policies which may not be
changed without shareholder approval. As matters of fundamental investment
policy, the Bond Series may not: (1) purchase any security if, as a result of
such purchase, more than 5% of the value of the Series' total assets would be
invested in the securities of a single issuer, except securities issued or
guaranteed by the United States Government or its agencies or instrumentalities;
(2) purchase any security if, as a result of such purchase, more than 10% of the
outstanding securities of any class of any issuer would be held by the Series
(for this purpose, all indebtedness of any issuer shall be deemed a single
class), except securities issued or guaranteed by the United States Government
or any of its agencies or instrumentalities; (3) purchase any security if, as a
result of such purchase, 25% or more of the value of the Series' total assets
would be invested in the securities of issuers having their principal business
activities in the same industry, except this limitation does not apply to
securities issued or guaranteed by the United States Government or any of its
agencies or instrumentalities, or to certificates of deposit or bankers'
acceptances; (4) purchase or sell commodities or commodity contracts; (5)
purchase participations or other direct interests in oil, gas, or other mineral
exploration or development programs; (6) make loans, except that the Series may
acquire publicly distributed bonds, debentures, notes and other debt securities
and may enter into repurchase agreements; (7) borrow money, except as a
temporary measure for extraordinary or emergency purposes and then only from
banks in amounts not exceeding the lesser of 10% of the Series' total assets
valued at cost or 5% of its total assets valued at market and only if
immediately thereafter there is an asset coverage of at least 300%; (8)
mortgage, pledge or hypothecate securities, except in connection with the
borrowings permitted under restriction (7) and then only where the market value
of the securities mortgaged, pledged or hypothecated does not exceed 10% of its
net assets taken at market; (9) underwrite securities issued by other
persons;(10) invest in companies for the purpose of exercising management or
control; (11) purchase or retain the securities of any issuer if, to the
knowledge of the Trustees, those Trustees or officers of the Trust and of its
investment adviser who each own beneficially more than 0.50% of the outstanding
securities of such issuer together own beneficially more than 5% of such
securities; and (12) issue securities or other obligations senior to shares of
the Series.
The following investment restrictions are not fundamental to the Bond
Series. The Bond Series may not: (1) invest more than 5% of its total assets in
the securities of companies with less than 3 years of continuous operation
unless such securities are guaranteed by the United States, Canada or a foreign
government; (2) purchase securities of open-end investment companies and may not
purchase the shares of closed-end investment companies except in the open market
at normal rates; (3) purchase securities on margin or make short sales unless
fully covered; (4) invest more than 15% of its total assets in securities with
legal or contractual restrictions on resale ("restricted securities") or
otherwise illiquid securities (excluding repurchase agreements maturing in less
than 7 days); (5) invest more than 5% of its total assets in puts, calls,
straddles, spreads or any combination thereof (excluding options on financial
futures contracts); (6) enter into a futures contract or purchase an option on a
futures contract for non-hedging purposes if the initial margin deposit and
premium would exceed 5% of its total assets; (7) purchase real estate or real
estate limited partnerships unless acquired as a result of ownership of
securities, except that it may invest in the securities of companies that own or
deal in real estate; (8) purchase any securities which would cause more than 2%
of the value of the Series' total assets at the time of such purchase to be
invested in warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange, or more than 5% of the value of total assets to be
invested in warrants whether or not so listed, such warrants in each case to be
valued at the lesser of cost or market but assigning no value to warrants
acquired by the Series in units with or attached to debt securities: (9) invest
more than 20% of its total assets in high-yield, high-risk bonds (see discussion
below on Certain Risk Factors Relating to High-Yield Bonds); or (10) invest more
than 10% of total assets in U.S. dollar denominated foreign securities which are
not publicly traded in the United States (see Risks and Considerations
Applicable to Investment Securities of Foreign Issuers below).
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CERTAIN RISK FACTORS RELATING TO THE BOND SERIES INVESTMENTS
HIGH YIELD BONDS. As noted above, the Bond Series may invest up to 20%
of its assets in high-yield, high-risk bonds. These bonds present certain risks
not normally found in the lower yield investment grade bonds:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. High-yield bonds are
very sensitive to adverse economic changes and corporate developments. During an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress that would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the issue
of a bond defaulted on its obligations to pay interest or principal or entered
into bankruptcy proceeding, the Bond Series may incur losses or expenses in
seeking recovery of amounts owed to it. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high-yield bonds and the Bond Series' net asset value.
PAYMENT EXPECTATIONS. High-yield bonds may contain redemption or call
provisions. If an issuer exercised these provisions in a declining interest rate
market, the Bond Series would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high-
yield bond's value will decrease in a rising interest rate market, as will the
value of the Bond Series' assets. If the Bond Series experiences unexpected net
redemptions, this may force it to sell high-yield bonds without regard to their
investment merits, thereby decreasing the asset base upon which their expenses
can be spread and possibly reducing the Bond Series' rate of return.
LIQUIDITY AND VALUATION. There may be little trading in the secondary
market for particular bonds, which may affect adversely the Bond Series' ability
to value accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield bonds, especially in a thin market.
ILLIQUID SECURITIES. The Bond Series may invest up to 15% of its net
assets in restricted or illiquid securities. The term "illiquid securities" for
this purpose means securities that the Series may not be able to dispose of
within seven days in the ordinary course of business at approximately the amount
at which the Bond Series has valued the securities. Illiquid restricted
securities may be sold only in privately negotiated transactions or in public
offerings with respect to which a registration statement is in effect under the
Securities Act of 1933.
However, not all restricted securities are illiquid. In recent years a
large institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
The Board of Trustees is responsible for establishing policies and
procedures for investments in restricted securities and other illiquid
securities, and the Board will monitor compliance with these policies and
procedures by investment advisers to the Series.
RISKS AND CONSIDERATIONS APPLICABLE TO INVESTMENT IN SECURITIES OF
FOREIGN ISSUERS. Elements of risk and opportunity which must be recognized and
evaluated by the Investment Adviser when investment in foreign issuers are made
for the Bond Series include trade imbalances and related economic policies;
expropriation or confiscatory taxation; limitation on the removal of funds or
other assets, political or social instability; the diverse structure and
liquidity of securities markets in various countries and regions; policies of
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governments with respect to possible nationalization of their industries; and
other specific local political and economic considerations. Foreign companies
and foreign investment practices are generally not subject to uniform
accounting, auditing and financial reporting standards and practices or
regulatory requirements comparable to those of U.S. companies. There may be less
information publicly available about foreign companies. Additional costs may
also be incurred in connection with the Bond Series' investment activities in
the area of foreign securities. Foreign brokerage commissions are generally
higher than in the United States. Administrative difficulties (such as the
applicability of foreign laws to foreign custodians in various circumstances
including bankruptcy, ability to recover lost assets, expropriation,
nationalization, record access, etc.) may be associated with the maintenance of
assets in foreign jurisdictions.
BLACKROCK EQUITY SERIES
The BlackRock Equity Series (the "Equity Series") invests primarily in
the securities of high quality companies, including common stocks, preferred
stocks, corporate bonds, notes, warrants and convertible securities.
Convertible Securities - Convertible securities are fixed income
securities which may be exchanged or converted into a predetermined number of
the issuer's underlying common stock at the option of the holder during a
specified time period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of "usable"
bonds and warrants or a combination of the features of several of these
securities. The investment characteristics of each convertible security vary
widely, which allows convertible securities to be employed for different
investment objectives.
The Equity Series will exchange or convert the convertible securities
held in its portfolio into shares of the underlying common stock in instances in
which, in the sub-adviser's opinion, the investment characteristics of the
underlying common shares will assist the Series in achieving its investment
objectives. Otherwise, the Series may hold or trade convertible securities. In
selecting convertible securities for the Series, the sub-adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security for
capital appreciation. In evaluating these matters with respect to a particular
convertible security, the sub-adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
WARRANTS - Warrants are basically options to purchase common stock at a
specific price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants may have
a life ranging from less than a year to twenty years or may be perpetual.
However, most warrants have expiration dates after which they are worthless. In
addition, if the market price of the common stocks does not exceed the warrant's
exercise price during the life of the warrant, the warrant will expire as
worthless. Warrants have no voting rights, pay no dividends, and have no rights
with respect to the assets of the corporation issuing them. The percentage
increase or decrease in the market price of the warrant may tend to be great
than the percentage increase or decrease in the market price of the optioned
common stock.
FUTURES AND OPTIONS TRANSACTIONS - As a means of reducing fluctuations
in the net asset value of the Equity Series, the Series may attempt to hedge all
or a portion of its portfolio by buying and selling financial futures contracts
buying put options on portfolio securities and listed put options on futures
contracts, and writing call options on futures contracts. The Equity Series may
also write covered call options on portfolio securities to attempt to increase
its current income. The Series will maintain its positions in securities, option
rights, and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out only on an exchange which provides a secondary
market for options of the same series.
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FINANCIAL FUTURES CONTRACTS - A futures contract is a firm commitment by
two parties; the seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the buyer who agrees to
take delivery of the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of shares of common stocks
represented in a particular index.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS - The Series may purchase
listed put options on financial futures contracts. Unlike entering directly into
a futures contract, which requires the purchaser to buy a financial instrument
on a set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of a put option, the related futures contracts will also decrease in
value while the put option will increase in value. In such an event, the Series
will normally close out its option by selling an identical option. If the hedge
is successful, the proceeds received by the Series upon the sale of the second
option will be large enough to offset the decrease in value of the hedged
securities.
Alternatively, the Series may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract of the
type underlying the option (for a price less than the strike price of the
option) and exercise the option. The Series would then deliver the futures
contract in return for payment of the strike price. If the Series neither closes
out nor exercises an option, the option will expire on the date provided in the
option contract, and the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts - In addition to purchasing
put options on futures, the Equity Series may write listed call options on
futures contracts to hedge its portfolio. When the Series writes a call option
on a futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at any
time during the life of the option if the option is exercised. If stock prices
fall, causing the prices of futures to go down, the Series' obligation under a
call option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Series' call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call, so
that the Series keeps the premium received for the option. This premium can
substantially offset the drop in value of the Series' fixed income or indexed
portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Series, or exercise of
it by the buyer, the Series may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be less
than the premium received by the Series for the initial option. The net premium
income of the Series will then substantially offset the decrease in value of the
hedged securities.
The Series will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Series will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
RISKS - When the Equity Series uses financial futures and options on
financial futures as hedging devices, there is a risk that the process of the
securities subject to the futures contracts may not correlate perfectly with the
prices of the securities in the Series' portfolio. This may cause the future
contract and any related options to react differently than the portfolio
securities to market changes. In addition, the Series' sub-adviser could be
incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the Series may lose money on the
futures contract or option.
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It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the sub-adviser will
consider liquidity before entering into options transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The
Series' ability to establish and close out futures and options positions depends
on this secondary market.
"MARGIN" IN FUTURES TRANSACTIONS - Unlike the purchase or sale of a
security, the Series does not pay or receive money upon the purchase or sale of
a futures contract. Rather, the Equity Series is required to deposit an amount
of "initial margin" in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
futures contract initial margin does not involve the borrowing of funds by the
Series to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Series upon termination of the futures contract, assuming all contractual
obligations have been satisfied.
A futures contract held by the Series is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Series pays
or received cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Series but is instead
settlement between the Series and the broker of the amount one would owe the
other if the futures contract expired. In computing its daily net asset value,
the Series will mark to market its open futures positions. The Series is also
required to deposit and maintain margin when it writes call options on futures
contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES - The Series may purchase
put options on portfolio securities to protect against price movements in
particular securities in its portfolio. A put option gives the Series, in return
for a premium, the right to sell the underlying security to the writer (seller)
at a specified price during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES - The Series may
also write covered call options to generate income. As a writer of a call
option, the Series has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the exercise
price. The Series may only sell call options either on securities held in its
portfolio or on securities which it has the right to obtain without payment of
further consideration (or has segregated cash in the amount of any additional
consideration).
OVER-THE-COUNTER OPTIONS - The Series may purchase and write
over-the-counter options on portfolio securities in negotiated transactions with
the buyers or writers of the options for those options on portfolio securities
held by the Series and not traded on an exchange.
Over-the-counter options are two party contracts with prices and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation.
Exchange-traded options generally have a continuous liquid market while
over-the-counter options may not.
U.S. GOVERNMENT OBLIGATIONS - The types of U.S. government obligations
in which the Series may invest are described below under "U.S. Government Income
Series".
COMMERCIAL PAPER - The Series may invest in commercial paper rated at
least A-1 by Standard & Poor's Corporation, or Prime-1 by Moody's Investors
Service, Inc., or F-1 by Fitch Investors Service, Inc., and money market
instruments (including commercial paper) which are unrated but of comparable
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quality, including Canadian Commercial Paper ("CCPs") and Europaper. In the case
where commercial paper, CCPs or Europaper has received different ratings from
different rating services, such commercial paper, CCPs or Europaper is an
acceptable investment so long as at least one rating is one of the preceding
high quality ratings and provided the sub-adviser has determined that such
investment presents minimal credit risks.
BANK INSTRUMENTS - The Series may invest in the instruments of banks and
savings and loans whose deposits are insured by the Bank Insurance Fund ("BIF"),
both of which are administered by the Federal Deposit Insurance Corporation
("FDIC"), or the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC, such as certificates of deposit, demand and time
deposits, savings shares, and bankers' acceptances (which are not necessarily
guaranteed by SIF or SAIF).
In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptance, the
Series may invest in:
o Eurodollar Certificates of Deposit ("ECDs") issued by foreign
branches of U.S. or foreign banks;
o Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
o Yankee Certificates of Deposit ("Yankee CDs"), which are U.S.
dollar-denominated certificates of deposits issued by U.S. branches
of foreign banks and held in the United States.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, and Europaper are subject to different risks
than domestic obligations of domestic banks or corporations. Examples of these
risks include international economic and political developments, foreign
governmental restrictions that may adversely affect the payment of principal or
interest, foreign withholding or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing entity, and the possible
impact of interruptions in the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan limitations, examinations, accounting,
auditing, record keeping, and the public availability of information. These
factors will be carefully considered by the Equity Series' sub-adviser in
selecting investments for the Series.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS - These transactions are
arrangements in which the Equity Series purchases securities with payment and
delivery scheduled for a future time. The Series engages in when-issued and
delayed delivery transactions only for the purpose of acquiring portfolio
securities consistent with the Series' investment objective and policies, not
for investment leverage. In when-issued and delayed delivery transactions, the
Series relies on the seller to complete the transaction. The seller's failure to
complete the transaction may cause the Series to miss a price or yield
considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for the Series. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Series sufficient to make payment for
the securities to be purchased are segregated on the Series' records at the
trade date. These securities are marked to market daily and maintained until the
transaction is settled.
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RESTRICTED AND ILLIQUID SECURITIES - The Series intends to invest in
restricted securities. Restricted securities are any securities in which the
Series may otherwise invest pursuant to its investment objective and policies
but which are subject to restriction on resale under federal securities law.
However, the Series will limit investments in illiquid securities, including
certain restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, and repurchase agreements providing for settlement
in more than seven days after notice, to 10% of its net assets.
The Series may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Series, who agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the purchaser must be
in an exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Series through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity.
The Series believes that Section 4(2) commercial paper and possibly
certain other restricted securities which meet the criteria for liquidity
established by the Board of Trustees are liquid. The Series intends, therefore,
to treat the restricted securities which meet the criteria for liquidity
established by the Trustees, including Section 4(2) commercial paper, as
determined by the sub-adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because such Section
4(2) commercial paper is liquid, the Series intends to not subject such paper to
the limitation applicable to restricted securities.
The Board of Trustees is responsible for establishing policies and
procedures for investments in restricted securities and other illiquid
securities, and the Board will monitor compliance with these policies and
procedures by investment advisers to the Series.
REPURCHASE AGREEMENTS - The Series or its custodian will take possession
of the securities subject to repurchase agreements, and these securities will be
marked to market daily. In the event that a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Series
might be delayed pending court action. The Series believes that under the
regular procedures normally in effect for custody of the Series' portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Series and allow retention or disposition of such
securities. The Series will only enter into repurchase agreements with banks and
other recognized financial institutions such as broker/dealers which are deemed
by the sub-adviser to be creditworthy pursuant to guidelines established by the
Trustees.
REVERSE REPURCHASE AGREEMENTS - The Series may also enter into reverse
repurchase agreements. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Series transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Series will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate. The use of reverse repurchase agreements may enable the Series
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Series will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the
Series, in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Series' records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
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LENDING OF PORTFOLIO SECURITIES - The collateral received when the
Equity Series lends portfolio securities must be valued daily and, should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the Series. During the time portfolio securities are on
loan, the borrower pays the Series any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Series or the
borrower. The Series may pay a negotiated portion of the interest earned on the
cash or equivalent collateral to the borrower or placing broker. The Series does
not have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
BLACKROCK U.S. GOVERNMENT INCOME SERIES
The BlackRock U.S. Government Income Series (the "Government Income
Series") invests primarily in securities which are guaranteed as to payment of
principal and interest by the U.S. government or its instrumentalities.
U.S. GOVERNMENT OBLIGATIONS - The types of U.S. government obligations
in which the Series may invest generally include direct obligations of the U.S.
Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations issued
or guaranteed by U.S. government agencies or instrumentalities. These securities
are backed by: (1) the full faith and credit of the U.S. Treasury; (2) the
issuer's right to borrow from the U.S. Treasury; (3) the discretionary authority
of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or (4) the credit of the agency or instrumentality issuing
the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are: Federal Land Banks; Central Bank
for Cooperatives; Federal Intermediate Credit Banks; Federal Home Loan Banks;
Farmers Home Association; and Federal National Mortgage Association.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) - Privately issued CMOs
generally represent an ownership Interest in federal agency mortgage
pass-through securities such as those issued by the Government National Mortgage
Association. The terms and characteristics of the mortgage instruments may vary
among pass-through mortgage loan pools. The market for such CMOs has expanded
considerably since its inception. The size of the primary issuance market and
the active participation in the secondary market by securities dealers and other
investors make government-related pools highly liquid.
ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS) - Like other U.S. government
securities, the market value of ARMS will generally vary inversely with changes
in market interest rates. Thus, the market value of ARMS generally declines when
interest rates rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital appreciation
than other similar investments (e.g., investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMS are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS - These transactions are
arrangements in which the U.S. Government Income Series purchases securities
with payment and delivery scheduled for a future time. The Series engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Series' investment objective and
policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Series relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Series to miss a
price or yield considered to be advantageous.
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These transactions are made to secure what is considered to be an
advantageous price or yield for the Series. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Series sufficient to make payment for
the securities to be purchased are segregated on the Series' records at the
trade date. These securities are marked to market daily and maintained until the
transaction is settled.
REPURCHASE AGREEMENTS - The Series or its custodian will take possession
of the securities subject to repurchase agreements, and these securities will be
marked to market daily. In the event that a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Series
might be delayed pending court action. The Series believes that under the
regular procedures normally in effect for custody of the Series' portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Series and allow retention or disposition of such
securities. The Series will only enter into repurchase agreements with banks and
other recognized financial institutions such as broker/dealers which are deemed
by the sub-adviser to be creditworthy pursuant to guidelines established by the
Trustees.
REVERSE REPURCHASE AGREEMENTS - The Series may also enter into reverse
repurchase agreements. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Series transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Series will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate. The use of reverse repurchase agreements may enable the Series
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Series will be able to avoid selling portfolio
instruments at a disadvantageous time. When effecting reverse repurchase
agreements, liquid assets of the Series, in a dollar amount sufficient to make
payment for the obligations to be purchased, are segregated on the Series'
records at the trade date. These securities are marked to market daily and
maintained until the transaction is settled.
LENDING OF PORTFOLIO SECURITIES - The collateral received when the U.S.
Government Income Series lends portfolio securities must be valued daily and,
should the market value of the loaned securities increase, the borrower must
furnish additional collateral to the Series. During the time portfolio
securities are on loan, the borrower pays the Series any dividends or interest
paid on such securities. Loans are subject to termination at the option of the
Series or the borrower. The Series may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Series does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
INVESTMENT RESTRICTIONS FOR THE EQUITY SERIES AND U.S. GOVERNMENT INCOME SERIES
The investment restrictions of the Series described below are
fundamental policies that may not be changed without the approval of at least a
majority of the outstanding shares of a Series or of 67% of the shares of a
Series represented at a meeting of shareholders at which the holders of 50% or
more of the outstanding shares of the Series are represented.
As a matter of fundamental policy, neither Series may: (1) issue senior
securities except that the Series may borrow money directly or through reverse
repurchase agreements in amounts up to one-third of the value of its net assets,
including the amount borrowed (the Series will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate management of
the portfolio by enabling the Series to meet redemption requests when the
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liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Series will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Series will
restrict the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse repurchase
agreements); (2) purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of purchases and sales of
securities (the deposit or payment by the Series of initial or variation margin
in connection with financial futures contracts or related options transactions
is not considered the purchase of a security on margin); (3) mortgage, pledge,
or hypothecate any assets, except to secure permitted borrowings (in those
cases, it may pledge assets having a value of 15% of its assets taken at cost.
Margin deposits for the purchase and sale of financial futures contracts and
related options are not deemed to be a pledge); (4) lend any of its assets
except portfolio securities up to one-third of the value of its total assets
(this shall not prevent the Series from purchasing or holding bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted by the
Series' investment objective, policy, and limitations or Declaration of Trust);
(5) purchase or sell commodities, commodity contracts, or commodity futures
contracts except that the Equity Series may buy and sell financial futures
contracts; (6) purchase or sell real estate, although it may invest in
securities secured by real estate or interests in real estate or issued by
companies, including real estate investment trusts, which invest in real estate
or interests therein; (7) with respect to 75% of the value of its total assets,
purchase securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities), if as a result more than 5% of the value of its
total assets would be invested in the securities of that issuer; (8) acquire
more than 10% of the outstanding voting securities of any one issuer; (9) invest
25% or more of its total assets in securities of issuers having their principal
business activities in the same industry; (10) underwrite any issue of
securities, except as it may be deemed to be an underwriter under the Securities
Act of 1933 in connection with the sale of securities in accordance with its
investment objective, policies, and limitations; or (11) purchase restricted
securities if immediately thereafter more than 10% of the net assets of the
Series, taken at market value, would be invested in such securities (except for
commercial paper issued under Section 4(2) of the Securities Act of 1933 and
certain other restricted securities which meet the criteria for liquidity as
established by the Board of Trustees).
The above limitations cannot be changed without shareholder approval.
The following limitations for the Equity and U.S. Government Income Series,
however, may be changed by the Trustees without shareholder approval.
Shareholders will be notified before any material change in these limitation
becomes effective. Under these limitations, neither Series securities, including
repurchase agreements providing for settlement in more than seven days after
notice and certain restricted securities determined by the Trustees not to be
liquid; (2) invest in other investment companies to the extent of more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general (a Series will
purchase securities of closed-end investment companies only in open market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization or acquisition of assets); (3) invest more than 5%
of the value of its total assets in securities of issuers which have records of
less than three years of continuous operations, including the operation of any
predecessor; (4) purchase or retain the securities of any issuer if the officers
and Trustees of the Trust or its investment adviser, owning individually more
than 1/2 of 1% of the issuer's securities, together own more than 5% of the
issuer's securities; (5) purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest in the
securities of issuers which invest in or sponsor such programs; (6) in the case
of the Equity Series, purchase securities of a company for the purpose of
exercising control or management; (7) invest more than 5% of its net assets in
warrants, including those acquired in units or attached to other securities For
purposes of this investment restriction, warrants will be valued at the lower of
cost or market, except that warrants acquired by the Series in units with or
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attached to securities may be deemed to be without value); (8) enter into
transactions for the purpose of engaging in arbitrage; (9) purchase put options
on securities unless the securities are held in the Series' portfolio and not
more than 5% of the value of the Series' total assets would be invested in
premiums on open put option positions; (10) write call options on securities
unless the securities are held in its portfolio or unless the Series is entitled
to them in deliverable form without further payment or after segregating cash in
the amount of any further payment, or (11) sell securities short unless (a) it
owns, or has right to acquire, an equal amount of such securities, or (b) it has
segregated an amount of its other assets equal to the lesser of the market value
of the securities sold short or the amount required to acquire such securities.
(The segregated amount will not exceed 10% of the Series' net assets. While in a
short position, the Series will retain the securities, rights, or segregated
assets).
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
REPURCHASE AGREEMENTS
The T. Rowe Price Growth and Income Series and the Bond Series may
invest in repurchase agreements. A repurchase agreement is an instrument through
which an investor (such as a Series) purchases a security from a bank with an
agreement by the seller to repurchase the security at the same price, plus
interest at a specified rate. The underlying securities are limited to those
which would otherwise qualify for investment by the Series. Repurchase
agreements usually have a short duration, often less than one week. As a
fundamental investment policy of the T. Rowe Price Growth and Income Series, the
Series will not will enter into a repurchase agreement of a duration of more
than seven business days if, as a result, more than 10% of the value of the
Series' total assets would be so invested. As a non-fundamental policy of the
Bond Series, the Series will not invest more than 10% of its assets in
repurchase agreements maturing in more than seven days. Neither of the Series
will enter into repurchase agreements with securities dealers unless the Series
has been advised by legal counsel that such a transaction would not constitute a
purchase of an interest in such a dealer under section 12(d)(3) of the
Investment Company Act of 1940.
INVESTMENT ADVISER AND OTHER SERVICES
The following sets forth certain additional information concerning Met
Investors Advisory Corp. ("Met Investors"), formerly known as Security First
Investment Management Corporation ("Security Management"), the investment
adviser for the Series; T. Rowe Price Associates, Inc. ("Price Associates"), the
sub-adviser to Met Investors for the T. Rowe Price Growth and Income; Neuberger
Berman, the sub-advisor to the Bond Series; and BlackRock Financial Management,
Inc. ("BlackRock"), the sub-adviser to Security Management for the Equity Series
and the U.S. Government Income Series.
MET INVESTORS AND THE ADVISORY AGREEMENTS
Met Investors serves as the investment adviser to the T. Rowe Price
Growth and Income Series and the Bond Series, pursuant to a Master Investment
Management and Advisory Agreement dated October 30, 1997 and serves as the
investment adviser to the Equity Series and the U.S. Government Income Series
pursuant to a Master Investment Management and Advisory Agreement dated March
27, 1998 ("the Advisory Agreements"). Met Investors was incorporated in Delaware
on December 6, 1973 and is a wholly-owned subsidiary of Security First Group,
Inc., also a Delaware corporation. Met Investors and Security First Group, Inc.
maintain their principal places of business at 11365 West Olympic Boulevard, Los
Angeles California 90064. The common stock of Security First Group is currently
wholly owned by a subsidiary of Metropolitan Life Insurance Company, a New York
life insurance company. Met Investors also acts as investment adviser to an
affiliated insurance company, Security First Life Insurance Company.
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The Advisory Agreements provide that Met Investors is responsible for
supervising and directing the investments of each of the Series in accordance
with the investment objectives of each. Pursuant to the Advisory Agreements, Met
Investors shall obtain and evaluate information relating to the economy,
industries, business, securities markets, and particular issues of securities.
In addition, Met Investors agrees to formulate and implement a continuing
program for the management of each of the Series' assets, give investment advice
and manage the investment and reinvestment of the Series' securities. Met
Investors's obligations include the making and execution of investment
decisions, and the placement of orders for the purchase and sale of securities
with or through such brokers, dealers or issuers as Security Management may
select. Met Investors is also authorized to enter into sub-advisory agreements
with third parties for the provision of investment advice to Met Investors
relating to each Series' portfolio of securities, investments, cash and other
properties.
Under the Advisory Agreements, the Trust will assume and pay legal and
independent accounting and auditing expenses of the Trust, costs related to
reports, notices and proxy material, compensation and expense of disinterested
trustees, share issuance expenses, expenses of custodians, transfer agents and
registrars, brokers' commissions, all taxes and fees payable to governmental
agencies, expenses of shareholders' and trustees' meetings and interest
expenses. Met Investors will be responsible for paying all expenses and charges
not assumed by the Trust.
The Advisory Agreements provide that Met Investors, its officers,
directors and employees shall not be liable for any error of judgment, mistake
of law, or loss suffered by the Trust, while rendering services under the
Agreements, except for loss resulting from willful misfeasance, bad faith, gross
negligence in the performance of their duties on behalf of the Trust or reckless
disregard of their duties and obligations under the Agreements.
For its services to the T. Rowe Price Growth and Income Series and Bond
Series, Met Investors receives from the Trust fees computed by using an annual
rate of .50% (1/2 of 1%) based on the average daily net assets of each of the
Series. Such compensation is accrued daily and payable monthly. For its services
to the Equity Series and U.S. Government Income Series, Security Management
receives from the Trust fees computed by using an annual rate of 70% and .55%,
respectively, of the average daily net assets of the respective Series. Such
compensation is accrued daily and payable monthly.
For the fiscal year ended July 31, 2000, management fees of $1,714,097
($514,229 after payment of subadvisory fees) were paid by the T. Rowe Price
Growth and Income Series to Met Investors.
During the fiscal year ended July 31, 2000, management fees in the
amount of $121,324 ($36,397 after payment of the subadvisory fee) were earned by
Met Investors from the Bond Series.
In regard to the U.S. Government Income Series, for the fiscal year
ended July 31, 2000, Met Investors earned advisory fees of $178,490 ($48,679
after payment of subadvisory fees). In regard to the Equity Series, for the
fiscal year ended July 31, 2000, Met Investors earned advisory fees of $418,770
($89,739 after payment of subadvisory fees). Each Advisory Agreement provides
that it will remain in effect for an initial term of two years from its initial
effective date and will continue in effect from year to year thereafter as to
each Series provided that such continuance is specifically approved at least
annually by the Board of Trustees (at a meeting called for that purpose), or by
vote of a majority of the outstanding shares of each Series. In either case,
renewal of the Advisory Agreement must be approved by a majority of the Trust's
independent Trustees. Each Advisory Agreement provides that it will terminate
automatically if assigned and that it may be terminated as to a particular
Series without penalty by either party upon 60 days' prior written notice to the
other party, provided that termination by the Trust must be authorized by a
resolution of a majority of the Board of Trustees or by a vote of a majority of
the outstanding shares of the affected Series.
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PRICE ASSOCIATES AND THE PRICE SUB-ADVISORY AGREEMENT
Price Associates serves as sub-adviser to Met Investors with respect to
the T. Rowe Price Growth and Income Series pursuant to a Sub-Advisory Agreement
(the "Price Sub-Advisory Agreement") dated October 30, 1997. Price Associates is
a Maryland corporation which was incorporated in 1947, as the successor to the
investment counseling business founded by the late Mr. T. Rowe Price in 1937.
Its principal offices are located at 100 East Pratt Street, Baltimore, Maryland
21202. Price Associates and its subsidiaries serve as investment advisers to
individual and institutional investors (including mutual funds) with total net
assets under supervision of approximately $179.6 billion as of September 30,
2000. Price Associates is registered as an investment adviser under the
Investment Advisers Act of 1940.
Under the Price Sub-Advisory Agreement Price Associates provides
investment management services to the T. Rowe Price Growth and Income Series.
Price Associates has the discretion to purchase or sell securities on behalf of
the Trust in accordance with the Trust's investment objectives or restrictions
and to communicate with brokers, dealers, custodians or other parties on behalf
of the Trust and to allocate brokerage or obtain research services. In
performing these services, Price Associates must obtain and evaluate information
relating to the economy, industries, business, securities markets and securities
as it may deem necessary, and it must formulate and implement a continuing plan
for performance of its services.
The Price Sub-Advisory Agreement provides that Price Associates, its
officers, directors and employees shall not be liable for any error of judgment,
mistake of law, or loss suffered by the Trust, while rendering services under
the Agreement, except for loss resulting from willful misfeasance, bad faith,
gross negligence in the performance of their duties on behalf of the Trust or
reckless disregard of their duties and obligations under the Price Sub-Advisory
Agreement.
For its services, Price Associates receives a fee from Security
Management computed by using an annual rate of .35% based on the average daily
net assets of the T. Rowe Price Growth and Income Series. Such compensation is
accrued daily and payable monthly.
For the fiscal year ended July 31, 2000, Price Associates received
advisory fees from the T. Rowe Price Growth and Income Series of $1,199,868. For
the fiscal year ended July 31, 2000, the ratios of total expenses to average net
assets for this Series was .55%.
The Price Sub-Advisory Agreement provides that it will remain in effect
for an initial term of two years and will continue in effect from year to year
thereafter as to each Series, provided that such continuance is specifically
approved at least annually by the Board of Trustees (at a meeting called for
that purpose), or by vote of a majority of the outstanding shares of each
Series. In either case, renewal of the Price Sub-Advisory Agreement must be
approved by a majority of the Trust's independent Trustees. The Price
Sub-Advisory Agreement provides that it will terminate automatically if assigned
and that it may be terminated without penalty by either party or by a Series of
the Trust upon 60 days prior written notice to the other party, provided that
termination by a Series of the Trust must be authorized by a resolution of a
majority of the Board of Trustees or by a vote of a majority of the outstanding
shares of the Series of the Trust.
No single shareholder owns beneficially more than 10% of the stock of
Price Associates.
NEUBERGER BERMAN AND NEUBERGER BERMAN SUB-ADVISORY AGREEMENT
Neuberger Berman was founded in 1939 to manage assets for high net worth
individuals. It is an investment adviser registered as such with the Securities
and Exchange Commission ("SEC") under the Investment Advisers Act of 1940. It is
also registered with the SEC as a broker-dealer under the Securities Exchange
Act of 1934, and is a member of the New York Stock Exchange. Its offices are
located at 605 Third Avenue, New York, New York 10158. Currently, it provides
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investment management services to a wide variety of clients, including
individuals, investment companies, pension and profit-sharing plans, trusts and
charitable organizations, and has approximately $54.4 billion in assets under
its management for clients as of December 31, 1999.
Under the Neuberger Berman Sub-Advisory Agreement, dated October 30,
1997, Neuberger Berman provides investment management services to the Bond
Series. Neuberger Berman has the discretion to purchase or sell securities on
behalf of the Trust in accordance with the Trust's investment objectives or
restrictions and to communicate with brokers, dealers, custodians or other
parties on behalf of the Trust and to allocate brokerage or obtain research
services. In performing these services, Neuberger Berman must obtain and
evaluate information relating to the economy, industries, business, securities
markets and securities as it may deem necessary, and it must formulate and
implement a continuing plan for performance of its services.
The Neuberger Berman Sub-Advisory Agreement provides that Neuberger
Berman, its officers, directors and employees shall not be liable for any error
of judgment, mistake of law, or loss suffered by the Trust, while rendering
services under the Agreement, except for loss resulting from willful
misfeasance, bad faith, gross negligence in the performance of their duties on
behalf of the Trust or reckless disregard of their duties and obligations under
the Neuberger Berman Sub-Advisory Agreement.
For its services, Neuberger Berman receives a fee from Security
Management computed by using an annual rate of .35% based on the average daily
net assets of the Bond Series. Such compensation is accrued daily and payable
monthly.
Neuberger Berman began providing sub-advisory services to the Bond
Series on July 15, 1997. In the fiscal year ended July 31, 2000, Neuberger
Berman received advisory fees of $84,927.
The Neuberger Berman Sub-Advisory Agreement provides that it will remain
in effect for an initial term of two years and will continue in effect from year
to year thereafter as to the Bond Series, provided that such continuance is
specifically approved at least annually by the Board of Trustees (at a meeting
called for that purpose), or by vote of a majority of the outstanding shares of
each Series. In either case, renewal of the Neuberger Berman Sub-Advisory
Agreement must be approved by a majority of the Trust's independent Trustees.
The Neuberger Berman Sub-Advisory Agreement provides that it will terminate
automatically if assigned and that it may be terminated without penalty by
either party or by a Series of the Trust upon 60 days prior written notice to
the other party, provided that termination by a Series of the Trust must be
authorized by a resolution of a majority of the Board of Trustees or by a vote
of a majority of the outstanding shares of the Series of the Trust.
BLACKROCK AND THE BLACKROCK SUB-ADVISORY AGREEMENT
BlackRock serves as sub-adviser to Met Investors with respect to the
Equity Series and U.S. Government Income Series pursuant to sub-advisory
agreements (the "BlackRock Sub-Advisory Agreements") dated March 27, 1998.
BlackRock is a wholly-owned subsidiary of BlackRock, Inc., which is subsidiary
of PNC Bank, N.A. The principal offices of BlackRock and BlackRock, Inc. are
located at 345 Park Avenue, New York, New York 10154, with additional offices in
Philadelphia, Wilmington, Edinburgh and Tokyo. BlackRock, Inc. is a fully
integrated money management firm with global fixed income, equity and cash
management capabilities. As of December 31, 1999, BlackRock, Inc. And its
subsidiaries managed or administered approximately $165 billion in assets.
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As compensation for providing services under the BlackRock Sub-Advisory
Agreements, BlackRock receives from Met Investors fees computed by using an
annual rate of 0.55% based on average daily assets of the Equity Series and an
annual rate of 0.40% based on the average daily net assets of the U.S.
Government Income Series. These fees are accrued daily, and paid monthly.
Under the BlackRock Sub-Advisory Agreements BlackRock provides
investment management services to the Equity Series and U.S. Government Income
Series. BlackRock has the discretion to purchase or sell securities on behalf of
the Series in accordance with the Series' investment objectives or restrictions
and to communicate with brokers, dealers, custodians or other parties on behalf
of the Series and to allocate brokerage or obtain research services. In
performing these services, BlackRock must obtain and evaluate information
relating to the economy, industries, business, securities markets and securities
as it may deem necessary, and it must formulate and implement a continuing plan
for performance of its services.
The BlackRock Sub-Advisory Agreements provide that BlackRock and its
officers, directors and employees shall not be liable for any error of judgment,
mistake of law, or loss suffered by the Trust, while rendering services under
the BlackRock Sub-Advisory Agreements, except for loss resulting from willful
misfeasance, bad faith, gross negligence in the performance of their duties on
behalf of the Trust or reckless disregard of their duties and obligations.
During the fiscal year ended July 31, 2000, BlackRock earned a
sub-advisor fee of $329,031 from the Equity Series. During the same period,
BlackRock earned a sub-advisor fee of $129,811 from the U.S. Government Income
Series.
The BlackRock Sub-Advisory Agreements provide that it will remain in
effect for an initial term of two years and will continue in effect from year to
year thereafter, provided that such continuance is specifically approved at
least annually by the Board of Trustees (at a meeting called for that purpose),
or by vote of a majority of the outstanding shares of the Series. In either
case, renewal of the BlackRock Sub-Advisory Agreement must be approved by a
majority of the Trust's independent Trustees. The BlackRock Sub-Advisory
Agreement provides that it will terminate automatically if assigned and that it
may be terminated without penalty by either party or by the relevant Series upon
60 days prior written notice to the other party, provided that termination by
the Series must be authorized by a resolution of a majority of the Board of
Trustees or by a vote of a majority of the outstanding shares of the Series.
PRINCIPAL HOLDERS OF SECURITIES
Security First Life Separate Account A, the depositor of which is the
Security First Life Insurance Company, has entered into a participation
agreement with the Trust for the purchase of Series shares at net asset value.
As of July 31, 2000, Security First Life Separate Account A was the owner of
99.51% of the outstanding shares of Bond Series, 99.51% of the outstanding
shares of the T. Rowe Price Growth & Income Series and 100% of the outstanding
shares of the Equity Series and U.S. Government Income Series. The address of
Security First Life Separate Account A, and the depositor, Security First Life
Insurance Company, is 11365 West Olympic Boulevard, Los Angeles, California
90064.
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MANAGEMENT OF THE TRUST
The Trustees are responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Trustee is provided below and includes each person's
name, address, age, present position(s) held with the Trust, principal
occupations for the past five years and positions held prior to the past five
years, total compensation received as a Trustee from the Trust for its most
recent fiscal year
<TABLE>
<CAPTION>
------------------------------------- -------------------- --------------------------- ----------------------------
NAME, ADDRESS, AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) AGGREGATE COMPENSATION
WITH TRUST DURING PAST 5 YEARS FROM TRUST
------------------------------------- -------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Jack R. Borsting Trustee Current - Executive $11,000
3415 South Figueroa, DCC 217 Director, Center for
Los Angeles, CA 90089-0871 Telecommunications
Age 71 Management, University of
Southern California
Prior to 1995 - Dean, USC
School of Business, Dept.
of Information &
Operations Management
------------------------------------- -------------------- --------------------------- ----------------------------
Katherine L. Hensley Trustee Retired. $11,000
400 South Hope Street Formerly - Partner in the
Los Angeles, CA 90071-2899 law firm of O'Melveny &
Age 63 Myers
------------------------------------- -------------------- --------------------------- ----------------------------
Howard H Kayton* Trustee Senior Vice President and $0
11365 West Olympic Boulevard Chief Actuary of Security
Los Angeles, CA 90064 First Group, Inc.
Age 64
------------------------------------- -------------------- --------------------------- ----------------------------
Lawrence E. Marcus Trustee Retired. $11,000
4616 Dorset Formerly - Executive
Dallas, Texas 75229 Vice President of
Age 82 Neiman-Marcus Company, a
general merchandise
retailer
------------------------------------- -------------------- --------------------------- ----------------------------
Richard C. Pearson President President of Security $0
11365 West Olympic Boulevard First Group, Inc. and an
Los Angeles, CA 90064 officer of its
Age 57 subsidiaries
------------------------------------- -------------------- --------------------------- ----------------------------
Jane F. Eagle Senior Vice Senior Vice President of $0
11365 West Olympic Boulevard President and Security First Group,
Los Angeles, CA 90064 Chief Financial Inc. and an officer of
Age 35 Officer its subsidiaries.
------------------------------------- -------------------- --------------------------- ----------------------------
Cheryl M. MacGregor Senior Vice Senior Vice President, $0
11365 West Olympic Boulevard President, Administration of
Los Angeles, CA 90064 Administration Security First Group,
Age 53 Inc. and an officer of
its subsidiaries.
------------------------------------- -------------------- --------------------------- ----------------------------
James C. Turner Vice President, Vice President, Taxation $0
11365 West Olympic Boulevard Taxation of Security First Group,
Los Angeles, CA 90064 Inc.
Age 55
------------------------------------- -------------------- --------------------------- ----------------------------
Cheryl J. Finney Vice President and Associate General Counsel $0
11365 West Olympic Boulevard Assistant Secretary of Security First Group,
Los Angeles, CA 90064 Inc. and an officer of
Age 46 its subsidiaries.
------------------------------------- -------------------- --------------------------- ----------------------------
</TABLE>
Each disinterested Trustee receives a Trustee's fee of $7,000 per year,
$1,000 for each Trustees' meeting attended and reimbursement of expenses.
Ms. Eagle is also Senior Vice President, Finance of Met Investors. Mr.
Pearson is also President of Met Investors. Mr. Turner is also Vice President,
Taxation and Assistant Secretary of Met Investors. Ms. Finney is also Vice
President, and Assistant Secretary of Met Investors.
* Interested Trustee
21
<PAGE>
BROKERAGE
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Trust are made by Met Investors pursuant to the terms of the
Advisory Agreement. However, pursuant to the terms of the Sub-Advisory
Agreements, Price Associates, Neuberger Berman and BlackRock may allocate
brokerage and principal business or obtain research services from organizations
with which the Trust or Met Investors may be dealing. Met Investors is
ultimately responsible for implementing these decisions, including the
allocation of principal business and portfolio brokerage and the negotiation of
commissions.
In purchasing and selling the Series' portfolio securities, it is Met
Investors's, Price Associates', Neuberger Berman's and BlackRock's policies to
seek quality execution at the most favorable prices through responsible
broker-dealers and, in the case of agency transactions, at competitive
commission rates. However, under certain conditions and with the exception of
the Bond Series advised by Neuberger Berman, a Series may pay higher brokerage
commissions in return for brokerage and research services. In selecting
broker-dealers to execute a Series' portfolio transactions, consideration will
be given to such factors as the price of the security, the rate of commission,
the size and difficulty of the order, the reliability integrity, financial
condition, general execution and operational capabilities of competing
broker-dealers, and brokerage and research services which they provide to Met
Investors, Price Associates, Neuberger Berman, BlackRock or the Series.
Met Investors, Price Associates or BlackRock may cause a Series to pay a
broker-dealer who furnishes brokerage and/or research services a commission that
is in excess of the commission another broker-dealer would have received for
executing the transaction if it is determined that such commission is reasonable
in relation to the value of the brokerage and/or research services which have
been provided. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities of Security Management,
Price Associates and BlackRock with respect to the accounts over which they
exercise investment discretion. In some cases, research services are generated
by third parties, but are provided to Met Investors, Price Associates, Neuberger
Berman or BlackRock by or through broker-dealers.
Price Associates, Neuberger Berman and BlackRock may effect principal
transactions on behalf of a Series with a broker-dealer who furnishes brokerage
and/or research services, designate any such broker-dealer to receive selling
concessions, discounts or other allowances, or otherwise deal with any such
broker-dealer in connection with the acquisition of securities in underwritings.
Additionally, purchases and sales of fixed income securities are transacted with
the issuer, the issuer's underwriter, or with a primary market maker acting as
principal or agent. The Trust does not usually pay brokerage commissions for
these purchases and sales, although the price of the securities generally
includes compensation which is not disclosed separately. The prices the Trust
pays to underwriters of newly-issued securities usually include a concession
paid by the issuer to the underwriter. Transactions placed through dealers who
are serving as primary market makers reflect the spread between the bid and
asked prices. Met Investors, Price Associates, Neuberger Berman and BlackRock
receive a wide range of research services from broker-dealers including
information on securities markets, the economy, individual companies,
statistical information, accounting and tax law interpretations, technical
market action, pricing and appraisal services, and credit analysis. Research
services are received primarily in the form of written reports, telephone
contacts, personal meetings with security analysts, corporate and industry
spokespersons, economists, academicians, government representatives, and access
to various computer-generated data. Research services received from
broker-dealers are supplemental to Met Investors's, Price Associates', Neuberger
Berman's and BlackRock's own research efforts and, when utilized, are subject to
internal analysis before being incorporated into the investment process.
22
<PAGE>
Each year Met Investors, Price Associates, Neuberger Berman and
BlackRock assess the contribution of the brokerage and research services
provided by broker-dealers and allocate a portion of the brokerage business of
their clients on the basis of these assessments. In addition, broker-dealers
sometimes suggest a level of business they would like to receive in return for
the various brokerage and research services they provide. Actual brokerage
received by any firm may be less than the suggested allocations, but can (and
often does) exceed the suggestions because total brokerage is allocated on the
basis of all the considerations described above. In no instance is a
broker-dealer excluded from receiving business because it has not been
identified as providing research services.
Met Investors, Price Associates, Neuberger Berman and BlackRock cannot
readily determine the extent to which commissions or net prices charged by
broker-dealers reflect the value of their unsolicited research services. In some
instances, Met Investors and/or Price Associates, and/or Neuberger Berman and/or
BlackRock will receive research services they might otherwise have had to
perform for themselves. The research services provided by broker-dealers can be
useful to Met Investors, Price Associates, Neuberger Berman and BlackRock in
serving their other clients, but they can also be useful in serving the Trust.
Met Investors, Price Associates, Neuberger Berman and BlackRock do not
allocate business to any broker- dealer on the basis of its efforts in promoting
sales of shares of the Series. However, this does not mean that such
broker-dealers will not receive business from the Trust.
Some of Price Associates', Neuberger Berman's or BlackRock's other
clients have investment objectives and programs similar to one or more of the
Series. They may occasionally make recommendations to other clients which result
in their purchasing or selling securities simultaneously with a Series. As a
result, the demand for securities being purchased or the supply of securities
being sold may increase, and this could have an adverse effect on the price of
those securities. It is Price Associates', Neuberger Berman's and BlackRock's
policy not to favor one client over another in making recommendations or in
placing orders. If two or more clients are purchasing or selling a given
security on the same day from or to the same broker-dealer, the advisor may
average the price of the transactions and allocate the average among the clients
participating in the transaction. Price Associates has established a general
investment policy that it will ordinarily not make additional purchases of a
common stock of a company for its clients (including the T. Rowe Price Funds)
if, as a result of such purchases, 10% or more of the outstanding common stock
of such company would be held by its clients in the aggregate.
All brokerage commissions will be allocated by Price Associates,
Neuberger Berman and BlackRock according to the foregoing policies. The T. Rowe
Price Growth and Income Series paid brokerage commissions to securities dealers
in connection with underwritings during the fiscal year ended July 31, 2000, of
$162,871. The Equity Series paid brokerage commissions to securities dealers
during that fiscal year of $97,806. The Bond Series and U.S. Government Income
Series did not pay any brokerage commissions or discounts to securities dealers
in that fiscal year.
PORTFOLIO TURNOVER
The portfolio turnover rate can be expected to be higher during periods
of rapidly changing economic or market conditions than in a more stable period.
Portfolio turnover may be defined as the ratio of the total dollar amount of the
lesser of the purchase or sales of securities to the monthly average value of
portfolio securities owned by the Trust. The portfolio turnover rate for the T.
Rowe Price Growth and Income Series for the fiscal year ended July 31, 2000, was
16%. The portfolio turnover rate for the Bond Series for the fiscal year ended
July 31, 2000, was 177%. The portfolio turnover rate during said period for the
Equity Series was 83%. The portfolio turnover rate for the U.S. Government
Income Series for said period was 159%.
High portfolio turnover involved correspondingly greater brokerage
commissions, to the extent such commissions are payable, and other transaction
costs that are borne directly by the Series involved. Higher turnover rates
reflect an increased rate of realization of gains and losses by the Series,
23
<PAGE>
which would normally affect the taxable income of the Series' shareholders.
Where the shareholder is an insurance company separate account funding variable
annuity contracts, qualified as such under the Internal Revenue Code ("Code"),
however, the contract owners are not currently charged with such income or
losses except to the extent provided under the Code (normally when distributions
under the contracts are made).
PRICING AND REDEMPTION OF SECURITIES BEING OFFERED
DETERMINING NET ASSET VALUE
The net asset value per share of each Series is determined by dividing
the value of the Series' securities, plus any cash and other assets (including
dividends and interest accrued and not collected), less all liabilities
(including accrued expenses), by the number of shares outstanding.
T. ROWE PRICE GROWTH AND INCOME AND BOND SERIES
Debt securities other than convertible securities and short-term
obligations are valued at prices obtained for the day of valuation from a bond
pricing service of a major dealer in bonds, when such prices are available.
However, when such prices are not available and where Met Investors deems it
appropriate to do so, an over-the-counter or exchange quotation may be used. The
market value of the Series' other portfolio securities is determined as follows:
securities traded on a national securities exchange are valued at the bid price
for such securities, as reported by securities dealers. When market quotations
are not readily available, or when restricted securities are being valued, such
securities are valued at fair value as determined in good faith by the Board of
Trustees. Any other assets are also valued at their fair value as determined in
good faith by the Board.
EQUITY AND U.S. GOVERNMENT INCOME SERIES
The market values of the Series' portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or for short-term
obligations with maturities of less than 60 days, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Board of Trustees.
The Series will value future contracts, options, put options on futures
and financial futures at their market values established by the exchanges at the
close of option trading on such exchanges unless the Board determines in good
faith that another method of valuing option positions is necessary to appraise
their fair value.
24
<PAGE>
REDEMPTION OF SHARES
The Trust will redeem shares at the net asset value per share next to be
determined after receipt of a duly executed request for redemption. Redemption
of shares or payment may be suspended at times (i) when the New York Stock
Exchange is closed other than customary weekends and holidays, (ii) when trading
on said exchange is restricted, (iii) when an emergency (as determined by the
Securities and Exchange Commission) exists, making disposal of portfolio
securities or the valuation of net assets of the Series not reasonably
practicable, or (iv) when the Securities and Exchange Commission has by order
permitted such suspension for the protection of shareholders of the Trust.
The Trust's redemption procedures will not be changed without prior
notice to shareholders.
TAXATION
Under the Code, each of the Series is treated as a separate regulated
investment company provided the qualification requirements of Subchapter M are
otherwise met. As a regulated investment company, a Series will not be subject
to federal income tax on net investment income and capital gains (short- and
long-term), if any, that it distributes to its shareholders if at least 90% of
its net investment income and net short-term capital gains for the taxable year
is distributed.
In order to qualify as a regulated investment company under the Code, a
Series must, among other things, (a) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks or securities, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
and (b) diversify its holdings so that, at the end of each fiscal quarter, (i)
at least 50% of the market value of the Series' assets is represented by cash,
Government securities and other securities limited in respect of any one issuer
to 5% of the Series' assets and to not more than 10% of the voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than Government securities).
In addition to the diversification requirements contained in the Trust's
investment restrictions, the Trust is also subject to diversification
requirements applicable to variable annuities under Section 817(h) of the Code.
Under this section, a variable annuity will not receive the tax treatment
afforded annuities if its underlying investments are not adequately diversified.
Under applicable regulations, no more than 55% of total assets can be invested
in one investment, 70% in two investments, 80% in three investments and 90% in
four investments. Investments are generally defined as securities issued by any
one issuer. U.S. Government agencies or instrumentalities are considered
separate issuers.
Unlike public shareholders, under the Code a life insurance company
separate account will not incur any federal income tax liability on dividends
and capital gains distributions received from a regulated investment company by
a separate account funding variable annuity contracts as defined in section
817(d) of the Code.
To the extent that there is in excess of $250,000 invested in a Series
other than through variable contract premium payment, the Code imposes a 4%
nondeductible excise tax on the undistributed income of such Series to the
extent the Series does not distribute at least 98% of its net investment income
and its net capital gains (both long- and short-term) for each taxable year by
the end of such year. For purposes of the 4% excise tax, dividends and
distributions will be treated as paid when actually distributed, except that
dividends declared in December payable to shareholders of record on a specified
date in December, and paid before February 1 of the following year, will be
treated as having been (i) paid by the Series on the record date and (ii)
received by each shareholder on such date. Net capital gains realized for the
one year period ending on October 31 of each tax year are subject to
distribution in this manner.
Series which do not have in excess of $250,000 invested other than
through variable contract premium payments are not subject to the above
described 4% excise tax. Each Series will send written notices to its
shareholders (Separate Accounts) regarding the tax status of all distributions
made during each taxable year.
25
<PAGE>
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
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 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. 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.
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.
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.
STANDARD & POOR'S CORPORATION
Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differs from the higher-rated issues only in small degree.
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.
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.
FITCH INVESTORS SERVICE, INC.
Fitch's investment grade bond ratings are summarized as follows: AAA -
Bonds considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably foreseeable events; AA Bonds
considered to be investment grade and of very high credit quality. The obligors'
ability to pay interest and repay principal is very strong, although not quite
as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated 'F-1+'; A - Bonds considered
to be investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings; BBB - Bonds considered to be investment grade and of
26
<PAGE>
satisfactory credit quality. The obligors' ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) Minus (-) - Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the 'AAA' category.
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's employs the following three designations, all judged to be of
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short- term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. Categories A-1, A-2 and A-3
are as follows: A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation;
A-2--Capacity for timely payments on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1"; and A-3--Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes In circumstances than obligations carrying the higher
designations.
CUSTODIAN
The Bank of New York (the "Custodian"), 1 Wall Street, New York, New
York 10286, serves as the Trust's custodian. Pursuant to the terms of the
Custodian Agreement executed with the Trust, the Trust will forward to the
Custodian the proceeds of each purchase of Series shares. The Custodian will
27
<PAGE>
hold such proceeds and make disbursements therefrom in accordance with the terms
of the Custodian Agreement. It will retain possession of the securities
purchased with such proceeds and maintain appropriate records with respect to
receipt and disbursements of money, receipt and release of securities, and all
other transactions of the Custodian with respect to the securities and other
assets of the Series.
The Custodian Agreement provides that each of the Series shall pay to
the Custodian compensation for its services, in accordance with the Custodian's
regularly established rate schedule. Said compensation shall be computed on the
basis of the Series' average daily net assets payable as of the end of each
month. The Custodian Agreement may be terminated by either the Trust or the
Custodian upon 60 days' written notice to the other party. Such termination
shall not be in contravention of any applicable federal or state laws or
regulations, or any provision of the Trust Declaration or By-Laws.
INDEPENDENT AUDITORS
The financial statements of Security First Trust at July 31, 1999, and
July 31, 2000, and for the periods indicated in this report appearing in this
Statement of Additional Information and Registration Statement have been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
appearing elsewhere in the registration statement, and is included in reliance
upon their report of such firm given upon their authority as experts in
accounting and auditing. The consolidated financials statements and the related
financial statements schedules of Security First Trust at July 31, 1998, 1997
and 1996 included elsewhere in the registration statement have been audited by
Ernst & Young LLP, independent auditors, as stated in their reports appearing
elsewhere in the registration statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
FEDERAL REGISTRATION OF SHARES
The Trust's shares are registered for sale under the Securities Act of
1933.
LEGAL COUNSEL
Sullivan & Worcester LLP, whose address is 1025 Connecticut Avenue N.W.,
Washington, D.C. 20036, is legal counsel to the Trust.
28
<PAGE>
================================================================================
Dear Contract Owner:
The stock market soared, dove, then rose again during the six months ended July
31, 2000, creating significant volatility among various sectors and individual
stocks. By the time the dust settled at the end of June, most major market
indices were mixed for the six-month period.
Bond prices, which move inversely to their yields, have risen in expectation of
a slowing economy due to higher short-term interest rates. Treasury yields
decreased in the first half of 2000. Over the course of the last six months, the
yield of the thirty year Treasury has decreased by nearly 58 basis points.
I encourage you to review the following report covering the past six months and
to contact us if you have any questions.
Respectfully submitted,
/s/ RICHARD C. PEARSON
-------------------------------------
Richard C. Pearson
President
[SECURITY FIRST TRUST LOGO]
================================================================================
<PAGE> 2
================================================================================
SECURITY FIRST TRUST:
T. ROWE PRICE GROWTH
AND INCOME SERIES AND
EQUITY SERIES
EQUITY MARKET OVERVIEW
There have been signs during the past few months that momentum may have
begun to shift back toward quality companies with a history of earnings growth
and relatively high dividend yields, and we regard this development -- if it
continues --as a welcome return to reality in the equities market.
The year began with a continuation of the pattern that characterized the
stock market through most of last year. In the first quarter, the
technology-heavy Nasdaq Composite led the way as the more aggressive market
sectors provided the strongest performance. In April and May, those stocks
experienced a sudden and sharp decline, and traditional value stocks provided
better relative performance. In June, the market under-went another reversal in
sentiment, with growth stocks rebounding from their spring decline. By the end
of July, the Standard and Poors 500 rose slightly while the Nasdaq Composite
suffered a modest loss. Within these indices, growth stocks generally fared
better than value stocks, and smaller and mid-cap shares outperformed the
largest-cap stocks.
EQUITY MARKET OUTLOOK
After the shakeout of the past six months, the market ended up treading
water as investors digested a series of tightening moves by the Fed aimed at
slowing the pace of economic growth. In earlier reports we discussed the
de-linkage between stock prices and the earnings and dividend growth that
normally support them, since share prices have risen at a faster pace in recent
years. This gap began to close modestly during the recent period, with earnings
and dividend growth moving ahead while stocks declined in value. Despite the
improved performance of value stocks mentioned earlier, they remain very
inexpensive relative to their growth stock siblings. If history is any guide,
true value tends to reassert itself over time.
PORTFOLIO MANAGEMENT:
T. ROWE PRICE GROWTH
AND INCOME SERIES
During the six-month period, the portfolio benefited from several
successful investments and suffered from some that did not work out as well. Our
holdings in the financial, consumer nondurables, and technology sectors were
generally good performers, while business services, transportation, and basic
materials were weaker overall.
GROWTH AND INCOME SERIES
SECTOR DIVERSIFICATION PIE CHART
<TABLE>
<S> <C>
Utilities 5.3%
Capital Equipment 4.1%
Consumer Non-Durables 20.6%
Short-Term Securities 3.4%
Consumer Services 16.6%
Transportation 5.9%
Energy 10.5%
Financial 16.9%
Consumer Cyclicals 0.5%
Process Industries 10.7%
Technology 5.5%
</TABLE>
Among our major holdings were BP Amoco, Citigroup, American Home
Products, Abbott Laboratories, Disney, and Starwood Hotels & Resorts Worldwide.
================================================================================
1
<PAGE> 3
================================================================================
--------------------------------------------------------------------------------
GROWTH & INCOME SERIES
15 LARGEST HOLDINGS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Security Portfolio
-------- -------------
<S> <C>
BP Amoco PLC 3.9
Citigroup, Inc. 3.6
American Home Products 2.0
Abbott Laboratories 1.9
Disney Walt Company Holding Co. 1.9
Starwood Hotel & Resort
Worldwide, Inc. 1.8
First Data Corp. 1.8
Kimberly-Clarke Corp. 1.8
General Electric Co. 1.7
Viacom, Inc. CL B 1.7
Target Corp. 1.6
Boeing Company 1.5
Chubb Corp. 1.5
St. Paul Companies, Inc. 1.4
Waste Management, Inc. 1.4
-----
TOTAL 29.5
=====
</TABLE>
The strategy we followed during the period was to invest in good
companies after the sell-off. Equity investors not only have high expectations
for future returns, but also little tolerance for any disappointing news
affecting their investments. As a result, the stocks of many quality companies
with solid earnings histories suffered in the downdraft.
In this climate, we capitalized on the significant price declines in
several stocks to make new investments. Our experience suggests that investing
in strong companies after they lose much of their value is often a rewarding
move. This was our reason for purchases of Rockwell International, Gillette,
Microsoft, America Online, Black & Decker, and Motorola. Rockwell is the classic
value stock. Having fallen substantially in price, the stock sold for 10 times
earnings and sported a dividend yield of 3% --an attractive valuation for a
leading manufacturing company. Our other purchases share the common
characteristics of recent price weakness, strong market position, and attractive
valuations. Microsoft is a slightly unusual holding for us given our general
reluctance to invest in technology stocks for valuation reasons. Nonetheless,
after its highly publicized antitrust problems and stock price nosedive, we
though it was an opportune time to initiate a small position.
Most of the portfolio sales were of successful investments whose
valuations reached unattractive levels as their share prices rose, which
diminished their appeal for us. Included among our major sales were Baker Hughes
and General Electric.
The fund's holdings sell at a substantial discount to the overall
market. Our historical approach has been to invest in companies selling at
relatively low price/earnings ratios with attractive dividend yields and other
compelling valuation characteristics. Compared with the broad market, at the end
of June we had a portfolio of undervalued companies with good prospects over the
next few years.
PORTFOLIO MANAGEMENT:
EQUITY SERIES
In this volatile market environment, the Security First Trust Equity
Series portfolio underperformed the Standard and Poors 500 Index for the
quarter. In particular, an overweight position in the technology sector and an
underweight position in the consumer staples sector early in the second quarter
hurt performance.
EQUITY SERIES
SECTOR DIVERSIFICATION PIE CHART
<TABLE>
<S> <C>
Utilities 8.2%
Capital Equipment 6.3%
Consumer Non-Durables 14.9%
Consumer Services 10.2%
Energy 5.6%
Financial 18.1%
Consumer Cyclicals 0.5%
Process Industries 1.9%
Technology 34.3%
</TABLE>
================================================================================
2
<PAGE> 4
================================================================================
Stock selection also detracted from performance among the larger
positions in the portfolio while stock selection among the smaller positions in
the portfolio contributed positively to performance.
During the last few months, we bought Alcatel, Anheuser Busch, Ericsson
and Mellon Financial Group. This group showed improving fundamentals and
attractive growth prospects. We sold Fleet Boston Financial Corp. due to
earnings uncertainty, sold Qualcomm because of deteriorating fundamentals and
sold Warner-Lambert because it was fully valued. As of the end of June, the top
ten holdings included Cisco Systems, General Electric, Intel and Microsoft.
--------------------------------------------------------------------------------
EQUITY SERIES
15 LARGEST HOLDINGS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Security Portfolio
-------- -------------
<S> <C>
Cisco Systems 4.8
General Electric 4.2
Intel Corp. 4.2
Citigroup, Inc. 4.1
SPDR Trust 3.4
Microsoft Corp. 3.2
American International Group 2.8
Exxon Mobil Corp. 2.8
Nortel Networks Corp. 2.7
Walmart Stores 2.5
EMC Mass Corp. 1.9
Merck & Co. 1.9
Pfizer, Inc. 1.8
Dell Computer Corp. 1.8
Royal Dutch Petroleum Co. ADR 1.8
-----
TOTAL 43.9
=====
</TABLE>
Going forward, the portfolio still maintains a value tilt with modes
overweight positions in the capital goods, energy and financial sectors relative
to the Standard and Poors 500 Index. Despite this value bias, the Portfolio
holds many companies that should benefit from the market's emphasis on companies
with strong earnings growth prospects.
SECURITY FIRST TRUST:
BOND SERIES AND U.S.
GOVERNMENT INCOME SERIES
FIXED-INCOME MARKET OVERVIEW
The U.S. economy finally slowed from its rapid pace in the second
quarter as gains related to Y2K liquidity and preparations, bonus compensation
payments, unseasonably warm weather and tax receipts began to dissipate. While
the consumer continued to spend, it was clearly with less enthusiasm than the
first quarter, as retail sales declined significantly in the second quarter. A
slowdown in the manufacturing sector appeared as well, with the NAPM Purchasing
Managers Index falling to its lowest level in 18 months. While the economy is
surely slowing, inflation appears less clear. Secular trends such as improving
technology and globalization of labor markets continue to put downward pressure
on inflation. However, the sharp increase in oil and natural gas prices, along
with an upward trending core CPI and Personal Consumption Expenditure deflator,
suggest that cyclical inflationary pressures could continue to build even if the
economy slows to a more sustainable pace. In March, the Federal Reserve raised
both the overnight rate and the discount rate 0.25% to 6.0% and 5.5%,
respectively. Despite the sell-off in the equity market in April, in May
concerns about an overheating economy due to an increased shortage of labor and
rising oil prices led the Federal Reserve to rise rates another 0.50% to 6.5%
Treasury yields decreased in the first half of 2000. Over the course of
the year so far, the yield of the 30-year Treasury has decreased by nearly 58
basis points (0.58%). The yield of the 10-Year Treasury posted a net decrease of
42 basis points (0.42%). We anticipate a continued flattening of the yield curve
as a result of an active Federal Reserve and potential Treasury repurchases of
long maturity debt.
Mortgages posted positive returns during the first half of the year, but
trailed the broader market, which was led by the strong rally in the Treasury
market. As measured by the Lehman Brothers Mortgage Index, mortgages posted a
3.67% total return versus 3.99% for the Lehman Brothers Aggregate Index.
Strength in the housing market has continued unabated, leading
================================================================================
3
<PAGE> 5
================================================================================
to more supply than expected, but in comparison to other spread sectors,
mortgages benefited from greater liquidity and higher credit quality. On a
relative valuation basis mortgages appear cheap, although uncertainty was
increased in the market by Treasury Undersecretary Gensler's testimony
concerning a bill seeking to end the quasi-governmental status of FNMA and
FHLMC. GNMAs performed well during the first quarter as a Treasury substitute,
since it is the only other asset class backed by the full faith and credit of
the U.S. Government.
FIXED-INCOME MARKET OUTLOOK
While some imbalanced and potential inflationary pressures exist, data
points to slower economic growth and restrained inflation. We believe that the
Fed will refrain from tightening rates for the rest of the year.
PORTFOLIO MANAGEMENT:
BOND SERIES
We manage the Bond Series portfolio with the objective of earning
superior total returns than broadly diversified investment quality bond
portfolios that are measured against the Lehman Aggregate Index. We seek to meet
this objective through a superior yield profile, diversification, capital
appreciation and minimal capital loss.
During the first half of the Series' fiscal year (August 1, 1999 -
January 31, 2000), an extension of the bear market produced anemic returns (-14%
at the portfolio level). However, in the second half (February 1, 2000 - July
31, 2000) a bond market rally produced much more robust returns (4.49% at the
portfolio level).
In addition, while reviewing those results one should bear in mind that
for the last year, risk involving fixed income securities has simply not been
rewarded. Treasury Bills -- the risk free asset class --have provided some of
the highest returns and the under-performance of riskier asset classes is
perhaps not surprising.
The evolution of the portfolio structure over the last year has been a
reduction to our commitment to the Treasury sector, an increase in commitment to
the mortgage sector, reduced commitment to high yield and international issues
and our conservative duration posture.
BOND SERIES
SECTOR DIVERSIFICATION CHART
<TABLE>
<S> <C>
Corporate Bonds 26.6%
Foreign Governments 1.6%
Federal Agencies 58.0%
U.S. Government Obligations 13.8%
</TABLE>
During the last year mortgage spreads returned to levels not seen in the
last decade, and we took advantage of this by adding primarily GNMA securities
that offer the full faith and credit of the United States Government combined
with minimal prepayment risk. Offered the opportunity to add yield with no
credit risk, we increased our commitment by over 50% during the course of the
year.
The high yield and international sectors suffered during the last year.
High yield was buffeted by higher rates, a slowing economy and increasing
downgrade and defaults. International markets suffered as the dollar continued
to show strength versus all currencies except the yen. We responded by cutting
our commitment. There are a number of high yield issuers that seem quite
attractive. We have moved to issues with good visibility, larger size and access
to the equity market. Internationally, we expect that the dollar's strength will
wane in the coming months and present us with new opportunities. In the meantime
caution is our watchword, and we will add to positions slowly.
================================================================================
4
<PAGE> 6
PORTFOLIO MANAGEMENT:
U.S. GOVERNMENT
INCOME SERIES
During the semi-annual period, the duration of the Portfolio remained
long relative to its benchmark for most of the first quarter. The Portfolio
ended the quarter with a duration of 5.75 versus 5.64 for the benchmark. We
reduced residential mortgage positions during the quarter in favor of
Treasuries/Agencies, although mortgages are our largest overweight position. The
Portfolio's residential mortgage exposure in the quarter decreased from 45% to
40%. We added slightly to Treasuries/Agencies in the quarter, although our
Treasury and agency allocation remains below the market weighting. The
Portfolio's exposure to Treasuries/Agencies decreased from 97.4% to 91.5% for
the quarter. We also had a slightly higher allocation to cash at the end of the
quarter. Looking forward, we are structuring the Portfolio to take advantage of
the intermediate-long part of the yield curve. Our yield curve structure in the
Portfolio emphasizes the 10- to 20-year part of the curve over the front-end.
U.S. GOVERNMENT INCOME SERIES
SECTOR DIVERSIFICATION CHART
<TABLE>
<S> <C>
Corporate Bonds 1.9%
Federal Agencies 59.5%
Short-Term Securities 6.6%
U.S. Government Obligations 32.0%
</TABLE>
PERFORMANCE OF SECURITY FIRST TRUST
GROWTH AND INCOME SERIES, BOND
SERIES, EQUITY SERIES AND U.S.
GOVERNMENT INCOME SERIES
The following are the average annual and total returns for each series
for the period ending July 31, 2000, assuming an investment of $10,000 at
the start of the period, and redemption at the end of the period, with dividends
reinvested. These returns are based on past experience. Future values of shares
will fluctuate so that their redemption values may be more or less than original
cost.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Average Annual Total Returns
--------------------------------------------------------------------------------
Fund 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and
Income -7.48% 6.17% 15.02% 13.37%
Series(1)(2)
--------------------------------------------------------------------------------
Bond 3.29% 3.90% 5.30% 6.52%
Series(1)(2)
--------------------------------------------------------------------------------
Equity 8.11% 13.74% 18.89% N/A(*)
Series(1)
--------------------------------------------------------------------------------
U.S
Government 5.99% 4.31% 5.18% N/A(*)
Income(1)
--------------------------------------------------------------------------------
Consumer 3.61% 2.47% 2.51% 2.84%
Price Index
--------------------------------------------------------------------------------
</TABLE>
(*) Funds were introduced as of May 1993.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Compound Total Returns
--------------------------------------------------------------------------------
Fund 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and
Income -7.48% 19.68% 101.31% 250.74%
Series(1)(2)
--------------------------------------------------------------------------------
Bond 3.29% 12.16% 29.46% 88.07%
Series(1)(2)
--------------------------------------------------------------------------------
Equity
Series(1) 8.11% 47.14% 137.53% N/A(*)
--------------------------------------------------------------------------------
U.S
Government 5.99% 13.50% 28.73% N/A(*)
Income(1)
--------------------------------------------------------------------------------
Consumer 3.61% 7.59% 13.20% 32.32%
Price Index
--------------------------------------------------------------------------------
</TABLE>
(*) Funds were introduced as of May 1993.
(1) Return is computed after deduction of all series expenses, but before
deduction of actuarial risk charges and other fees of the variable
annuity account.
(2) From inception to July 1983, Security First Investment Management
Corporation reimbursed the Growth and Income Series for expenses in
excess of the maximum expense limitation, and these reimbursements
were repaid from August 1983 to July 1986. Likewise, the Bond Series
was reimbursed for excess expenses from inception to July 1985, and
these reimbursements were repaid from August 1985 to July 1993.
Reimbursement of expenses to a series increases average annual total
returns while repayments of such reimbursements reduces these returns.
================================================================================
5
<PAGE> 7
================================================================================
The following graphs set forth the historical performance of each series as
compared to a stated market index for the periods ended July 31:
Comparison of Change in Value of $10,000 Investment in Security First Trust
T. Rowe Price Growth and Income Series and Standard and Poors 500 Index
Assuming Dividends and Distributions are Reinvested.
[GRAPH]
10000 0
9500 550
10000 2000
10500 3000
11500 2500
13500 1500
15000 4000
17000 5000
25000 9000
28000 12000
38000 8000
35000 15000
The performance indicated here may not be indicative of future performance.
Comparison of Change in Value of $10,000 Investment in Security First Trust
Bond Series, Lehman Government Bonds Index, and the Lehman Aggregate Bond Index
Assuming Dividends and Distributions are Reinvested.
[GRAPH]
10000 0 0
11000 230 242
12500 400 400
13000 750 750
12750 800 800
14000 900 1000
15000 900 1000
16000 1000 1000
17000 1200 1000
17500 1500 750
18000 2500 500
The performance indicated here may not be indicative of future performance.
Comparison of Change in Value of $10,000 Investment in Security First Trust
Equity Series and Standard and Poors 500 Index
Assuming Dividends and Distributions are Reinvested.
[GRAPH]
10000 0
10000 256
10040 745
12000 2014
12500 3115
18000 6500
25500 9000
27500 10000
The performance indicated here may not be indicative of future performance.
(*)The Series commenced operations on 5/19/93.
Comparison of Change in Value of $10,000 Investment in Security First Trust
U.S. Government Income Series and Lehman Government and Intermediate Index
Assuming Dividends and Distributions are Reinvested.
[GRAPH]
10000 0
10100 0
10000 100
10750 150
11100 400
12000 500
12900 750
13000 1000
13750 1250
The performance indicated here may not be indicative of future performance.
(*)The Series commenced operations on 5/19/93.
================================================================================
6
<PAGE> 8
================================================================================
SECURITY FIRST TRUST T. ROWE
PRICE GROWTH AND INCOME SERIES
The graph and Per Share Data Table below illustrate the growth in per share
value for the period ending July 31, 2000, of one share of the Security First
Trust T. Rowe Price Growth and Income Series purchased on August 1, 1979, at a
price of $5.07, assuming that dividends and capital gains were reinvested.
The results shown should not be considered a representation of the income
that may be earned by investing in the Series today. The value of variable
annuities funded by shares in this Series will be reduced by any actuarial risk
charges.
[GROWTH AND INCOME SERIES GRAPH]
PER SHARE DATA
<TABLE>
<CAPTION>
Per Share
Value with Cumulative
Calendar Net Dividend Dividends & Change
Year Asset & Capital Capital Gains Yearly from
Ending Value Gains Reinvested Change 8/1/79
-------- ----- ---------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
1990 6.25 .44 23.70 -11.0 +367.5
1991 7.69 .24 30.07 +26.9 +493.1
1992 8.17 .22 32.80 +9.1 +546.9
1993 9.12 .22 37.49 +14.3 +639.4
1994 9.05 .32 38.51 +2.7 +659.6
1995 11.52 .34 50.49 +31.1 +895.8
1996 13.18 .83 61.42 +21.7 +1111.4
1997 15.52 1.25 78.12 +27.2 +1440.8
1998 15.81 1.29 86.06 +10.2 +1597.4
1999 16.06 1.06 93.67 +8.8 +1747.5
7/2000 15.63 -- 90.68 -3.2 +1688.6
</TABLE>
SECURITY FIRST TRUST
BOND SERIES
The graph and Per Share Data Table below illustrate the growth in per share
value for the period ending July 31, 2000, of one share of the Security First
Trust Bond Series purchased on August 1, 1979, at a price of $3.12, assuming
that dividends and capital gains were reinvested.
The results shown should not be considered a representation of the income
that may be earned by investing in the Series today. The value of variable
annuities funded by shares in this Series will be reduced by any actuarial risk
charges.
[BOND SERIES GRAPH]
PER SHARE DATA
<TABLE>
<CAPTION>
Per Share
Value with Cumulative
Calendar Net Dividend Dividends & Change
Year Asset & Capital Capital Gains Yearly from
Ending Value Gains Reinvested Change 8/1/79
-------- ----- ---------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
1990 3.52 .54 8.76 +4.4 +180.8
1991 3.79 .25 10.06 +14.8 +222.4
1992 3.80 .23 10.70 +6.4 +242.9
1993 3.94 .22 11.72 +9.5 +275.6
1994 3.58 .22 11.31 -3.5 +262.5
1995 3.94 .24 13.21 +16.8 +323.4
1996 3.82 .24 13.58 +2.8 +335.3
1997 3.95 .21 14.81 +9.1 +374.6
1998 4.03 .21 15.92 +7.5 +410.3
1999 3.72 .22 15.51 -2.6 +397.1
7/2000 3.84 -- 16.03 +3.4 +413.8
</TABLE>
================================================================================
7
<PAGE> 9
================================================================================
SECURITY FIRST TRUST
EQUITY SERIES
The Per Share Data Table below illustrates the growth in per share value
for the period ending July 31, 2000, of one share of the Security First Trust
Equity Series purchased on May 19, 1993, at a price of $5.00, assuming that
dividends and capital gains were reinvested.
The results shown should not be considered a representation of the
income that may be earned by investing in the Series today. The value of
variable annuities funded by shares in this Series will be reduced by any
actuarial risk charges.
PER SHARE DATA
<TABLE>
<CAPTION>
Per Share
Value with Cumulative
Calendar Net Dividend Dividends & Change
Year Asset & Capital Capital Gains Yearly from
Ending Value Gains Reinvested Change 5/19/93
-------- ------ --------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
1993 $ 5.15 $ .03 $ 5.18 +3.6% +3.6%+
1994 4.78 .05 4.85 -6.3 -3.0
1995 5.91 .21 6.21 +28.0 +24.2
1996 6.45 .55 7.36 +18.5 +47.2
1997 7.63 .72 9.52 +29.3 +90.4
1998 7.89 1.51 11.73 +23.2 +134.6
1999 9.19 .31 14.16 +20.7 +183.2
7/2000 8.93 -- 13.73 -3.0 +174.6
</TABLE>
+change from 5-19-93 to 12-31-93
SECURITY FIRST TRUST
U.S. GOVERNMENT INCOME SERIES
The Per Share Data Table below illustrates the growth in per share value
for the period ending July 31, 2000, of one share of the Security First Trust
U.S. Government Income Series purchased on May 19, 1993, at a price of $5.00,
assuming the dividends and capital gains were reinvested.
The results shown should not be considered a representation of the
income that may be earned by investing in the Series today. The value of
variable annuities funded by shares in this Series will be reduced by any
actuarial risk charges.
PER SHARE DATA
<TABLE>
<CAPTION>
Per Share
Value with Cumulative
Calendar Net Dividend Dividends & Change
Year Asset & Capital Capital Gains Yearly from
Ending Value Gains Reinvested Change 5/19/93
-------- ------ --------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1993 $ 5.04 $ .08 $ 5.11 +2.2% +2.2%(+)
1994 4.74 .14 4.96 -2.9 -0.8
1995 5.18 .20 5.63 +13.5 +12.6
1996 5.14 .22 5.83 +3.6 +16.6
1997 5.26 .24 6.24 +7.0 +24.8
1998 5.25 .40 6.70 +7.4 +34.0
1999 4.83 .29 6.53 -2.5 +30.6
7/2000 5.10 -- 6.90 +5.7 +38.0
</TABLE>
+change from 5-19-93 to 12-31-93
================================================================================
8
<PAGE> 10
================================================================================
SECURITY FIRST TRUST
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investments at market - Note A and Schedule I:
Investment securities (cost:
Bond Series - $22,623,192; Growth
and Income Series - $279,333,808;
Equity Series - $44,935,123;
U.S. Government Income Series - $32,553,278) $ 22,203,630 $323,981,404 $58,124,170 $ 32,011,805
Cash 606,373 720,133 1,098,402 63,714
Interest receivable 219,885 2,936 4,478 467,431
Dividends receivable 436,244 26,446
Receivable for securities sold 1,846,756 1,218,552 2,102,505
------------- ------------ ----------- ------------
24,876,644 325,140,717 60,472,048 34,645,455
LIABILITIES
Payable for securities purchased 1,614,601 1,411,012 2,099,625
Accrued expenses 14,023 51,269 15,642 14,198
Payable for capital shares redeemed 19,729 33,871 882 304
Payable to investment adviser - Note B 6,947 97,241 28,309 10,653
Payable for directors' fees 305 4,332 776 626
Unrealized depreciation on foreign
currency contracts 1,349
------------- ------------ ----------- ------------
1,656,954 186,713 1,456,621 2,125,406
NET ASSETS
Capital shares (authorized 100,000,000
shares of $.01 par value for each series) 24,156,181 261,640,068 41,153,313 32,937,994
Undistributed net investment income 876,932 3,412,895 35,302 1,113,498
Undistributed net realized gain (loss) (1,392,512) 15,253,445 4,637,765 (989,970)
Net unrealized appreciation (depreciation)
of investments (420,911) 44,647,596 13,189,047 (541,473)
------------- ------------ ----------- ------------
NET ASSETS $ 23,219,690 $324,954,004 $59,015,427 $ 32,520,049
============= ============ =========== ============
Capital shares outstanding 6,052,985 20,789,263 6,610,048 6,379,108
Net asset value per share $ 3.84 $ 15.63 $ 8.93 $ 5.10
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
9
<PAGE> 11
================================================================================
SECURITY FIRST TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 6,810,679 $ 607,061
Interest $ 1,685,659 1,273,872 52,216 $ 2,121,312
----------- ------------ ----------- -----------
1,685,659 8,084,551 659,277 2,121,312
EXPENSES
Custodian fees 16,947 50,938 22,847 18,950
Adviser fees - Note B 84,927 1,199,868 329,031 129,811
Management fees - Note B 36,397 514,229 89,736 48,679
Printing expenses 16,391 31,743 13,490 14,542
Insurance expenses 1,064 15,631 2,744 1,487
Audit fees 5,132 7,676 6,397 5,116
Directors' fees and expenses 1,781 26,514 4,468 2,079
Miscellaneous expenses 859 6,914 5,708 8,128
----------- ------------ ----------- -----------
163,498 1,853,513 474,421 228,792
----------- ------------ ----------- -----------
NET INVESTMENT INCOME 1,522,161 6,231,038 184,856 1,892,520
NET REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS - Notes A and C
Net realized gain (loss) on sale of investments (1,106,001) 20,126,873 5,002,057 (464,991)
Net unrealized appreciation (depreciation) of:
Investments during the period 334,147 (55,204,755) (545,090) 454,161
Assets denominated in foreign currencies (1,349)
----------- ------------ ----------- -----------
Net gain (loss) on investments (773,203) (35,077,882) 4,456,967 (10,830)
----------- ------------ ----------- -----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 748,958 $(28,846,844) $ 4,641,823 $ 1,881,690
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
10
<PAGE> 12
================================================================================
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 1,522,161 $ 6,231,038 $ 184,856 $ 1,892,520
Net realized gain (loss) on sale
of investments (1,106,001) 20,126,873 5,002,057 (464,991)
Net unrealized appreciation (depreciation)
during the period 332,798 (55,204,755) (545,090) 454,161
------------ ------------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 748,958 (28,846,844) 4,641,823 1,881,690
------------ ------------- ------------ ------------
DISTRIBUTIONS TO SHAREOWNERS
Net investment income (1,410,330) (6,182,728) (360,159) (1,836,952)
Net realized gains (16,135,169) (1,714,979)
CAPITAL SHARE TRANSACTIONS - NOTE D
Reinvestment of net investment income
distributed 1,410,330 6,182,728 360,159 1,836,952
Reinvestment of net realized gains 16,135,169 1,714,979
Sales of capital shares 3,319,764 19,704,012 1,705,091 2,282,843
Redemptions of capital shares (5,566,736) (35,014,349) (5,644,649) (3,957,033)
------------ ------------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
FROM CAPITAL SHARE
TRANSACTIONS (836,642) 7,007,560 (1,864,420) 162,762
------------ ------------- ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS (1,498,014) (44,157,181) 702,265 207,500
NET ASSETS
BEGINNING OF YEAR 24,717,704 369,111,185 58,313,162 32,312,549
------------ ------------- ------------ ------------
END OF YEAR (including undistributed net
investment income: Bond Series -$876,932;
Growth and Income Series - $3,412,895;
Equity Series - $35,302; U.S. Government
Income Series - $1,113,498) $ 23,219,690 $ 324,954,004 $ 59,015,427 $ 32,520,049
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
11
<PAGE> 13
================================================================================
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1999
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 1,222,895 $ 5,764,382 $ 398,609 $ 1,803,367
Net realized gain (loss) on sale
of investments (198,084) 17,734,362 1,354,678 (13,673)
Net unrealized appreciation (depreciation)
during the period (968,222) 31,098,623 7,802,709 (1,476,045)
------------ ------------- ------------ ------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 56,589 54,597,367 9,555,996 313,649
------------ ------------- ------------ ------------
DISTRIBUTIONS TO SHAREOWNERS
Net investment income (968,742) (5,234,796) (449,055) (1,847,027)
Net realized gains (207,719) (18,412,869) (8,668,236) (597,259)
CAPITAL SHARE TRANSACTIONS - NOTE D
Reinvestment of net investment income
distributed 968,742 5,234,796 449,055 1,847,027
Reinvestment of net realized gains 207,719 18,412,869 8,668,236 597,259
Sales of capital shares 9,504,353 37,641,014 793,709 2,362,361
Redemptions of capital shares (2,777,630) (13,568,724) (6,839,695) (4,454,380)
------------ ------------- ------------ ------------
INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS 7,903,184 47,719,955 3,071,305 352,267
------------ ------------- ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 6,783,312 78,669,657 3,510,010 (1,778,370)
NET ASSETS
BEGINNING OF YEAR 17,934,392 290,441,528 54,803,152 34,090,919
------------ ------------- ------------ ------------
END OF YEAR (including undistributed net
investment income: Bond Series - $765,101;
Growth and Income Series - $3,364,585;
Equity Series - $210,605; U.S. Government
Income Series - $1,057,930) $ 24,717,704 $ 369,111,185 $ 58,313,162 $ 32,312,549
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
12
<PAGE> 14
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- --------- ------
<S> <C> <C> <C>
CORPORATE NOTES 26.6%
Aerospace & Defense: 1.0%
Boeing Co., 8.75%, 08/15/21 50,000 $ 56,688
Lockheed Martin Corp., 7.75%, 05/01/26 90,000 86,063
Tyco International, Ltd., 6.375%, 06/15/05 80,000 76,100
--------
218,851
Automobiles & Related: 2.1%
Amerco., 8.80%, 02/04/05 150,000 143,813
Borg Warner Automotive, Inc., 6.5%, 02/15/09 235,000 208,269
Capital Auto Receivables Asset, 6.30%, 05/15/04 125,000 123,628
--------
475,710
Banking: 1.6%
Dime Bancorp, Inc., 6.375%, 01/30/01 250,000 248,445
HSBC Fin Nederland Bank, 7.40%, 04/15/03 100,000 99,750
--------
348,195
Chemicals and Allied Products: 0.8%
Fort James Corp., 6.875%, 09/15/07 195,000 182,325
Electric Utilities: 1.9%
CMS Energy Corp., 8.00%, 07/01/11 225,000 222,188
National Rural Utilities, 6.50%, 09/15/02 100,000 98,875
Public Service Electric & Gas Co., 6.25%, 01/01/07 100,000 92,750
--------
413,813
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
13
<PAGE> 15
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- --------- ----------
<S> <C> <C> <C>
CORPORATE NOTES (Continued)
Finance & Credit: 7.5%
G.E. Capital Mortgage Svcs., Inc., 6.25%, 12/25/28 245,861 $ 169,644
G.E. Capital Mortgage Svcs., Inc., 6.50%, 04/25/29 305,696 208,240
Honda Auto Lease Trust, 6.45%, 09/16/02 325,000 322,943
Hayes Lemerz International, Inc., 8.25%, 12/15/08 50,000 43,500
Northwest Asset Corp., 6.75%, 05/25/29 246,974 178,864
Merrill Lynch Mtg. Investment, Inc., 7.56%, 09/15/09 115,000 113,850
Salomon Smith Barney, Inc., 7.375%, 05/15/07 300,000 291,750
Texaco Capital, Inc., 5.5%, 01/15/09 220,000 194,700
Valero Pass-Through Asset Trust, 6.75%, 12/15/02 140,000 135,450
----------
1,658,941
Food & Beverages: 0.4%
Archer Daniels Midland Co., 6.625%, 05/01/29 120,000 102,150
Forest Products: 0.4%
Noranda Forest, Inc., 7.50%, 07/15/03 100,000 98,625
Health Services: 0.3%
Tenet Healthcare Corp., 7.875%, 01/15/03 70,000 68,950
Insurance Carriers: 1.2%
Conseco, Inc., 6.40%, 06/15/01 200,000 169,000
Prudential Insurance Co. America, 6.875%, 04/15/03 100,000 98,125
----------
267,125
Media & Communications: 1.5%
CSC Holdings, Inc., 8.125%, 07/15/2009 25,000 24,594
Isle of Capri Casinos, Inc., 8.75%, 04/15/09 100,000 91,500
Liberty Media Corp., 7.875%, 07/15/09 150,000 145,875
Metromedia Fiber Network, Inc., 10.00%, 12/15/09 70,000 68,250
----------
330,219
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
14
<PAGE> 16
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
CORPORATE NOTES (Continued)
Miscellaneous Business Services: 0.5%
Allied Waste North America, 7.875%, 01/0/09 115,000 $ 102,063
Miscellaneous Consumer Products: 2.5%
American Standard, Inc., 7.375%, 04/15/05 45,000 42,525
Jones Apparel Group, Inc., 7.875%, 06/15/06 230,000 219,937
S C International Service, Inc., 9.25%, 09/01/07 60,000 57,375
WMX Technologies, Inc., 7.125%, 06/15/01 250,000 245,625
------------
565,462
Oil and Gas Extraction: 1.6%
Apache Corp., 7.70%, 03/15/26 155,000 153,063
Quaker State Corp., 6.625%, 10/15/05 100,000 96,375
Tosco Corp., 8.125%, 02/15/2030 100,000 101,500
------------
350,938
Telephone Communication: 1.9%
Allegiance Telecom, Inc., 0.00%, 02/15/08 25,000 18,625
Charter Communications Holdings, 8.625%, 04/01/09 100,000 88,000
Crown Castle International, 0.00%, 05/15/11 75,000 47,250
GTE Corp., 6.94%, 04/15/28 100,000 90,121
Global Crossing Holdings, Ltd., 9.625%, 05/15/08 100,000 98,250
US West Communications, Inc., 7.50%, 06/15/23 80,000 73,900
------------
416,146
Transportation: 1.4%
Canadian National Railway Co., 6.90%, 07/15/28 165,000 145,200
Newport News Shipbuilding, Inc., 9.25% 12/01/06 60,000 60,600
Norfolk Southern Corp., 7.80%, 05/15/27 100,000 98,250
------------
304,050
------------
TOTAL CORPORATE NOTES
(COST $6,195,796) 5,903,563
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
15
<PAGE> 17
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ----------- --------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES 58.0%
Federal Home Loan Mortgage Corp.: 0.2%
9.50%, 04/01/19 26,287 $ 27,346
9.00%, 06/01/19 13,352 13,811
------------
41,157
Federal National Mortgage Assn.: 10.8%
6.625%, 01/15/02 1,835,000 1,828,908
7.00%, 09/01/10 149,495 146,831
7.00%, 05/01/12 132,560 130,197
6.50%, 03/01/13 290,404 280,510
7.50%, 08/25/21 9,069 9,086
------------
2,395,532
Government National Mortgage Assn.: 47.0%
9.00%, 04/15/09 2,174 2,227
9.00%, 05/15/09 11,631 11,915
9.00%, 05/15/09 3,477 3,562
9.00%, 05/15/09 2,752 2,819
9.00%, 05/15/09 1,061 1,087
9.00%, 05/15/09 1,599 1,638
11.25%, 09/15/15 78,115 85,511
11.50%, 11/15/15 9,611 10,662
10.00%, 06/15/17 21,329 22,782
9.25%, 07/15/17 7,003 7,200
10.00%, 11/15/17 7,615 8,134
11.50%, 02/15/18 3,244 3,599
10.00%, 03/15/19 23,635 25,245
10.00%, 03/15/20 13,654 14,584
9.25%, 05/15/20 29,390 30,216
9.25%, 05/15/21 86,986 89,432
9.25%, 06/15/21 21,090 21,683
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
16
<PAGE> 18
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES (Continued)
Government National Mortgage Assn. (Continued)
7.00%, 08/15/23 70,120 $ 68,213
7.50%, 06/15/23 79,457 78,836
7.50%, 10/15/23 117,086 116,170
7.00%, 01/15/24 113,194 110,116
7.00%, 03/15/24 78,222 76,095
7.00%, 01/15/25 350,914 341,590
9.50%, 01/15/25 10,583 10,983
9.50%, 05/15/25 7,044 7,310
7.00%, 02/15/26 462,666 450,086
7.50%, 09/15/26 163,631 162,351
8.00%, 05/15/27 196,047 197,884
6.50%, 04/15/28 731,865 694,810
7.00%, 05/15/28 339,969 330,726
7.00%, 06/15/28 298,407 290,293
6.50%, 10/15/28 1,760,691 1,671,548
6.50%, 11/15/28 504,356 478,821
6.50%, 01/15/29 233,482 221,661
6.50%, 03/15/29 261,925 248,663
6.50%, 04/15/29 245,761 233,318
6.50%, 05/15/29 937,928 891,031
6.50%, 05/15/29 272,923 259,276
6.50%, 06/15/29 149,737 142,156
6.50%, 07/15/29 653,751 620,652
8.00%, 07/15/29 157,641 159,118
7.00%, 08/15/29 988,686 961,803
7.50%, 09/15/29 543,844 539,592
8.00%, 09/15/29 246,506 248,816
8.00%, 01/15/30 252,752 255,120
8.00%, 06/15/30 229,799 231,885
---------------
10,441,219
---------------
TOTAL FEDERAL AGENCIES
(COST $13,094,895) 12,877,908
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
17
<PAGE> 19
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 13.8%
U.S. Treasury Bonds: 3.4%
6.625%, 02/15/27 260,000 $ 280,067
5.25%, 02/15/29 520,000 469,622
------------
749,689
U.S. Treasury Notes: 10.4%
3.375%, 01/15/07 316,839 305,252
5.50%, 05/15/09 1,385,000 1,327,869
6.00%, 08/15/09 675,000 670,565
------------
2,303,686
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $2,969,151) 3,053,375
FOREIGN GOVERNMENT OBLIGATIONS 1.6%
Argentina Rep, 0.00%, 03/31/05 400,000 368,784
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(COST $363,350) 368,784
------------
TOTAL INVESTMENTS
(COST $22,623,192) 100.0% 22,203,630
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
18
<PAGE> 20
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Forward Foreign Currency Contracts Portfolio Principal Value
----------------------------------- ---------- --------- -----------
<S> <C> <C> <C>
CONTRACTS TO BUY
557,000 Canadian Dollars (Settlement Date 08/09/00;
Payable amount $377,627; Market value $376,922) $ (705)
25,000 Euro Dollars (Settlement Date 08/22/00;
Payable amount $23,739; Market value $23,095) (644)
------------
(1,349)
Other assets less liabilities 1,017,409
------------
NET ASSETS $23,219,690
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
19
<PAGE> 21
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ---------- -------- ------------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 4.1%
Electrical Equipment: 4.1%
Black & Decker Corp. 68,200 $ 2,536,187
General Electric Co. 105,000 5,400,938
Hubbell, Inc. Class B 60,000 1,447,500
Stanley Works 150,000 3,928,125
-------------
13,312,750
CONSUMER CYCLICALS 0.5%
Automobiles & Related: 0.5%
Genuine Parts Co. 80,000 1,605,000
CONSUMER NONDURABLES 20.6%
Food & Beverages: 6.4%
Anheuser-Busch Company, Inc. 50,000 4,025,000
Campbell Soup Co. 100,000 2,650,000
General Mills, Inc. 108,000 3,712,500
Hershey Foods, Inc. 70,000 3,237,500
McCormick & Co. 100,000 2,931,250
Pepsico, Inc. 50,000 2,290,625
Ralston Purina Group 100,000 2,018,750
-------------
20,865,625
Health Services: 0.7%
Baxter International, Inc. 30,000 2,332,500
Miscellaneous Consumer Products: 5.5%
Colgate Palmolive Co. 60,000 3,341,250
Eastman Kodak Company 60,000 3,292,500
Fortune Brands, Inc. 120,000 2,700,000
Gillette Co. 51,300 1,497,318
</TABLE>
These accompanying notes are an integral part of these financial statements.
================================================================================
20
<PAGE> 22
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
------------------ ---------- -------- ------------
<S> <C> <C> <C>
CONSUMER NONDURABLES (Continued)
Miscellaneous Consumer Products (Continued)
Int'l. Flavors & Fragrance 100,000 $ 2,675,000
Owens Corning Fiber 70,000 385,000
Philip Morris Companies, Inc. 100,000 2,525,000
UST, Inc. 100,000 1,450,000
-------------
17,866,068
Pharmaceuticals: 8.0%
Abbott Laboratories 150,000 6,243,750
American Home Products Corporation 125,000 6,632,812
Johnson & Johnson 45,000 4,187,813
Merck & Co. 27,500 1,971,406
Pharmacia Corporation 59,500 3,257,625
Schering-Plough Corp. 80,000 3,455,000
-------------
25,748,406
CONSUMER SERVICES 16.6%
Entertainment & Leisure: 3.1%
Hilton Hotels Corp. 400,000 4,100,000
Starwood Hotel & Resort Worldwide, Inc. 175,000 5,971,875
-------------
10,071,875
General Merchandise Stores: 6.6%
Albertsons, Inc. 125,000 3,773,437
May Department Stores Co. 58,000 1,377,500
Neiman-Marcus Group, Inc.* 90,000 2,970,000
Nordstrom, Inc. 67,000 1,172,500
Penney J C Co. 50,000 806,250
Target Corp. 180,000 5,220,000
Toys R Us, Inc.* 250,000 4,125,000
Tupperware Corp. 100,000 1,943,750
-------------
21,388,437
</TABLE>
* Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
21
<PAGE> 23
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- ------------
<S> <C> <C> <C>
CONSUMER SERVICES (Continued)
Media & Communications: 5.5%
Walt Disney Company Holding Co. 156,300 $ 6,046,855
Knight Ridder, Inc. 60,000 3,127,500
Meredith Corp. 60,000 1,908,750
Readers Digest Assn., Inc. 35,000 1,194,375
Viacom, Inc. CL B * 81,375 5,396,180
-------------
17,673,660
Miscellaneous Business Services: 1.4%
Waste Management, Inc. 250,000 4,671,875
ENERGY 10.5%
Oil And Gas Extraction: 10.5%
Amerada Hess Corp. 65,000 3,932,500
BP Amoco PLC. 241,532 12,635,143
Baker Hughes, Inc. 131,200 4,542,800
Chevron Corp. 40,000 3,160,000
Exxon Mobil Corp. 57,122 4,569,760
Texaco, Inc. 30,600 1,512,788
Unocal Corp. 125,000 3,781,250
-------------
34,134,241
FINANCIAL 16.9%
Banking: 6.6%
Bank One Corp. 110,000 3,499,375
Chase Manhattan Corp. 45,000 2,235,938
Firstar Corp.* 175,000 3,456,250
Mellon Financial Corp. 100,000 3,768,750
National City Corp. 100,000 1,775,000
Washington Mutual, Inc. 120,000 3,855,000
</TABLE>
* Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
22
<PAGE> 24
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ---------- -------- -------------
<S> <C> <C> <C>
FINANCIAL (Continued)
Banking (Continued)
Wells Fargo & Co. 66,660 $ 2,753,891
-------------
21,344,204
Federal Agencies: 0.7%
Freddie Mac 60,000 2,366,250
Financial Services: 5.2%
H&R Block, Inc. 60,000 1,920,000
Citigroup, Inc. 165,547 11,681,410
J.P. Morgan & Co. 25,000 3,337,500
-------------
16,938,910
Insurance Carriers: 4.4%
Chubb Corp. 65,000 4,810,000
Loews Corp. 30,000 1,882,500
St. Paul Companies, Inc. 105,136 4,671,981
UnumProvident Corp. 125,000 2,875,000
-------------
14,239,481
PROCESS INDUSTRIES 10.7%
Chemicals and Allied Products: 7.0%
Dow Chemical Co. 90,000 2,587,500
Dupont Co. 50,000 2,265,625
Fort James Corp. 125,000 3,820,313
Great Lakes Chemical Corp. 100,000 2,937,500
Hercules, Inc. 130,000 1,941,875
Imperial Chemical ADR 100,000 2,868,750
Minnesota Mining & Manufacturing Co. 38,300 3,449,394
Pall Corp. 125,000 2,593,750
-------------
22,464,707
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
23
<PAGE> 25
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- --------- ------ -----
PROCESS INDUSTRIES (Continued)
<S> <C> <C> <C>
Forest Products: 0.4%
Weyerhaeuser Co. 30,000 $ 1,370,625
Metal Mining: 1.0%
Newmont Mining Corp. 75,000 1,331,250
Phelps Dodge Corp. 50,000 2,034,375
-------------
3,365,625
Paper And Allied Products: 2.3%
Kimberly-Clark Corp. 100,000 5,743,750
International Paper Co. 47,278 1,607,452
-------------
7,351,202
TECHNOLOGY 5.5%
Computer and Office Equipment: 5.5%
America Online, Inc.* 40,000 2,132,500
BMC Software, Inc.* 100,000 1,887,500
Computer Associates International, Inc. 75,000 1,860,938
First Data Corp. 125,000 5,757,813
Microsoft Corp. 40,000 2,792,500
Motorola, Inc. 50,000 1,653,125
Xerox Corp. 120,000 1,785,000
-------------
17,869,376
TRANSPORTATION 5.9%
Aerospace and Defense: 3.8%
Boeing Company 100,000 4,900,000
Lockheed Martin Corp. 100,000 2,812,500
Raytheon Co. CL B 100,000 2,425,000
Rockwell International Corp. 60,000 2,103,750
-------------
12,241,250
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
24
<PAGE> 26
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- --------- ------ -----
<S> <C> <C> <C>
TRANSPORTATION (Continued)
Railroad Transportation: 2.1%
Norfolk Southern Corp. 200,000 $ 3,725,000
Union Pacific Corp. 70,000 3,023,125
------------
6,748,125
UTILITIES 5.3%
Telephone Communication: 2.4%
AT&T Co. 30,000 928,125
SBC Communications, Inc. 104,865 4,463,317
Verizon Communications, Inc. 48,800 2,293,600
------------
7,685,042
Utility Holding Companies: 2.9%
Edison International 50,000 984,375
Niagara Mohawk Holdings, Inc.* 137,500 1,830,468
Peco Energy Co. 50,000 2,134,375
Scottish Power PLC* 40,600 1,344,875
Unicom Corp. 75,000 3,079,688
------------
9,373,781
============
TOTAL EQUITY SECURITIES
(COST $268,381,419) 313,029,015
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
25
<PAGE> 27
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Short-Term Investments Portfolio Principal Value
---------------------- ----------- ---------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 3.4%
Commercial Paper: 3.4%
Ciesco L.P, 6.55%, 08/17/2000 5,000,000 $ 4,985,340
Knight Ridder Inc., 6.54%, 08/31/2000 6,000,000 5,967,049
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $10,952,389) 10,952,389
------------
TOTAL INVESTMENTS
(COST $279,333,808) 100.0% 323,981,404
Other assets less liabilities 972,600
------------
NET ASSETS $ 324,954,004
=============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
26
<PAGE> 28
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- -----------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 6.3%
Aerospace & Defense: 1.1%
Boeing Company 4,400 $ 215,600
Tyco International, Ltd. 8,100 433,350
-----------
648,950
Electrical Equipment: 4.2%
General Electric Co. 47,600 2,448,425
Machinery: 1.0%
Illinois Tool Works, Inc. 9,600 549,600
CONSUMER NONDURABLES 14.9%
Food & Beverages: 3.4%
Anheuser-Busch Company, Inc. 9,700 780,850
Coca Cola 13,800 846,112
Pepsico, Inc. 7,400 339,013
-----------
1,965,975
Health Services: 0.7%
Medtronic, Inc. 7,900 403,394
Miscellaneous Consumer Products: 1.3%
McDonalds Corp. 10,300 324,450
Proctor & Gamble Co. 7,200 409,500
-----------
733,950
Pharmaceuticals: 9.5%
American Home Products Co. 12,000 636,750
Amgen, Inc.* 6,000 389,625
Johnson & Johnson 10,300 958,544
Lilly Eli & Co. 7,800 810,225
Merck & Co. 15,100 1,082,481
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
27
<PAGE> 29
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ------------ ------- ------------
<S> <C> <C> <C>
CONSUMER NONDURABLES (Continued)
Pharmaceuticals (Continued)
Pfizer, Inc. 24,475 $ 1,055,484
Schering Plough Corp. 13,800 595,988
------------
5,529,097
CONSUMER CYCLICALS 0.5%
Automobiles & Related: 0.5%
Ford Motor Co. 6,400 298,000
CONSUMER SERVICES 10.2%
General Merchandise Stores: 5.2%
Costco Wholesale Corp.* 14,300 465,644
Gap, Inc. 8,300 297,244
Home Depot, Inc. 16,450 851,288
Walmart Stores 26,000 1,428,375
------------
3,042,551
Media & Communications: 5.0%
A T & T Corp Liberty Media Group 15,400 342,650
Clear Channel Communication, Inc.* 10,500 799,969
Walt Disney Company Holding Co. 14,000 541,625
Time Warner, Inc. 7,600 582,825
Viacom, Inc. CL B * 9,154 607,025
------------
2,874,094
ENERGY 5.6%
Oil And Gas Extraction: 5.6%
Exxon Mobil Corp. 20,528 1,642,240
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
28
<PAGE> 30
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- ------------
<S> <C> <C> <C>
ENERGY (Continued)
Oil And Gas Extraction (Continued)
Royal Dutch Petroleum Co. ADR 17,700 $ 1,031,025
Schlumberger Limited 8,200 606,288
Transocean Sedco Forex, Inc. 26 1,287
------------
3,280,840
FINANCIAL 18.1%
Banking: 1.8%
Chase Manhattan Corp. 12,800 636,000
Mellon Financial Corp. 11,500 433,406
------------
1,069,406
Federal Agencies: 1.3%
Federal National Mortgage Assn. 18,700 737,481
Financial Services: 12.0%
American Express Co. 6,400 362,800
Citigroup, Inc. 33,475 2,362,080
MBNA Corp. 13,700 457,238
Morgan Stanley Dean Witter 9,870 900,638
Northern Trust Corp. 6,500 486,688
Charles Schwab Corp. 12,100 437,113
SPDR Trust 13,800 1,972,535
------------
6,979,092
Insurance Carriers: 3.0%
Ace Limited 2,400 86,400
American International Group 18,880 1,655,540
------------
1,741,940
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
29
<PAGE> 31
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ------------ ------ -----------
<S> <C> <C> <C>
PROCESS INDUSTRIES 1.9%
Chemicals and Allied Products: 0.6%
Dow Chemical Co. 11,100 $ 319,125
Metal Mining: 0.7%
Alcoa, Inc. 14,300 432,575
Paper And Allied Products: 0.6%
International Paper Co. 10,700 363,800
TECHNOLOGY 34.3%
Communication Equipment: 8.3%
Arcatel Sponsored ADRS 4,100 299,813
Corning, Inc. 2,000 467,875
Lucent Technologies, Inc. 16,300 713,125
Motorola, Inc. 27,000 892,688
Nextel Communication, Inc.* 9,800 548,188
Nortel Networks Corp. 20,900 1,554,436
Vodafone Airtouch PLC ADR 8,000 340,000
-----------
4,816,125
Computer & Office Equipment: 26.0%
America Online, Inc.* 18,100 964,956
Applied Materials, Inc.* 4,000 303,500
Cisco Systems Inc.* 42,600 2,787,638
Dell Computer Corp.* 24,000 1,054,500
EMC Mass Corp.* 13,100 1,115,138
Electronic Data System Corp. 10,500 451,500
Hewlett Packard Co. 5,200 567,775
Intel Corp. 36,600 2,443,050
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
30
<PAGE> 32
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- ------ ------------
<S> <C> <C> <C>
TECHNOLOGY (Continued)
Computer & Office Equipment (Continued)
International Business Machines Corp. 8,800 $ 989,450
Microsoft Corp. 26,800 1,870,975
Oracle Corp.* 13,500 1,015,031
Sun Microsystems, Inc.* 7,900 832,956
Texas Instruments, Inc. 12,700 745,331
-------------
15,141,800
UTILITIES 8.2%
Telephone Communication: 5.9%
AT&T Co. 12,000 371,250
Qwest Communications International, Inc. 11,936 560,246
SBC Communications, Inc. 19,000 808,687
Verizon Communications, Inc. 19,900 935,300
Worldcom, Inc.* 19,000 742,187
-------------
3,417,670
Utility Holding Companies: 2.3%
Aes Corp.* 13,800 737,437
American Power Conversion Corp.* 6,500 165,343
Calpine Corp. 6,000 427,500
-------------
1,330,280
-------------
TOTAL INVESTMENTS
(COST $44,935,123) 100.0% 58,124,170
Other assets less liabilities 891,257
-------------
NET ASSETS $ 59,015,427
=============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
31
<PAGE> 33
================================================================================
SECURITY FIRST TRUST SCHEDULE I
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ----------- ---------- -----------
<S> <C> <C> <C>
CORPORATE NOTES 1.9%
Finance & Credit: 1.9%
Deutsche Mortgage & Asset, 6.22%, 09/15/07 106,776 $ 102,804
GMAC Mortgage Corp., 5.94%, 07/01/13 431,651 387,757
Residential Accredit Lines, Inc., 6.75%, 05/25/28 116,248 113,822
-----------
604,383
-----------
TOTAL CORPORATE NOTES
(COST $639,117) 604,383
U.S. GOVERNMENT OBLIGATIONS 32.0%
U.S. Treasury Bonds: 30.7%
8.75%, 11/15/08 500,000 532,030
12.75%, 11/15/10 600,000 768,186
14.00%, 11/15/11 50,000 69,438
9.25%, 02/15/16 410,000 536,202
8.50%, 02/15/20 3,130,000 3,969,216
6.375%, 08/15/27 3,580,000 3,744,429
5.25%, 02/15/29 230,000 207,718
-----------
9,827,219
U.S. Treasury Notes: 1.3%
6.375%, 04/30/02 250,000 250,000
5.875%, 11/15/04 170,000 167,768
-----------
417,768
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $10,361,424) 10,244,987
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
32
<PAGE> 34
================================================================================
SECURITY FIRST TRUST SCHEDULE I
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- ---------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES 59.5%
Federal Farm Credit Bank: 6.7%
6.05%, 04/21/03 550,000 $ 538,203
6.94%, 05/19/05 125,000 124,816
7.37%, 08/01/06 1,500,000 1,496,835
-----------
2,159,854
Federal Home Loan Bank: 0.8%
8.00%, 08/27/01 250,000 252,768
Federal Home Loan Mortgage Corp.: 16.1%
7.36%, 06/05/07 1,500,000 1,476,150
7.00%, 07/01/07 54,479 53,236
7.00%, 09/01/10 159,137 156,500
6.50%, 04/01/11 942,803 911,568
6.00%, 05/11/11 999,667 949,054
5.50%, 05/01/14 465,156 432,595
6.918%, 07/01/27 6,176 6,183
6.50%, 04/01/29 487,194 461,158
6.50%, 05/01/29 715,730 677,481
6.50%, 06/01/29 35,025 33,154
-----------
5,157,079
Federal National Mortgage Assn.: 22.1%
6.125%, 11/25/03 130,144 128,787
5.125%, 02/13/04 175,000 165,120
6.14%, 09/10/08 225,000 208,861
6.09%, 10/01/08 513,030 475,168
6.00%, 11/01/08 270,526 259,705
6.50%, 03/01/09 71,587 70,693
7.00%, 04/01/11 775,935 762,108
7.00%, 05/01/11 370,525 363,922
5.50%, 07/01/13 428,017 396,985
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
33
<PAGE> 35
================================================================================
SECURITY FIRST TRUST SCHEDULE I
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ------------ ----------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES (Continued)
Federal National Mortgage Assn. (Continued)
8.00%, 11/01/13 523,443 $ 525,406
5.50%, 01/01/14 462,803 429,249
5.50%, 02/01/14 458,187 424,968
6.00%, 03/01/14 61,348 58,127
8.00%, 08/01/14 246,977 249,677
6.50%, 05/17/15 700,000 662,816
6.32%, 10/01/23 691,946 633,131
8.00%, 10/01/25 144,592 145,134
6.00%, 06/01/29 487,442 447,681
6.50%, 06/01/29 495,016 467,944
6.50%, 09/01/29 194,289 183,663
-----------
7,059,145
Government National Mortgage Assn.: 12.9%
8.25%, 02/15/09 199,930 203,179
6.00%, 04/15/14 453,313 431,780
7.00%, 10/15/23 480,979 467,901
7.50%, 01/15/26 689,529 684,135
6.50%, 03/15/29 214,265 203,417
6.50%, 04/15/29 176,935 167,977
6.50%, 05/15/29 230,708 219,028
6.50%, 06/15/29 216,195 205,249
6.50%, 07/15/29 537,122 509,927
6.50%, 07/15/29 498,364 473,132
6.50%, 08/15/29 602,089 571,605
-----------
4,137,330
Other Federal Agencies: 0.9%
Small Business Admin., 5.50%, 10/01/18 334,152 296,259
-----------
TOTAL FEDERAL AGENCIES
(COST $19,452,737) 19,062,435
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
34
<PAGE> 36
================================================================================
SECURITY FIRST TRUST SCHEDULE I
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Short-Term Investments Portfolio Principal Value
---------------------- --------- ---------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 6.6%
Federal Home Loan Bank, 5.72%, 08/01/00
(COST $2,100,000) 2,100,000 $ 2,100,000
-------------
TOTAL INVESTMENTS
(COST $32,553,278) 100.0% 32,011,805
Other assets less liabilities 508,244
-------------
NET ASSETS $ 32,520,049
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
35
<PAGE> 37
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000
NOTE A -- ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
Security First Trust (the Trust) was established under Massachusetts law
pursuant to a Declaration of Trust dated February 13, 1987, as an unincorporated
business trust, a form of organization that is commonly called a Massachusetts
Business Trust. The Trust is registered with the Securities and Exchange
Commission as a diversified open-end management investment company (mutual fund)
under the Investment Company Act of 1940 (1940 Act).
On June 17, 1987, the shareowners of Security First Legal Reserve Fund, Inc. and
Security First Variable Life Fund, Inc. (the Funds), each of which was a
Maryland corporation registered as an investment company under the 1940 Act,
approved Plans of Reorganization and Liquidation and on July 24, 1987, the Funds
became Series of the Trust and their shareowners became shareowners of the Bond
Series and the T. Rowe Price Growth and Income Series (the Growth and Income
Series), respectively, in a tax-free exchange of shares. The Trust operates as a
"series company," as that term is used in Rule 18f-2 under the 1940 Act.
Financial information for periods prior to June 17, 1987, reflect the results of
the respective funds.
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares and to divide such shares into an unlimited number of series, all without
shareowner approval. Pursuant to this authority, the Board of Trustees of
Security First Trust established the Equity Series and the U.S. Government
Income Series on July 11, 1993, which commenced operations May 19, 1993.
The following is a summary of significant accounting policies followed by the
Trust:
FEDERAL INCOME TAXES -- Each series of the Trust has elected to qualify as a
"Regulated Investment Company." No provision for federal income taxes is
necessary because each series intends to maintain its qualification as a
"Regulated Investment Company" under the Internal Revenue Code and distribute
each year substantially all of its net income and realized capital gains to its
shareowners. Income and gains to be distributed are determined annually as of
December 31.
As of 12/31/1999 the Bond Series and U.S. Government Income Series had capital
loss carryforwards of $657,021 and $857,344, respectively. The loss
carryforwards expire on 12/31/2009.
PORTFOLIO VALUATION -- Investments are carried at market value. The market value
of equity securities is determined as follows: securities traded on a national
securities exchange are valued at the last sale price; securities not traded on
a national securities exchange are valued at the bid price for such securities
as reported by security dealers. Fixed maturities are valued at prices obtained
from a major dealer in bonds.
Short-term investments that have remaining maturities of more than 60 days and
for which representative market quotations are readily available are valued at
the most recent bid price or yield equivalent as quoted by a major broker-dealer
in money market securities. Securities with remaining maturities of 60 days or
less are valued at their amortized cost, which approximates market value due to
the short duration to maturity. Securities and other assets for which such
procedures are deemed not to reflect fair value, or for which representative
quotes are not readily available, are valued at prices deemed best to reflect
their fair value as determined in good faith by or under supervision of officers
of the Trust in a manner specifically authorized by the Board of Directors and
applied on a consistent basis.
================================================================================
36
<PAGE> 38
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CURRENCY TRANSLATION -- Assets and liabilities are translated into U.S. dollars
at the prevailing exchange rate at the end of the reporting period. Purchases
and sales of securities and income and expenses are translated into U.S. dollars
at the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
FOREIGN CURRENCY CONTRACTS -- The Trust may use foreign currency contracts to
facilitate transactions in foreign securities and to manage the Trust's currency
exposure.
Contracts to buy and to sell foreign currency generally are used to minimize the
effect of currency fluctuation on the portfolios. Also, a contract to buy or to
sell can offset a previous contract. Losses may arise from changes in the value
of the foreign currency or if the counterparties do not perform under the
contractual terms.
The U.S. dollar value of forward foreign currency contracts is determined using
forward currency exchange rates supplied by The Wall Street Journal. Purchases
and sales of forward foreign currency contracts having the same settlement date
are offset, and any gain or loss is recognized on the date of offset; otherwise,
the gain or loss is recognized on the settlement date.
DIVIDENDS AND DISTRIBUTIONS -- Each series declares dividends annually. Net
realized gains from security transactions, if any, are distributed annually.
OTHER -- As is common in the industry, security transactions are accounted for
no later than the day following the date the securities are purchased or sold.
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Net realized gain or loss on sale of investments is determined by the
specific identification method.
ESTIMATES -- Certain amounts reported in the accompanying financial statements
are based on management's best estimates and judgements. Actual results could
differ from those estimates.
NOTE B -- REMUNERATION OF MANAGER AND OTHERS
Bond Series and T. Rowe Price Growth and Income Series:
Security First Investment Management Corporation (Security Management or
Manager) serves as both investment adviser and manager, and is entitled by
agreement to a monthly fee equal to 1/24 of 1% of the average daily net asset
value of the Bond Series and Growth and Income Series (equivalent annually to
.5%), less compensation payable to the Series' sub-advisers, Neuberger & Berman,
LLC and T. Rowe Price Associates, respectively. However, to the extent that
operating expenses (including management fees but excluding interest and taxes
and certain extraordinary expenses) of each series exceed 2.5% of the first $30
million of each series' average daily net assets, 2.0% of the next $70 million
of each series' average daily net assets, and 1.5% of each series' average daily
net assets in excess of that amount, calculated on the basis of each series'
fiscal year (the expense limitation), the agreement requires that Security
Management waive its fee. In addition, for the year ended July 31, 2000,
Security Management has also agreed to reimburse the Bond Series for any
remaining expenses exceeding a limitation
SECURITY FIRST TRUST
================================================================================
37
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REMUNERATION OF MANAGER AND OTHERS (CONTINUED)
equivalent annually to 1.5%. Security Management may elect on an annual basis to
reimburse the Series for future excess expenses.
If during the fiscal year repayments are made to the Manager and the series'
expenses subsequently exceed the expense limitation, the Series shall recover
such repayments from the Manager to the extent of the excess determined.
Conversely, if during the fiscal year repayments are made by the Manager and the
series' expenses subsequently are within the expense limitation, the Manager
shall recover such repayments to the extent of the excess repaid. It is
management's opinion that it is reasonably possible that actual operating
expense may be less than the expense limitation; however, in accordance with the
requirements of FASB Statement No. 5, no accrual has been made for the
contingent obligation to repay Security Management for excess expense
reimbursements since the conditions required for such accrual have not, in the
opinion of management, been met.
T. Rowe Price Associates provides investment advice and makes investment
decisions for the Growth and Income Series, while Neuberger & Berman, LLC
provides the same for the Bond Series. T. Rowe Price Associates and Neuberger &
Berman, LLC are each paid an annual fee of .35% of the average daily net assets
of the series for which they respectively provide investment advice less any
compensation payable to Security Management acting as adviser on certain assets
in which a series may invest.
Equity Series and U.S. Government Income Series:
Security Management serves as both investment adviser and manager, and is
entitled by agreement to a monthly fee equal to 1/17 of 1% (equivalent annually
to .7%) of the average daily net asset value of the Equity Series and 1/22 of 1%
(equivalent annually to .55%) of the average daily net asset value of the U.S.
Government Income Series, less compensation payable to the Series' sub-adviser,
Blackrock, Inc. (Blackrock). However, to the extent that operating expenses
(including management fees but excluding interest and taxes and certain
extraordinary expenses) of each series exceed 2.5% of the first $30 million of
each series' average daily net assets, 2.0% of the next $70 million of each
series' average daily net assets and 1.5% of each series' average daily net
assets in excess of that amount, calculated on the basis of each series' fiscal
year (the expense limitation), the agreement requires that Security Management
and Blackrock waive their fees.
Blackrock provides investment advice and makes investment decisions for the U.S.
Government Income Series and for the Equity Series. Blackrock is paid an annual
fee of .40% of the average daily net assets of the U.S. Government Income Series
and an annual fee of .55% of the average daily net assets of the Equity Series.
SECURITY FIRST TRUST
================================================================================
38
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS
Purchases and sales of fixed maturities and equity securities for the year ended
July 31, 2000 were as follows:
<TABLE>
<CAPTION>
T. Rowe Price
Growth U.S.
and Government
Income Equity Income
Bond Series Series Series Series
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Government Securities:
Purchases $ 27,262,380 $ 50,241,251
Sales 28,207,320 51,138,844
Other Investment Securities:
Purchases 15,323,341 $ 77,736,240 $ 48,945,616 256,172
Sales 16,089,569 50,617,104 48,275,745 1,597,940
</TABLE>
The cost of investments at July 31, 2000 was the same for both financial
statement and federal income tax purposes. At July 31, 2000, the composition of
unrealized appreciation and depreciation of investment securities was as
follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation Depreciation Net
-------------- -------------- ---------------
<S> <C> <C> <C>
Bond Series $ 151,839 $ (572,750) $ (420,911)
T. Rowe Price Growth and Income Series 87,812,518 (43,164,922) 44,647,596
Equity Series 15,042,867 (1,853,820) 13,189,047
U.S. Government Income Series 235,733 (777,206) (541,473)
</TABLE>
================================================================================
39
<PAGE> 41
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- CAPITAL SHARE TRANSACTIONS
Transactions in capital shares of the Trust were as follows:
<TABLE>
<CAPTION>
Shares Issued
in Connection
with Reinvestment of
Net Net
Investment Realized
Income Gain
Sold Distributions Distributions Redeemed Net
---------- ------------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 2000
Bond Series 860,594 379,121 (1,471,680) (231,965)
T. Rowe Price Growth and Income Series 1,176,075 385,000 1,004,682 (2,272,433) 293,324
Equity Series 191,684 39,195 186,614 (634,942) (217,449)
U.S. Government Income Series 453,683 380,323 (790,971) 43,035
YEAR ENDED JULY 31, 1999
Bond Series 2,312,332 240,383 51,543 (682,801) 1,921,457
T. Rowe Price Growth and Income Series 2,272,424 331,107 1,164,634 (812,020) 2,956,145
Equity Series 94,561 56,914 1,098,636 (814,089) 436,022
U.S. Government Income Series 441,277 351,815 113,764 (828,203) 78,653
</TABLE>
================================================================================
40
<PAGE> 42
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS
The per share information for each respective series' capital stock outstanding
throughout the period is as follows:
<TABLE>
<CAPTION>
NET REALIZED TOTAL
AND UNREALIZED INCOME
NET ASSET GAINS (LOSS) DIVIDENDS
VALUE AT NET (LOSSES) ON FROM FROM NET
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT
OF YEAR INCOME OPERATIONS INCOME
-------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 $ 3.92 $ .24 $ (.04) $ .20 $ (.24)
1997 3.88 .24 .14 .38 (.24)
1998 4.02 .19 .11 .30 (.21)
1999 4.11 .18 (.14) .04 (.18)
2000 3.93 .24 (.11) .13 (.22)
T. ROWE PRICE
GROWTH AND
INCOME SERIES
Year ended July 31,
1996 $ 10.58 $ .30 $ 1.56 $ 1.86 $ (.30)
1997 12.10 .30 4.69 4.99 (.29)
1998 16.26 .28 1.27 1.55 (.30)
1999 16.56 .29 2.45 2.74 (.29)
2000 18.01 .29 (1.61) (1.32) (.29)
EQUITY SERIES
Year ended July 31,
1996 $ 5.70 $ .10 $ .46 $ .56 $ (.05)
1997 6.05 .09 2.60 2.69 (.11)
1998 8.18 .07 1.04 1.11 (.08)
1999 8.57 .06 1.42 1.48 (.07)
2000 8.54 .02 .68 .70 (.05)
U.S. GOVERNMENT
INCOME SERIES
Year ended July 31,
1996 $ 5.13 $ .18 $ .04 $ .22 $ (.19)
1997 5.15 .23 .20 .43 (.22)
1998 5.36 .27 .06 .33 (.24)
1999 5.45 .30 (.24) .06 (.31)
2000 5.10 .30 (.01) .29 (.29)
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
FROM NET ASSET
REALIZED VALUE AT
CAPITAL END OF TOTAL
GAINS YEAR RETURN(1)
--------------- ------------- --------------
<S> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 $ 3.88 5.10%
1997 4.02 9.79
1998 4.11 7.46
1999 $ (.04) 3.93 0.97
2000 3.84 3.31
T. ROWE PRICE
GROWTH AND
INCOME SERIES
Year ended July 31,
1996 $ (.04) $ 12.10 17.58%
1997 (.54) 16.26 41.24
1998 (.95) 16.56 9.53
1999 (1.00) 18.01 16.55
2000 (.77) 15.63 (7.33
EQUITY SERIES
Year ended July 31,
1996 $ (.16) $ 6.05 9.82%
1997 (.45) 8.18 44.46
1998 (.64) 8.57 13.57
1999 (1.44) 8.54 17.27
2000 (.26) 8.93 8.20
U.S. GOVERNMENT
INCOME SERIES
Year ended July 31,
1996 $ (.01) $ 5 .15 4.29%
1997 5.36 8.35
1998 5.45 6.16
1999 (.10) 5.10 1.10
2000 5.10 5.69
</TABLE>
(1) Total return computed after deduction of all series expenses, but before
deduction of actuarial risk charges and other fees of the variable annuity
account.
================================================================================
41
<PAGE> 43
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Ratio of
Ratio of Net
Operating Investment
Expenses Income Portfolio Net Assets
to Average to Average Turnover End of
Net Assets Net Assets Rate Year
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 .90% 6.32% 34% $ 8,981,365
1997 .75 6.41 54 10,634,720
1998 .73 5.78 125 17,934,392
1999 .66 5.46 147 24,717,704
2000 .68 6.30 177 23,219,690
T. ROWE PRICE
GROWTH AND INCOME SERIES
Year ended July 31,
1996 .64% 2.73% 8% $ 112,552,893
1997 .57 2.44 14 204,703,098
1998 .57 1.92 11 290,441,528
1999 .59 1.83 15 369,111,185
2000 .55 1.83 16 324,954,004
EQUITY SERIES
Year ended July 31,
1996 1.00% 2.24% 88% $ 20,701,776
1997 1.00* 1.56* 55 47,571,469
1998 .91* .86* 87 54,803,152
1999 .81 .72 23 58,313,162
2000 .80 .31 83 59,015,427
U.S. GOVERNMENT INCOME SERIES
Year ended July 31,
1996 .70% 5.38% 148% $ 14,888,824
1997 .70** 5.68** 62 28,889,460
1998 .66** 5.53** 103 34,090,919
1999 .71 5.37 307 32,312,549
2000 .71 5.85 159 32,520,049
</TABLE>
* The former investment adviser had agreed to waive a portion of its management
and advisory fees. Absent this agreement, the ratio of expenses to average net
assets and the ratio of net investment income to average net assets would have
been .98% and .81% and 1.05% and 1.51% for 1998 and 1997 respectively.
** The former investment adviser had agreed to waive a portion of its management
and advisory fees. Absent this agreement, the ratio of expenses to average net
assets and the ratio of net investment income to average net assets would have
been .90% and 5.27% and 1.04% and 5.34% for 1998 and 1997 respectively.
================================================================================
42
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Trustees
of the Security First Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of the Security First Trust comprised of the Bond
Series, the T. Rowe Price Growth and Income Series, the Equity Series, and the
U.S. Government Income Series (collectively, the "Trust") as of July 31, 2000
and the related statements of operations for the year then ended and the
statements of changes in net assets and the financial highlights for each of the
two years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for the three years ended July 31,
1998, were audited by other auditors whose report, dated September 14, 1998,
expressed an unqualified opinion on those financial highlights for each of the
three years.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 2000, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Security First Trust's Bond Series, T. Rowe Price Growth and Income Series,
Equity Series, and U.S. Government Income Series as of July 31, 2000, the
results of their operations for the year then ended, and the changes in their
net assets and the financial highlights for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
-------------------------
September 1, 2000
Los Angeles, California
<PAGE> 45
VARIABLE ANNUITIES OFFER CHOICES AND BENEFITS THAT REGULAR MUTUAL FUNDS CAN'T
Tax-deferred retirement savings plans are among the best investments a
person can make today for his or her future. As a vehicle for creating
tax-favored retirement savings, variable annuities offer many advantages.
A variable annuity offers the opportunity to invest in a diversified
portfolio of securities similar to mutual funds. Taxes are deferred on all
dividends and on all increases in portfolio value until you take your money out.
At retirement, another significant advantage is that the variable
annuity can provide you with income that is based on the performance of the fund
or funds in which you participated. You may elect to receive monthly, quarterly
or annual payments for a specified number of years, your lifetime, or the longer
of your lifetime and the lifetime of your joint payee. See your policy for
specific options available to you.
The Security First Trust series offers you a choice of professionally
managed options. You may invest in a Bond Series, Growth and Income Series,
Equity Series, or U.S. Government Income Series, each with a varying degree of
risk:
SECURITY FIRST TRUST BOND SERIES is for conservative investors. The
objective is to achieve the highest investment income over the long term
consistent with the preservation of capital.
SECURITY FIRST TRUST T. ROWE PRICE GROWTH AND INCOME SERIES is for
individuals willing to accept a degree of risk. The fund's goal is growth of
principal with a reasonable level of income primarily through investment in
common stocks.
SECURITY FIRST TRUST EQUITY SERIES also seeks to provide growth of
capital and income through investment in common stocks of high quality
companies. The fund is for individuals willing to accept a degree of risk.
SECURITY FIRST TRUST U.S. GOVERNMENT INCOME SERIES is for conservative
investors and seeks to provide current income through investment in a
diversified portfolio limited primarily to U.S. government securities.
ANNUAL REPORT
JULY 31, 2000
SECURITY
FIRST
TRUST
--------------------------------------------------------------------------------
BOARD OF TRUSTEES
Jack R. Borsting Howard H. Kayton
Katherine L. Hensley Lawrence E. Marcus
[SECURITY FIRST TRUST LOGO]
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
SFG 1768
Security First Trust Bond Series
Security First Trust T. Rowe Price Growth and Income Series
Security First Trust Equity Series
Security First Trust U.S. Government Income Series
<PAGE>
MET INVESTORS SERIES TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to Met Investors Series
Trust's Registration Statement on Form N-1A filed on October 23, 2000,
Registration No. 333-48456 ("Form N-1A Registration Statement")
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to the Prospectus contained
in Part A of this Registration Statement.
5. None other than as set forth in Exhibits 1 and 2.
6(a). Form of Management Agreement between Met Investors Advisory Corp. and Met
Investors Series Trust. Incorporated by reference to the Form N-1A Registration
Statement.
6(b). Form of Investment Advisory Agreement between BlackRock Financial
Management Inc. and Met Investors Advisory Corp. with respect to the BlackRock
Equity Portfolio. Incorporated by reference to the Form N-1A Registration
Statement.
6(c). Form of Investment Advisory Agreement between BlackRock Financial
Management Inc. and Met Investors Advisory Corp. with respect to the BlackRock
U.S. Government Income Portfolio. Incorporated by reference to the Form N-1A
Registration Statement.
7. Form of Distribution Agreement between Met Investors Series Trust and MetLife
Distributors, Inc. with respect to the Class A shares. Incorporated by reference
to the Form N-1A Registration Statement.
8. Form of Deferred Compensation Plan. Incorporated by reference to the Form
N-1A Registration Statement.
9. Form of Custody Agreement between Investors Bank & Trust Company and Met
Investors Series Trust. Incorporated by reference to the Form N-1A Registration
Statement.
10(a). Rule 12b-1 Distribution Plans. Incorporated by reference to the Form N-1A
Registration Statement.
10(b). Multiple Class Plan. Incorporated by reference to the Form N-1A
Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Previously filed.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14. Consent of Deloitte & Touche LLP (with respect to the BlackRock Equity and
BlackRock U.S. Government Income Series of Security First Trust). Previously
filed.
15. Not applicable.
16. Powers of Attorney. Incorporated by reference to the Form N-1A Registration
Statement.
17. Form of Proxy Card and Voting Instructions. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post-Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Newport Beach and State of California on the 14th day
of December, 2000.
MET INVESTORS SERIES TRUST
By:/s/ Elizabeth M. Forget
Name: Elizabeth M. Forget
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Post-Effective Amendment No. 1 to the Registration Statement in the
capacities indicated on the 14th day of December, 2000.
Signatures Title
/s/ Elizabeth M. Forget President, Trustee
-=============---------- ========
Elizabeth M. Forget
/s/ Mark Reynolds Chief Financial Officer and Treasurer
Mark Reynolds
/s/ Stephen M. Alderman Trustee
Stephen M. Alderman
/s/ Jack R. Borsting Trustee
Jack R. Borsting
/s/ Gregory P. Brakovich Trustee
Gregory R. Brakovich
/s/ Theodore A. Myers Trustee
Theodore A. Myers
/s/ Tod A. Parrott Trustee
Tod A. Parrott
/s/ Dawn M. Vroegop Trustee
Dawn M. Vroegop
/s/ Roger T. Wickers Trustee
Roger T. Wickers
